ogp q2 2018 sample results - reagan consulting · organic growth total agency organic growth...

Q2 2018OGP ID: 9999Current Value Driver Comparison

Organic Growth

Total Agency Organic Growth Organic Growth by Product Line Reagan Consulting Observations

• Brokers continued their strong start to 2018with 6.1% organic growth through June - up from 4.6% in Q2 2017 and 5.6% in Q1 2018

• Commercial lines (5.7% in Q2 2018 vs. 3.9% in Q2 2017) and personal lines (4.6% in Q2 2018 vs. 2.3% in Q2 2017) posted significantly higher growth

• Group benefits continues to be the highperformer for many firms at 6.3% growthin Q2 2018, which is 1.4% higher than the4.9% growth posted in Q2 2017

• OGP Projected 2018 Growth: 6.0%Brokers have tempered early growth

Sample organic expectations down from 7.0% to 6.0% for growth rank: 2018 (vs. 4.5% in 2017)

Profitability

Total Agency EBITDA Margin EBITDA Margin by Product Line Reagan Consulting Observations

• Overall broker profitability of 22.7% decreasedalmost 2 points from 24.6% in Q2 2017

• Despite overall revenue being up over 6% through Q2 2018, contingent income is relatively flat year-over-year pushing margins down

• Like overall EBITDA margin, margins in all threelines of business declined slightly vs. prior year

• YTD profitability numbers are inflated by cash-basis contingent income recorded through Q2so margins will come down throughout the year

• OGP Projected 2018 Margin: 20.0%Brokers are projecting a 20.0% margin for

Sample profitability 2018, in line with the 2017 full-year rank: margin of 20.4%

The Rule of 20 (see note below)

Total Agency Rule of 20 Rule of 20 by Product Line Reagan Consulting Observations

• The 17.8 median Rule of 20 score is up fromlast year's 16.5 score through Q2

• Rule of 20 scores are very consistent across lines of business - only 0.8 points separate thehighest and lowest scores

• Rule of 20 scores, like EBITDA margins, areinflated by cash-basis contingent incomeand will decline throughout the year

• OGP Projected 2018 Score: 16.5 Brokers project a solid increase in rule of20 scores for 2018 (vs. 14.3 in 2017) which reflects their positive outlook for organic growth

Sample Rule of 20 rank:

About the Rule of 20

Note: If data for your firm reads "0.0%" or "0.0" it may mean that no data was submitted for that metric.(1) Represents Q2 2018 results for AJG, AON, BRO and MMC and Q1 2018 results for WLTW.

70th - 80th percentile



19.5 17.8

22.5

17.4

-

5.0

10.0

15.0

20.0

25.0

Sample Firm OGP SurveyMedian

OGP 75thPercentile

PublicBrokers (1)

9.5%

6.1%

9.2%

5.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%


OGP 75thPercentile

PublicBrokers (1)

15.8%

4.3%6.1%5.7%

4.6%6.3%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

CommercialLines

Personal Lines Group Benefits

Sample Firm OGP Median

20.0%22.7%

29.9%

24.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


OGP 75thPercentile

PublicBrokers (1)

18.6%

22.5% 23.9%21.6%

27.4%

20.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

CommercialLines



25.1

15.618.018.2 17.7 17.4

-

5.0

10.0

15.0

20.0

25.0

30.0

CommercialLines



Organic Growth & Profitability Survey

Reagan Consulting has developed a metric called the “Rule of 20” to provide a quick means of benchmarking an agency's shareholder returns. The Rule of 20 is calculated by adding half of an agency's EBITDA margin to its organic revenue growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and / or share price appreciation, a shareholder return of approximately 15% - 17%, which is a typical agency / brokerage return under normal market conditions.

1

Q2 2018OGP ID: 9999Agency Organic Growth & Profitability Scatter Plot

Surveyed firms with annual revenues less than $10 million Sample FirmSurveyed firms with annual revenues between $10 and $25 million Top and Bottom 25% of all firmsSurveyed firms with annual revenues greater than $25 million Rule of 20 line (All points on this line indicate a Rule of 20 score of 20)

About the Scatter Plot

Note: Scatter Plot represents Q2 2018 results for AJG, AON, BRO and MMC and Q1 2018 results for WLTW.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Prof

itabi

lity (

EBIT

DA M

argi

n)

Organic Growth

AJGAON

WLTW

MMC

BRO

Bottom 25% Growth

Top 25% Growth

Rule of 20

Rule of 20

In the chart above, we've plotted every firm in the survey that completed both the total agency organic growth section and the total agency profitability section. Each firm's organic growth is plotted along the x-axis, and each firm's profitability is plotted along the y-axis. We've included a couple of guidelines on the graph to help in interpreting the data. The grey dotted lines show the top and bottom 25% of firms in organic growth and profitability. The solid purple line represents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20. Finally, we've broken the firms into groups based on revenue size, as distinguished by the different colored dots. The goal of this scatter plot is to show the wide range of organic growth and profitability results in the industry and to benchmark where your firm falls.


Bottom 25% Profitability

Top 25% Profitability

2

Q2 2018OGP ID: 9999Growth & Profitability Drivers / Projections

Sales Velocity (see note below)

Sales Velocity About Sales Velocity

Reagan Consulting Observations

• The industry has maintained Sales Velocity numbers in the low teens over the last several• years, varying between 10.0% and 14.0%

• Median Sales Velocity was 13.9% for the industry through the first six months of 2018, which is slightly above historical levels

• If a firm consistently posts Sales Velocity figures in the top 25% of the industry (18.5% or • higher in Q2 2018), it is likely the firm will generate above average industry growth, assuming

Sample Sales • normal levels of client retention Velocity rank:

Operating Margin & Contingent Income as % of Revenue

Operating Margin Contingent / Bonus / Override Income as a % of Revenue

Sample Operating Sample Bonus Inc. as Margin rank: % of Revenue rank:

About Operating Margin

2018 Projections

Projected Agency Organic Growth Projected Agency EBITDA Margin % Projected Agency Rule of 20

Sample organic Sample EBITDA Sample Rule of growth rank: margin rank: 20 rank:



50th - 60th percentile 20th - 30th percentile




Reagan Consulting has developed a metric called "Sales Velocity" to benchmark an agency's new business results against other firms. Expressed as a percentage, Sales Velocity is calculated by dividing the new business written in the current year by the prior year’s commissions and fees. Sales Velocity is among the most important drivers of organic growth.14.5% 13.9%

18.5%

10.0%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%


OGP 75thPercentile

OGP 25thPercentile

5.8%

11.1%

19.3%

5.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


OGP 75thPercentile

OGP 25thPercentile

8.2%7.3%

8.9%

5.2%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%


OGP 75thPercentile

OGP 25thPercentile

8.0%

6.0%

10.0%

4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


OGP 75thPercentile

OGP 25thPercentile

15.0%

20.0%

25.0%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


OGP 75thPercentile

OGP 25thPercentile

15.5 16.5

20.9

12.2

-

5.0

10.0

15.0

20.0

25.0


OGP 75thPercentile

OGP 25thPercentile

Operating Margin is calculated as EBITDA less contingent / bonus / override income, divided by pro-forma net revenues less contingent income.

3

Q2 2018OGP ID: 9999Historical Trending

Quarterly Organic Growth - Total Agency Median (Q2 2010 - Present)

Comparative Median Organic Growth by Product Line (Second Quarter Numbers, 2010 - 2018)

Comparative Median Profitability and Rule of 20 Analysis (Second Quarter Numbers, 2010 - 2018)

About EBITDA Margin and Operating Margin


0.2%

1.0%

1.9%

3.3% 3.3%

3.8% 3.7%

5.0%

5.5% 5.4%

6.1% 6.1%

6.9% 6.8%

6.2% 6.2%5.8% 6.0%

6.2%5.8% 5.9%

4.4%4.6%

5.1%

4.0%3.6%

4.2%3.9%

4.6%

3.9%

4.5%

5.6%

6.1%

II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II

2.2%

6.8%

8.2%

6.6%

5.4%

3.1%3.9%

5.7%

2011 2012 2013 2014 2015 2016 2017 2018

Commercial Lines

1.4%1.8%

3.5%

2.2%1.8% 1.7%

2.3%

4.6%

2011 2012 2013 2014 2015 2016 2017 2018

Personal Lines

3.1%

7.7%

5.2% 5.5%

4.6%

6.8%6.2%

4.9%

6.3%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Group Benefits

21.8% 22.9% 22.1%24.0% 24.5% 24.6%

23.1%24.6%

22.7%

10.4%13.9%

11.7%13.3% 14.0% 12.9%

11.2% 11.3% 11.1%

2010 2011 2012 2013 2014 2015 2016 2017 2018

EBITDA Margin and Operating Margin

EBITDA Margin Operating Margin

11.2

15.4 16.9

18.7 18.3 19.0

16.7 16.5 17.8

2010 2011 2012 2013 2014 2015 2016 2017 2018

Rule of 20

EBITDA Margin is calculated by dividing a firm's pro-forma EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by the firm's pro-forma net revenues. Operating Margin is calculated as EBITDA less contingent / bonus / override income, divided by pro-forma net revenues less contingent income.

2010 2011 2012 2013 2014 2015 2016 2017 2018

4

Organic Growth & Profitability (OGP) Survey Market Commentary (Q2 2018)

- 1 -

The Good Times Keep Rolling while the Barbarians are Stuck at the Gate

by Kevin Stipe

Before we dive in, thanks for participating in the OGP Survey, the industry’s leading source of real-time information for mid-size and large agents and brokers. A record number – 58 – of the Business Insurance Top 100 brokers participated in the 2nd quarter.

Brokers just logged their highest organic growth rate in 14 quarters. The 6.1% rate for the second quarter puts 2018 within striking distance of the best years in the 10-year history of the OGP survey.

Agency Organic Growth, Q2 2010-2018

The good news is widespread, with every line of business up from a year ago. Commercial lines, which represents the largest source of revenue for many OGP agencies, grew at 5.7%, while group benefits grew at 6.3%.

Perhaps the best story is in personal lines. Insurtech barbarians have been gathering at the gate for years, eager to drive the independent agent out of the personal lines segment once and for all.

Not so fast. As it turns out, the personal lines gate is proving a bit stronger than the barbarians

anticipated. This quarter’s 4.6% increase was the fastest personal lines growth rate recorded since the OGP survey began in late 2008. This is not to suggest that personal lines is safe from disruption from Insurtech – it certainly is not. But personal lines always seems to be fighting for its life; Insurtech is just the latest in a long line of adversaries. Despite the constant predictions of their demise, independent agents have an uncanny knack for finding ways to adapt, add value and ultimately keep their customers.

Personal Lines Organic Growth, Q2 2010-2018

Here’s a thought: is it possible that Insurtech is helping, rather than hurting, OGP firms and enabling them to grow more quickly? Are OGP firms improving their marketshare by embracing Insurtech tools and resources? An astonishing 23% of OGP firms reported double-digit growth in personal lines through the 2nd quarter. Something interesting is happening here – we will investigate that more deeply in next quarter’s Market Commentary. Why are OGP brokers growing at their fastest rate since 2014? Will it continue?

0.2%

3.3%

5.5%

6.9%5.8% 5.9%

4.0%4.6%

6.1%

2010 2011 2012 2013 2014 2015 2016 2017 2018

1.5% 1.4%1.8%

3.5%

2.2%1.8% 1.7%

2.3%

4.6%

0%

1%

2%

3%

4%

5%

2010 2011 2012 2013 2014 2015 2016 2017 2018Source: Reagan Consulting OGP Survey, 2nd Quarter results Source: Reagan Consulting OGP Survey, 2nd Quarter results


- 2 -

Our industry is benefiting from a combination of favorable circumstances similar to those of 2012-2014. During those years, firming insurance prices teamed up with strong U.S. economic growth to enable brokers to achieve organic growth rates exceeding 6%.

CL Pricing and U.S. GDP vs. Organic Growth

It appears likely that the rapid growth will continue, at least for a while. OGP readers may recall that the last contraction/expansion cycle revealed that there is a 6 to 9 month lag between U.S. GDP results and their eventual impact on insurance broker growth. If this past pattern persists, the Q2 U.S. GDP growth of 4.1% should pay dividends for brokers through the end of 2018 and into at least the first quarter of 2019. If the U.S. economy continues to surge during the second half of 2018, 2019 could be a banner year for insurance brokers.

For those not satisfied until they’ve found some shred of bad news, now it is your turn. Broker EBITDA margins declined to 22.7% of revenue during the second quarter, down nearly two percentage points from the prior year.

While the magnitude of this decrease is alarming on the surface, it appears to be contingent income driven, since operating margins (which exclude contingent and investment income) are basically the same as a year ago.

EBITDA and Operating Profit, Q2 2010-2018

A review of the data indicates 2018 is turning out to be among the worst contingent income years in the survey’s history – the median increase in contingent income was less than 1%, with nearly half of OGP firms experiencing a decline. OGP participants are once again forecasting a year-end EBITDA margin of 20%, (same as last year) so it appears they are taking the loss of contingent income in stride and are in fact prepared for it. As a means to measure how brokers are balancing the two primary value drivers (organic growth and EBITDA margin), the OGP Survey calculates a combined measurement called the Rule of 20. The Rule of 20, calculated by adding organic growth to one-half of an agency’s EBITDA margin, jumped to 17.8, the best score since 2015. This figure will likely decline during the balance of 2018 since EBITDA margins are inflated during the first half of the year by contingent income. Nevertheless, OGP firms are projecting a median figure of 16.5 for all of 2018.

1.9% 3.7%

6.2% 6.2% 6.2%4.6% 4.2% 4.5%

6.1%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015 2016 2017 Q22018

US GDP GrowthP&C Pricing, Q2 Reagan est.Broker Org Growth (Median)

22.9% 22.1% 24.0% 24.5% 24.6% 23.1% 24.6% 22.7%

13.9% 11.7% 13.3% 14.0% 12.9% 11.2% 11.3% 11.1%

2010 2011 2012 2013 2014 2015 2016 2017

EBITDA Margin Operating Margin

Sources: CIAB and Bureau of Economic Analysis

Sources: Reagan Consulting OGP Survey, 2nd Quarter Results


- 3 -

Rule of 20 (Median & Top Quartile), 2010-2018

M&A Marketplace

After a blowout year in 2017, M&A activity is down approximately 10.6% during the first half of 2018. But even at the current slightly slower pace, 2018 is shaping up to be the second heaviest consolidation year in history, with over 500 transactions.

M&A Transactions, 2010-2018

The story behind the M&A activity is pretty simple: valuations have never been higher, and the list of hungry buyers has never been longer. As we predicted in this space in January, valuations have actually increased in 2018 over the record levels of 2017.

Perhaps the most surprising news here is who has benefited the most in 2018. Valuations for large

platform agencies (those over $25 million in revenue) were already extremely high and have inched slightly higher. But for this group, double-digit EBITDA valuation multiples have been the norm for a couple of years now. The real surprise has been in the $3-$10 million revenue range, where valuations are now frequently at a guarantee of 8.5X EBITDA (or higher) plus an earn-out opportunity that could take valuations to 11.5X EBITDA or higher.

M&A Deal Valuations, 2010-2018

Mark Your Calendar: May 5-7, 2019 Reagan Consulting will once again be hosting our bi-annual Agency Ownership Summit in Atlanta on May 5-7, 2019. Approximately 175 industry leaders will attend the industry’s premier event dedicated to agency valuation, leadership, perpetuation and M&A. Many have referred to it as the best industry event they’ve ever attended. Next quarter’s Market Commentary will provide sign-up instructions. If you’d like more information about the Summit, please call 404.233.5545.

11.2 15.4 16.9

18.7 18.3 19.0 16.7 16.5 17.8

16.0

21.0 22.1 25.1 25.1 24.5

20.3 22.4 22.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Median Top Quartile

244 311

364

245 360

492 457 558

292 261

2010 2011 2012 2013 2014 2015 2016 2017 Q22017

Q22018

6.0x 6.3x 6.5x 6.8x 7.0x 7.5x 8.0x 8.0x 8.5x

2.5x 2.5x 2.5x 3.0x 3.0x 3.0x 3.0x 3.0x 3.0x

2010 2011 2012 2013 2014 2015 2016 2017 2018Typical Guaranteed Price Earn-Out Opportunity

Source: Reagan Consulting OGP Survey, 2nd Quarter Results

Source: SNL Financial

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ogp q2 2018 sample results - reagan consulting · organic growth total agency organic growth...

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