The Highs, Low of Agency Q1 Profitability and the Post-Pandemic Path Forward: Reagan

Insurance agencies reported a couple of highs and a low in first quarter profitability results, according to the latest Reagan Consulting Growth & Profitability Survey of the agency consulting firm’s agents and broker clients.

Three industry measures were the best first quarter profitability results in the 13-year history of the survey:

• First, earnings before interest, taxes, depreciation and amortization (EBITDA) margin (or pre-tax profitability) was 31.2%, over 1.5 percentage points higher than Q1 2020.
• Second, median operating margin was 16.7%. Operating margin measures broker profitability excluding contingent and bonus income. Q1 2021 operating margin was almost 4 percentage points higher than Q1 2020 results. This increase signals that brokers continue to benefit from expense savings due to COVID-19, according to Reagan Consulting.
• Third, commercial lines posted 6.3% organic growth, a high since COVID-19 began affecting businesses as well as a Q1 13-year best.

Those highs were offset by the first decline in personal lines income since 2010 (at negative 0.2%), and the lowest Q1 growth (2.1%) of group health benefits in 13 years.

According to Reagan partner Mark Crites, the industry is still stabilizing amidst the pandemic. Crites attributes the growth in commercial lines to a combination of the rebounding economy and rate increases. “Our agent and broker clients continue to see double-digit rate increases on major commercial renewals through the first three months of the year,” Crites says.

On the other hand, COVID’s damage to the entertainment, hospitality and retail industries caused employee furloughs and layoffs, which in turn affected group health benefits income for insurers. “With the majority of group policies now on a per-employee-per-month model, brokers felt the pressure immediately,” Crites said.

Why the loss of personal lines growth? Crites attributes that to the need to preserve finances during the pandemic and “brokers’ inability to renew homeowners’ policies in the wildfire zones and other high-risk coastal areas through the traditional marketplace.”

Path Forward

Reagan advisors say its survey results from about 200 participating agencies point to two paths for post-pandemic growth.

First, agents and brokers must lead with what they can influence.

“No one can control when a hard or soft market hits. Similarly, no one can control the economic cycle,” said Crites. “But you can control the third growth driver, sales velocity,” which is a measure of new business production.

He said the Q1 2021 increase in sales velocity shows that agents and brokers “are finding ways to get in front of prospective clients.” Quarterly organic growth for those in the survey came in at 5.5%, up from 2020’s Q4 growth result of 4.3%. This first quarter organic growth was the highest since the 6.6% recorded for the first quarter of 2020.

Second, agents should reinvest the cost savings realized from the pandemic, savings that Reagan estimates at 2% to 4% of total net revenue.

“Firms that reinvest these dollars back into the business — instead of distributing extra profits to shareholders — will be the winners coming out of COVID-19,” Crites said.