Study: Industry On Road to Recovery

Organic growth improved, albeit modestly, and profitability held constant for the industry’s leading independent insurance agencies, according to The Independent Insurance Agents & Brokers of America (IIABA). The association released its “2011 Best Practices Study,” which documents the business practices of a number of high-performing agencies and urges others to adopt similar methods.

Every three years, IIABA collaborates with Reagan Consulting to select “Best Practices” firms throughout the nation for outstanding management and financial achievement in six revenue categories (less than $1.25 million; $1.25 to $2.5 million; $2.5 to $5 million; $5 to $10 million; $10 to $25 million; and more than $25 million). Agencies are nominated by either an IIABA-affiliated state association or an insurance company and qualified based on operational excellence.

Twelve insurance companies and four industry vendors provide financial support for the research and development of the Best Practices study – Applied Systems, Addis Intellectual Capital, Central Insurance Cos., Chubb, EMC Insurance Companies, Encompass Insurance, Erie Insurance, Great American Insurance Group, The Hanover Insurance Group, Harleysville Insurance, Imperial PFS, InsurBanc, Kemper Preferred, Liberty Mutual Agency Corporation, MetLife Auto & Home and Zurich North America.

“The results of this year’s Best Practices Study indicate good news after several years of negative growth, shrinking profit margins and declining agency values,” said Madelyn Flannagan, IIABA VP of agent development, research and education. In fact, the study found that most study participants benefited from the growth strategies deployed over the last couple of years, when the recession suddenly amplified the pressures of a prolonged soft market. A strong focus on total account development, increased advertising/marketing activities and producer hiring/development/management strategies gave most agencies a competitive advantage when the economy began to rebound in 2010, and stopped or reversed the revenue decline that first became apparent in the 2006 study. Generally, the smaller revenue-sized agencies reported flat growth, while the larger commercial agencies reported improvement over the 2010 study results. Organic growth for the $10-25 million group increased from 0.7 percent to 2.4 percent and the $25 million-plus group increased from 1.2 percent to 3.3 percent.

As with revenue growth, the agencies benefited from steps taken over the last couple of years to control and lower expenses. Profitability remained flat in all study groups with an average Pro Forma EBITDA margin of 26.2 percent for agencies with revenue less than $5 million and 20.0 percent for agencies with revenue above $5 million. Margins had decreased continuously since 2006 when they were at their highest in the study’s then-13-year history.

Other findings from the 2011 Best Practices Study include:

• In recent years, the Rule of 20 outcomes—a quick measure for determining whether an agency is creating value for its shareholders—had fallen significantly short of the desired score of 20 for most of the study groups. The 2011 results leveled off at an average score of 13.2 for the “less than $5 million” agencies and increased to an average 11.7 for the “more than $5 million” agencies.

• Revenue per employee, an industry standard productivity measure, also remained flat with the average for the “less than $5 million” agencies just over $150,000 and the “more than $5 million” at $172,000. These averages are down only slightly from the revenue per employee levels reached prior to the start of the soft market. The resulting drop in revenue forced agencies to concentrate on better utilizing new and existing technology to support sales and marketing efforts as well as containing costs. As a result, productivity remained stable.

• Personal lines, once again, had positive growth rates (an average of 3.1 percent for the "less than $5 million" and 3.8 percent for the "more than $5 million"). However, group medical grew more last year with an average of 3.0 percent for the "less than $5 million" and a strong 4.2 percent for the "more than $5 million," up more than 3 percent from last year.

• Commercial lines continued to see negative growth, but it was found to be far less negative than last year. Many agents said they are starting to see some commercial insurance rates hold at their current levels. This could indicate that the 2012 results are bound to improve—as long as the economy doesn’t stall again.