Q1 2020 Organic Growth & OGP ID: Profitability Survey ... · Q1 2020 OGP ID: Sample Agency Current...

Q1 2020OGP ID: Sample AgencyCurrent Value Driver Comparison

Organic Growth

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

• Brokers posted 6.6% organic growth in Q12020, the highest figure in 25 quarters. Thiswas the ninth consecutive quarter in whichindustry growth exceeded 5.0%.

• Commercial lines (8.4%) was the lead driverof industry growth, posting its largest growth rate since Q1 2014.

• Group benefits (5.8% in Q1 2020 vs. 3.8% in Q1 2019) growth increased materially, whilepersonal lines (2.8% in Q1 2020 vs. 3.0% in Q1 2018) declined for the second consecutiveQ1.

• OGP Projected 2020 Growth: 4.1% Your organic Despite a strong first quarter, brokers reduced growth rank: growth outlook from 7.0% as of Q4 2019.

Profitability

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

• Overall broker profitability increased from27.8% in Q1 2019 to 29.6% in Q1 2020 asbrokers continued to manage expenses anddrive stronger operating margins (12.8% inQ1 2020 vs. 11.6% in Q1 2019)

• Contingent income as a % of revenuedecreased slightly from 5.9% in Q1 2019 to5.7% in Q1 2020

• Q1 profitability results are inflated by cash-basis contingent income; margins willdecline throughout the year

• OGP Projected 2020 Margin: 20.0%Brokers are maintaining their outlook for a

Your profitability 20.0% margin in 2020, in line with the 2019 rank: full-year margin of 20.1%

The Rule of 20 (see note below)

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

• The 21.8 median Rule of 20 score is upsignificantly from last year's score of 19.6

• Rule of 20 scores for commercial andpersonal lines increased, while group benefitsRule of 20 scores decreased from Q1 2019

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

• OGP Projected 2020 Score: 14.6 Brokers' Rule of 20 outlook decreased from 18.0 as of Q4 2019 to to a level in line with2015 - 2017 results

Your 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 Q1 2020 results for AJG, AON, BRO, MMC and WLTW.

30th - 40th percentile



24.2 21.8

27.2

16.3

-

5.0

10.0

15.0

20.0

25.0

30.0

Your Firm OGP SurveyMedian

OGP 75thPercentile

PublicBrokers (1)

4.4%

6.6%

10.7%

4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

SampleAgency

OGP SurveyMedian

OGP 75thPercentile

PublicBrokers (1)

3.3%2.1%

11.4%

8.4%

2.8%

5.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

CommercialLines

Personal Lines Group Benefits

Sample Agency OGP Median

39.6%

29.6%

37.2%

24.6%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

SampleAgency

OGP SurveyMedian

OGP 75thPercentile

PublicBrokers (1)

40.7% 39.7%34.3%

31.4%28.6%

20.5%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

CommercialLines



23.722.0

28.5

21.918.8

14.9

-

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

Q1 2020OGP ID: Sample AgencyAgency Organic Growth & Profitability Scatter Plot

Surveyed firms with annual revenues less than $10 million Sample AgencySurveyed 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 Q1 2020 results for AJG, AON, BRO, MMC and 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

AJG

AON

WLTW

MMC

Bottom 25% Growth

Top 25% Growth

Rule o f 20

Rule o f 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

BRO

2

Q1 2020OGP ID: Sample AgencyGrowth & 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 13.2% for the industry in Q1 2020, which is nearly a point higherthan last year's performance

• If a firm consistently posts Sales Velocity figures in the top 25% of the industry (17.7% or• higher in Q2020), it is likely the firm will generate above average industry growth,

Your Sales • assuming normal levels of client retention Velocity rank:

Operating Margin & Contingent Income as % of Revenue

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

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

About Operating Margin

2020 Projections

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

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



70th - 80th percentile 60th - 70th 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.

6.2%

13.2%

17.7%

8.5%

0.0%2.0%4.0%6.0%8.0%

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

Sample Agency OGP SurveyMedian

OGP 75thPercentile

OGP 25thPercentile

11.3%12.8%

20.8%

6.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


OGP 75thPercentile

OGP 25thPercentile

10.5%

5.7%

8.6%

3.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


OGP 75thPercentile

OGP 25thPercentile

6.9%

4.1%

7.0%

2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

SampleAgency

OGP SurveyMedian

OGP 75thPercentile

OGP 25thPercentile

23.5%

20.0%

25.0%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

SampleAgency

OGP SurveyMedian

OGP 75thPercentile

OGP 25thPercentile

18.7

14.6

18.9

10.0

- 2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0

SampleAgency

OGP SurveyMedian

OGP 75thPercentile

OGP 25thPercentile

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

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Q1 2020OGP ID: Sample Agency Historical Trending

Quarterly Organic Growth - Total Agency Median (Q1 2012 - Present)

Comparative Median Organic Growth by Product Line (First Quarter Numbers, 2012 - 2020)

Comparative Median Profitability and Rule of 20 Analysis (First Quarter Numbers, 2012 - 2020)

About EBITDA Margin and Operating Margin


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% 6.1% 6.1%

5.3%

6.4%6.1%

5.9%

6.6%

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 III IV I

6.6% 6.8%

8.4%

6.6%

3.3%4.0%

6.0%6.9%

8.4%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Commercial Lines

2.7%3.0%

2.8%

1.3%

2.1% 2.2%

3.9%

3.0%2.8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Personal Lines

4.3%3.7%

5.0%4.5%

6.9%

4.0%

7.3%

3.8%

5.8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Group Benefits

24.1%27.9%

29.9% 29.0% 28.5% 27.6% 26.9% 27.8%29.6%

9.2%12.0% 11.1% 9.5% 9.9% 10.4% 9.9% 11.6% 12.8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

EBITDA Margin and Operating Margin

EBITDA Margin Operating Margin

17.8

21.8 20.6 20.2 19.3

18.0 19.4 19.6

21.8

2012 2013 2014 2015 2016 2017 2018 2019 2020

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.

20202012 2013 2014 2015 2016 2017 2018 2019

4

Organic Growth & Profitability (OGP) Survey

Market Commentary (Q1 2020)

- 1 -

COVID-19…Pumping the Brakes by Harrison Brooks

Growth Overview: A Banner Year for Agents and Brokers…and then

COVID-19 arrived

2020 started so promising! 6.6% overall organic growth was the highest first quarter result since Reagan Consulting launched the Organic Growth and Profitability survey in 2008. Commercial lines led the way in the first quarter with median growth of 8.4%, while group benefits logged a solid 5.7%.

Agency Organic Growth, 2012-2020

Q1’s record-setting organic growth came on the heels of impressive organic growth of 5.9% in 2019. With strong organic growth trends, all-time high agency valuations, record-setting M&A activity, low interest rates, and a strong US economy, life has been good for agents and brokers! Almost too good, causing many agents and brokers to ask the question “What will slow down this positive momentum?” Many speculated, but none expected COVID-19.

While it is too early to tell the ultimate impact of this global pandemic, OGP survey participants are signaling that they believe it will only pump the breaks on growth rather than bring it to a halt. For example, only 6% of respondents are projecting negative organic growth for 2020.

Overall, survey participants are projecting 4.1% organic growth for 2020. While this figure is a nearly 3 percentage point decline from the level projected by participants just three months ago in the 2019 year-end OGP survey, it suggests that brokers are relatively optimistic regarding their ability to perform in the new economic reality.

2020 Organic Growth Expectations

The strong start to the year, coupled with the recent re-emergence of certain economic activity seems to be bolstering broker confidence for full year 2020 results. The 4.1% organic growth projection is more optimistic than the results from Reagan Consulting’s early April survey of 182 agents and brokers. Only one month ago, the median of those surveyed agents and brokers anticipated 2% total organic growth for 2020.

Optimism seems to be improving, with agents and brokers so far experiencing success navigating these unchartered waters. If the median broker actually finished the year with 4%+ organic growth, it would be an astonishing success and further illustrate the resilience of the insurance brokerage industry.

One strange piece of data worth noting: Slower growth brokers appear to be more optimistic about

5.0%

6.1% 6.2%5.8%

5.1%

3.9%

5.6% 5.3%

6.6%

2012 2013 2014 2015 2016 2017 2018 2019 2020

7.0%

4.1%

Pre-COVID Post-COVID

Source: Reagan Consulting OGP Survey, 1st quarter results

Source: Pre-COVID projections from Reagan Consulting’s Q4 2019 OGP Survey and Post-COVID projections from the Q1 2020 OGP Survey



- 2 -

holding on to their Q1 revenue gains than their faster-growth peers. The following chart compares the full-year 2020 organic growth projections of the top quartile and bottom quartile agencies.

Top Quartile vs. Bottom Quartile

Agencies’ Expectations

The variance in full-year expectations surprises us. High performing broker growth rates are projected to decline 5.7 percentage points, whereas low performing agencies anticipate no significant decline. Why would this be? It could be for a variety of reasons, including the possibility that slow growth firms have their heads in the sand regarding the economy’s impact to their business. However, another possibility is that at least for a brief window of time, slow growth firms may suffer less than their faster growing peers during the pandemic. Many factors that drive growth tend to be pretty similar across the agency universe. Levels of account retention vary from firm to firm, but not that dramatically. And the recent increasing rate environment has been a “lift all boats” phenomenon.

New business, however, is typically the great separator in the brokerage world. As would be expected, data shows that those who consistently generate the highest level of new business grow the fastest. If new business activity is significantly diminished for a period under shelter-in-place directives, it may hurt the fastest growing firms disproportionately to their slower-growing peers who produce less new business. Encouragingly, we have heard numerous positive stories of new business wins in the midst of COVID-19 from agents and brokers. Are these wins coming from the harvesting of pre-COVID-19 efforts? Or do they represent the “cracking of the code” on new business production in a completely virtual world? Those that “crack the code” will enjoy significant market-share gains during and after the pandemic.

Profitability Overview: Profit margins bolster brokers for the future

Profit margins for the first quarter are always somewhat misleading, as contingent & supplemental income, which falls straight to the bottom line as profit, is heavily weighted in the first half of the year. Profit margins are at their highest levels early in the year and then taper off as the year progresses. Even so, the year-over-year Q1 profit margin data illuminates some interesting trends.

Q1 EBITDA and Operating Profit, 2012-2020

10.7%

3.1%

5.0%

3.0%

High Performing Agencies Low Performing Agencies

Q1 OG 2020E

24.1%27.9%

29.9% 29.0% 28.5% 27.6% 26.9% 27.8% 29.3%

9.2%12.0% 11.1% 9.5% 9.9% 10.4% 9.9% 11.6% 12.8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

EBITDA Margin Operating Margin





- 3 -

Through Q1, agency profitability continued its recent upward trend, increasing from 27.8% in Q1 2019 to 29.3%. This welcome news is likely driven by much-improved contingent & supplemental income results year-to-date. In Q1 2019, contingent income was up 6.2%. Through the first quarter of 2020, it rose 13.3%. Beyond contingent income, though, there is more good news on the profitability front. Operating profits (which exclude contingents) also rose nicely through the first quarter (12.8% versus 11.6% in Q1 2019). This rise supports the claim that agents and brokers’ efforts to drive technological and operating efficiency improvements are working. These operating margin improvements and contingent income results could not come at a better time to help agents and brokers weather the COVID-19 storm. Another lever some agencies are pulling to preserve profitability is employee compensation. Several publicly traded and private equity backed brokers recently announced compensation cuts for employees in anticipation of future economic impacts from COVID-19. Q1 survey participants are still projecting 20% profit margins, consistent with the 2019 year-end OGP survey.

2020 YE EBITDA Margin Expectations

So, where does all this leave us? A record Q1 will help agents and brokers weather what appears to be a certain near-term US economic decline. Uncertain of when the economic shut-down will be lifted, agents and brokers must double down on new business generation efforts and proactively connect with clients and prospects as never before. New business seeds must be planted and prospect pipelines replenished. While the world seems to have hit the pause button, moves made by agents and brokers in the coming months will likely dictate who prospers in the years ahead. We can look back to the Great Recession of 2008-2009 for guidance. Firms that opportunistically invested in growth during those years experienced significant growth in the years that followed, leading several to become today’s market leaders. The opportunity to build for tomorrow’s recovery begins today.

20.0% 20.0%

Pre-COVID Post-COVID

All securities transactions are conducted through Reagan Securities, Inc., an affiliate of Reagan Consulting, Inc. Reagan Securities, Inc., is a member of FINRA/SIPC. Copyright © 2003-2020 Reagan Consulting. All rights reserved. No portion of this may be reproduced without the prior written consent of Reagan Consulting.

Source: Pre-COVID projections from Reagan Consulting’s Q4 2019 OGP Survey and Post-COVID projections from the Q1 2020 OGP Survey

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