Organic growth is stabilizing for the independent agency channel even as operating profits continue to improve, according to the recently released 2014 Big “I” Best Practices Study.

While last year’s Best Practices Study revealed the highest organic growth rates since 2008, this year’s study reports only one agency revenue category ($1.25-5 million) achieving an increased growth rate of at least one percentage point. But overall growth rates remained in the high single digits, with two revenue categories ($1.25 to 5 and $10 to 25 million) achieving double-digit growth rates.

“The results of this year’s Best Practices Study further demonstrate the stability of the independent agency system despite some challenges,” says Madelyn Flannagan, Big “I” vice president of agent development, research and education. “Most study participants have either grown their business or remained consistent. The industry is also continuing to invest more in staff and technology.”

The study also found that pro-forma profit margins—the actual profitability of an agency after normalizing non-reoccurring/extraordinary expenses and revenue, as well as excessive owner compensation and perks—were strong, but again stagnant. As revenue growth rates slow, profit margins continue to face mounting pressure, which could result in either no growth or negative growth in the coming year.

Meanwhile, operating profit margins—the pre-tax profit of an agency, excluding supplemental income like contingent, bonus and investment income—grew slightly. P-C contingent and life-health bonus income has historically contributed significantly to an agency’s profit margin. But over the last decade, that source of revenue has shrunk. In the past year, Best Practices Agencies focused on becoming less dependent on this income by reducing expenses, becoming more efficient and finding other sources of revenue.

Rule of 20 scores—a simple growth and profitability balancing equation that provides a quick way to determine whether or not agency is creating value for its shareholders—were down this year, reflecting flat growth and profitability results. A score of 20 or more indicates that an agency is maintaining a healthy balance between its efforts to grow revenues and to sustain or enhance profitability. Typically, a core of 20 or more indicates that an agency will achieve, through profit distributions and/or stock appreciation, an industry standard rate of return on the investments it is making in the people, systems and activities needed to grow and operate the agency.

Every three years, the Big “I” collaborates with Reagan Consulting to select Best Practices firms throughout the nation for outstanding management and financial achievement in six revenue categories (less than $1,250,000; $1,250,000 to $2,500,000; $2,500,000 to $5,000,000; $5,000,000 to $10,000,000; $10,000,000 to $25,000,000; and more than $25,000,000). Agencies are nominated by either a Big “I”-affiliated state association or an insurance company and qualified based on operational excellence. The study also reviews and updates financial and benchmarking information for the participating agencies.

Initiated by the Big “I” in 1993 as the foundation for efforts to improve agency performance and create higher valued agencies, the Best Practices Study  documents the business practices of leading independent insurance agencies and urges others to adopt similar practices.  

The following insurance companies and vendors provide financial support for the research and development of the Best Practices study: Agency Business Solutions/Amerisure Insurance, Applied Systems, Beyond Insurance, Central Insurance Cos., Chubb, CNA, EMC Insurance Companies, Encompass Insurance, Erie Insurance, The Hanover Insurance Group, Harleysville Insurance, Imperial PFS, InsurBanc, Kemper Preferred, Liberty Mutual Agency Corporation, Main Street America Group, Ohio Mutual Insurance Group, Travelers and Westfield Insurance.

The complete report can is available for purchase as an e-book or in paper form.

Margarita Tapia is Big “I” director of public affairs.