2017 P&C Insurance Brokerage Benchmark Report

June 13, 2017

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Smythe Advisory is proud to announce the release of our 2017 Property & Casualty Insurance Brokerage Report. The data collected for this report represents, what we believe to be, the largest available database on the financial performance of Canada’s independent brokerages. This year’s report highlights numerous issues that influence the financial health of industry participants.

Some highlights include:

Financial Performance

Canadian brokers continue to enjoy strong before tax operating profits. It is important to note there has been a decline in the average operating profit in each of the last three reports we have produced. In 2013, the average operating profit was approximately 29% and this has dropped to 26% in this year’s results. Rising wage costs appear to be responsible for the decline. High performing brokers continue to drive results through efficient use of employee resources.

Profitability by Brokerage Size

The overall size or scale of a brokerage continues to be a key factor in insurance brokerage profitability. Traditionally small brokerages offices tend to be profitable as they are directly managed by the owner and are often in smaller communities with lower cost structures. As organizations get larger, there are certain infrastructure costs that must be put in place. They tend to be fixed in nature but are scalable, resulting in greater profitability as the organization grows.

Sales Mix

Sales mix is less important than either the brokerage expertise or the ability to develop appropriate systems to efficiently handle the sales volume and mix of business. Top performers are not necessarily more weighted to commercial lines books. It is our opinion that other factors such as scale, expertise, management and business systems have a greater impact on profitability. Brokerages that focus on specific industries or lines of business are also more profitable.

Personnel

People are the biggest influencer of profitability and perhaps the biggest challenge for Canadian insurance brokerages today.

As in past years, employee effectiveness is the single most important differentiator for brokerage profitability. Our study shows that the top 20% of brokerages earn approximately $135,000 per FTE, compared to $119,000 industry-wide. We do not believe wages are lower for the top performers. We attribute the profitability to employee engagement, scale of offices and systems.

Employee productivity is an area of concern. Personnel expenses as a percentage of revenue rose almost 2% when compared to our previous report. Labour costs are increasing at a rate greater than commission income. There is evidence that it is challenging to recruit and retain quality people. Without significant premium increases and or efficiency gains, we would expect to see personnel costs continue to rise. Larger brokerages are better positioned to manage wage costs as a percentage of commissions because of greater commission rates and efficiencies that come from scale.

The Top Performers

The top performing brokerages enjoyed a 40% operating profit, as compared to 23% for the remaining population. It is our view that the top 20% of brokerages, in terms of profitability, have similar characteristics including:

  • Development of expertise in certain lines of business or industry specialization
  • Creation of systems that align with customer needs creating efficiency
  • Ability to analyze financial results and adjust accordingly
  • Strong employee engagement
  • Operating scale allows for investment in better technology and systems
  • Focus on underwriting
  • Strong relationships with markets delivering both profit and volume to key insurance company partners
  • Management of commercial producer costs
  • Reliance on professional managers

Trends in M&A Activity

M&A activity and deal flow continues to be strong in the Canadian market. In a number of recent transaction prices have been 25 to 30 percent higher than in similar transactions in 2015.

From the seller’s perspective, the most successful transaction occurs when the broker can bring several qualified buyers to create the competitive tension to get the highest selling price and purchase terms that are fair and reasonable. Given the prices being paid, it is equally important that we can understand, speak to and demonstrate the value of the business to potential purchasers. Particularly important is presenting information that is of interest to the purchaser such as strong margins, growth potential, scalability, quality of the book, good front line underwriting and the potential to leverage sales channels.

Recent large valuations should not be taken for granted. Consolidators are carefully evaluating if they are getting adequate returns.






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