The news for insurance agents& brokers concerning organic growth continues to be positive:According to the 129 producers who participated in ReaganConsulting Inc.'s most recent Organic Growth & ProfitabilitySurvey (OGP Survey), such growth continues to accelerate in2012.

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Through the second quarter, total agency organic growth totaled5.5 percent—almost twice the organic growth achieved this same timelast year. And here's the surprise: Commercial P&C is leadingthe pack. For the first time since the most recent soft marketbegan in 2004, commercial P&C growth is on track tosignificantly outpace life & health growth by year's end.

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Recent firming in P&C pricing fueled commercial-linesgrowth, which totaled 6.8 percent through the first two quarters ofthe year—more than three times the rate of growth at the same pointlast year (2.2 percent).

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Based on year-to-date results thus far, OGP Survey participantsproject 2012 organic growth for their agencies to total 5.7percent, a marked improvement over 2011's 3.7 percentorganic-growth rate for the industry.

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The typical insurance agency generates a majority of its revenuefrom commercial P&C activity, so this rising commercial P&Ctide has significant implications for agency valuations. Sincegrowth plays such a big part in an insurance agency's valuation,when growth in commercial P&C is stunted, so too is an agency'svaluation. On the flip side, when commercial P&C growth isrobust, the impact on agency valuations is highly positive.

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From 2008-2010, agency-value revenue multiples, as captured inthe Reagan Value Index (a composite of 30 agencies nationally thatwe appraise annually) fell dramatically—and in lockstep withcommercial P&C growth rates. The average independent insuranceagency was valued at 1.27 times revenue at the end of 2008.Commercial P&C growth remained negative or anemic for two moreyears, and agency valuations bottomed out in 2010. By year-end2011, as rates began to improve, so too did agency valuations,increasing to 1.21 times revenue.

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Barring a significant reversal of fortunes in the second half ofthis year, we believe that agency valuations, expressed as amultiple of revenues, will again approach 1.27 times revenue in2012, replacing most, if not all, of the erosion that has takenplace in agency-valuation multiples since 2008.

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So, how long will the good times roll for commercial P&Cgrowth? It's a safe bet that the near term will likely continue toshow improvement. If history is any guide, however, the party maybe shorter than we would like.

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The “new normal” appears to be longer soft-market cycles,punctuated by infrequent and much shorter hard-market cycles. Sincethe late 1980s, the duration of the two soft P&C market cyclesexceeded the only hard-market cycle by better than a 2:1 ratio.Going back even farther, to the early 1970s, the typical hardmarket lasted only three to four years. As the current commercialP&C market turned positive in 2011, we are now roughly 1.5years into a modestly hard market.

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What are the implications of these P&C pricing cycles foragency owners? 

  • Accept the “new normal” regarding long-term pricing in thecommercial P&C marketplace. Don't bank on commercial P&Cpricing to be a significant help in fueling long-term organicgrowth. Invest heavily in building a sales culture capable ofgenerating positive growth in commercial P&C even when theinevitable P&C pricing headwinds return.
  • Consider converting to a fee approach when appropriate toensure that your agency is compensated for the value it delivers,even in a down pricing cycle.
  • Diversify your agency's income base to make it less vulnerableto swings in commercial P&C pricing. Consider using a portionof the improved earnings that current P&C pricing will likelydeliver to your agency to invest in other sources of revenue andgrowth, including personal P&C and life & health. Althoughsmall employee-benefits business remains at significant risk as aresult of the Patient Protection and Affordable Care Act, theprospects for large employee-benefits and ancillary L&Hproducts remain excellent.
  • Finally, plan for the dry commercial P&C seasonsfinancially. Without question, this is a cyclical business. Build astrong balance sheet when times are good so that you can continueto make the necessary growth and people investments, even whentimes are tough.

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