After a couple of years of minimal (or even negative) organic growth and declining profit margins, insurance agents and brokers have put some halfway decent numbers on the board so far in 2011: Organic growth stands at 3.3 percent for the industry through the second quarter, and agents and brokers are projecting organic growth of 4.5 percent for the full year.

And as growth has rebounded, so has broker profitability, as measured by EBITDA margin. Once consistently above 20 percent, EBITDA margins dropped to 16.8 percent in 2009. However, agents and brokers are projecting a return to 20-percent margins for 2011.

So it seems as if things are moving in the right direction. But can this momentum last? To answer that question, we have to look at what has driven the performance turnaround this year.

P&C PRICING

Two major factors are driving broker growth, and one is P&C pricing. The soft market that we are still experiencing today began during the first quarter of 2004—almost eight years ago. However, the soft market is easing and has been for a little while.

After the second quarter ended, quarterly data from The Council of Insurance Agents & Brokers (CIAB) showed that for the first time since the soft market began, commercial-insurance pricing is basically flat. Per the CIAB, commercial-insurance pricing fell only 0.1 percent in the second quarter.

The steady movement toward a flat pricing environment over the last couple of years has been good news for agents and brokers, who typically derive the majority of their revenue from commercial P&C commissions and fees. In 2009, commercial-lines pricing declined by 5.4 percent and commercial-lines growth was negative 3.3 percent. However, the flat pricing in 2011 has contributed to positive 2.2 percent commercial-lines growth for agents and brokers so far in 2011.

U.S. ECONOMIC PERFORMANCE

Though P&C pricing gets a lot of publicity, the performance of the economy has actually been more influential in determining the fortunes of agents and brokers in recent years. In fact, the soft market has been going strong since 2004, but only recently has agent and broker organic growth turned negative. The reason? The “Great Recession” that started in 2008. Only after the economy started going backwards did brokers' struggles intensify.

At first, the recession didn't seem to bother agents and brokers all that much. They were defying gravity. Then, about six-to-nine months after the recession began, a sharp reduction in exposures, coupled with widespread return premiums, jolted the industry—and agent and broker organic growth went negative (see chart, with the clearly visible six-to-nine-month lag). Brokers had a warning period after the recession began, but the effects were inevitable.

Thankfully, when the economy recovered, agent and broker performance also started to rebound—again, six-to-nine months later. U.S. GDP regained positive growth in the third quarter of 2009, but it wouldn't be until the first quarter of 2010 that agent and broker organic growth did the same.

Today, brokers are enjoying the rewards of the 2010 economic rebound. Organic growth has been positive—and climbing—for the last six quarters.

WILL IT CONTINUE?

While agents and brokers continue to believe that things will go well, there are concerns. U.S. GDP growth dropped to 0.4 percent in first-quarter 2011, and there is widespread debate about whether the United States is headed toward another recession.

Agents and brokers haven't seen the effects of this most recent economic slowdown—but the six-to-nine-month clock is ticking. Are we a quarter or two away from another downturn in agent and broker organic growth? Could a stronger P&C pricing environment lessen the impact of a declining economy this time vs. late 2008/early 2009?

Something to watch in the coming months will be mergers-and-acquisitions activity, which suffered in 2009 but rebounded slightly in 2010 as performance picked up. It has been even stronger in 2011.

Agents and brokers are most likely to enter into transactions when they feel good about their ability to perform after close, thus maximizing the value of the firm in an earn-out.