Focus on improving margins, not growth, during next hard market

In the coming hard market, focus should be put on increasing profit margins, not on increasing a firm’s size, said Neil Morrison, president and CEO, HKMB HUB and HUB International – Ontario.
Morrison delivered his speech, ‘The Upside of the Downturn,’ as part of the Insurance Institute’s At the Forefront breakfast series in Toronto on May 27.
The next hard market will be a disappointment — tempered with reduced sales in payroll, Morrison told the packed room.
“What that means is … it is very difficult to see growth in this environment, but perhaps we will see increased profitability,” he said.
A firm just needs to be big enough to command economies of scale upon which it can increase margins, but not necessarily be the biggest, he suggested.
He compared the EBITDA (earnings before interest, tax, depreciation and amortization) against brokers’ market value (the multiple of its annual revenue that the market would pay for it should it go on the sales block).
“MMC has an EBITDA of 12% and a market value equal to one-times its annual revenues,” he said. “Willis has a 24% EBITDA, and they command an enterprise value of two-times their annual revenues, and Brown and Brown has a 35% EBITDA and its market value is 2.5x its annual revenue.
“So you can see quite clearly that size doesn’t matter — profitability matters,” he continued.
“The new normal suggests that rather than borrowing big sums of money to buy your rivals and leverage your balance sheet, focus instead on improving margin.”