WHO HAS THE GREENER GRASS?
A Comparative Look at the Allstate, State Farm, and Independent Agency Opportunities
from the perspective of the Agency Owner
Ownership – Who has the best deal?
At a gathering of insurance professionals there would likely be as many answers
to this question as there are agents in the room. This because to some degree comparing
the ownership demands, overhead structure, profitability, risks, opportunities,
etc. of owning an independent agency, an Allstate agency, and a State Farm agency
is very much like comparing apples and oranges. Just as the old saying “America
and Britain are two countries separated by a common language,” so too are
these various venues for insurance agency ownership separated by a common product.
The point is that just because it is neat and easy for a wishful neighbor to look
at the yard next door and observe that its commission rate is better (thus its proverbial
grass is greener) does not make this relatively simplistic observation true. For
instance, what if our wishful neighbor were to find out that he would have to be
willing to work roughly 12 hours a day, or tolerate 70% overhead, or deal with multiple
insurance carriers and their multitude of forms and processes, or would not be allowed
to sell his agency at retirement? A good bet is that he might begin to see that
his narrow commission observation comes with a lot of undesirable strings attached.
It brings to mind another old saying, “You don’t get something for nothing.”
Within the Allstate Family one will hear a good deal of talk regarding agency ownership
and commission opportunities outside of Allstate. In particular is seems opportunities
involving independent agency ownership and ownership of a State Farm Agency are
popular focuses of discussion. However, my gut tells me that the full experience
of being an Insurance Agency Owner cannot be fully appreciated by simply looking
at the base commission rate received by an individual agent.
Since my interest was piqued, I took a stab at comparing what I see to be the three
main agency ownership opportunities in the market today. The three ownership opportunities
are:
- Allstate (10% base)
- State Farm (8% base)
- Independent Agency (15%)
What am I trying to accomplish with this article? Well, after lending $500 Million
to over 1,000 Allstate Agents for agency purchases, I have a strong knowledge of
the Allstate opportunity. So, I wanted to take this opportunity to learn more about
the independent agency and State Farm Agency ownership opportunities. Most importantly
though, I wanted to get a feel for which opportunity is the best. And by best I
mean the best to me. Certainly, everyone will have their own opinion of which opportunity
is the best for them.
My personal expectations for what makes a good ownership opportunity for any business
are:
- I want to make money (profit) in step with my efforts
- I want it to be easy to get in and out of the business (easy to start and easy to
sell)
- I want the business opportunity to be within the framework of a true entrepreneurial
opportunity. My definition of entrepreneurial opportunity is:
- I have the freedom to manage business operations as I see fit
- The business should be an asset on my balance sheet – meaning I can sell it at market
value at anytime
- I want the upside potential to be in step with the downside risk associated with
owning a business
So, if you are considering entering the Insurance business, and can’t decide
which opportunity is right for you, I hope this article helps just a little. If
you are currently an Agent with Allstate, State Farm or an Independent Agency owner,
I hope this article gives you some comfort or clarification about whether or not
the grass is really greener on the other side.
Let’s start by taking a quick look at some basic Background information on
these three opportunities. In each section, I will give my own personal grade (A
– F) based on how the opportunities did or did not meet my criteria listed above:
OVERVIEW:
|
# AGENTS
|
CONTRACT
|
CONTRACT RESTRICTIONS
|
BASE COMP. |
PROFITABILITY
|
TAX STATUS
|
ALLSTATE
|
10,000
|
R3001
|
Exclusive
|
10% + Bonus
|
50% to 65%
|
Ind. Contractor
|
STATE FARM
|
17,000
|
AA05
|
Exclusive
|
8% + Bonus
|
40% to 65%
|
Ind. Contractor
|
INDEPENDENT
|
37,500
|
Var. Carriers
|
Independent
|
12 - 15%
|
28.5%
|
Owner Choice
|
Although Base Commission Percentage is important, clearly a 50% commission is of
no consequence if the business has 99.5% overhead. So the next factor to be considered
in determining the relative value each ownership opportunity offers is the average
base overhead expense required to operate the business.
Essentially an Owner must ask the ultimate question any business owner must ask
- “How much money will I make?” The above chart shows “Profitability”
which represents the amount of discretionary cash flow available to the owner after
all necessary operating expenses to run the business have been paid (not including
debt service).
With regard to business profitability, Allstate and State Farm have a significant
edge on Independent Agency Owners. This is due in large part to the staffing costs
of an Independent agency typically running at just over 50% of revenues.
For me, Allstate is superior to State Farm with regards to commission income and
profitability, and it comes in the form of a more consistent Base Commission Percentage.
Allstate Agents currently get a base commission rate of 10%, which provides a higher
degree of income stability, and subsequently a more consistent profit margin over
those State Farm Agents who receive a base commission of 8%.
When Allstate modifies its base commission to 9% starting in 2013, this will serve
to bring more instability to the income and subsequently the profitability received
by Allstate Agency Owners, as a greater portion of income will be shifted from fixed
compensation to contingent compensation. On the other hand, instability is not always
bad as some agents will be surprised to receive more income than they previously
expected. At the end of the day, I feel the majority of Allstate Agency Owners will
adapt nicely to a 9% base commission rate as this change in compensation will likely
not result in any wild swings in income that would affect Allstate Agents’
ability to efficiently operate their business.
With regard to Contract Restrictions, Independent Agency Owners have the most flexibility
to shop a client’s business within their various suite of carriers. Allstate
and State Farm agents are exclusive and must live with the current price of their
suite of products as set by their exclusive carrier.
***Independent Agency Owner’s Profit listed above was taken from the Insurance
Agents & Brokers of America annual Best Practice Study, which shows the average
adjusted profit for Independent Agents with Revenues under $1,250,000 to be 28.5%.
AUTHOR’S GRADES (OVERVIEW):
Allstate Insurance = B+
State Farm = B
Independent = C
GETTING IN THE BUSINESS
|
APPROVAL
|
INTERN PERIOD
|
PROBATION PERIOD
|
PURCHASE?
|
START-UP?
|
ALLSTATE
|
Interview Process
|
No
|
No
|
Yes - Free Market
|
Approved Location
|
STATE FARM
|
Interview Process
|
9 Months
|
12 Months Min.
|
No
|
Approved Location
|
INDEPENDENT
|
Apply to Carriers
|
No
|
No
|
Yes - Free Market
|
Anywhere
|
When it comes to getting into the business, Independent Agency Ownership gets an
“A.” There are many companies available to assist a new agent with regards
to signing with carriers, picking a location or purchasing an agency. Often, the
only barrier to purchasing a positive cash-flowing Independent Agency is an absence
of quality third-party bank financing.
With Allstate, once you become an approved buyer, you can negotiate and purchase
any agency you desire, or you have the option of opening a start-up agency at a
location to be approved by Allstate. You sign the R3001 contract to be an agent
prior to your first day open, so there is no internship or probationary period.
In my opinion, State Farm has some significant weaknesses with regard to getting
into the business. Once you are an approved agent with State Farm, you cannot simply
purchase a positive cash flowing agency. If a desirable agency comes available,
you can put your name in a hat and then cross your fingers and hope State Farm selects
you for this opportunity. It might even be the case that State Farm assigns you
only a portion of the agency you desire, while giving a portion of the agency to
other State Farm agents.
As a State Farm Agent, if you are selected to operate an existing agency or choose
to a start-up, you must first complete a nine month internship. At the end of the
intern process, you may be terminated; however, if you successfully complete the
intern process, then you become a TICA (Term Independent Contractor Agreement) for
a period of one year. This is essentially your probation period, where State Farm
judges your performance as an agent. If you meet their standards, you become an
actual State Farm Agent and sign an AA05 contract, which signifies you are now an
agent with State Farm. If you fail to meet expectations during your TICA period,
State Farm reserves the right to terminate your TICA contract and not promote you
to an agent. This can be very painful financially, as TICA agents have already signed
a lease and often taken on debt to cover business operations, along with purchasing
the necessary furniture, phone and other equipment to run their agency.
AUTHOR’S GRADES (GETTING IN THE BUSINESS):
Allstate Insurance = B+
State Farm = F
Independent = A
GETTING OUT OF THE BUSINESS
|
ABILITY TO SELL
|
EASE OF TRANSITION
|
SALES PRICE?
|
CASH AT CLOSING?
|
TRAILING BENEFITS?
|
ALLSTATE
|
Yes
|
Medium to High
|
2.5X Commissions
|
75% to 100%
|
No
|
STATE FARM
|
No
|
Low
|
$0
|
8% + Bonus
|
Defined Benefit
|
INDEPENDENT
|
Yes
|
Medium to High
|
1.5X Commissions
|
0% - 10%
|
No
|
In a SURVEY* of Independent Agency owners who purchased an agency, only 15% borrowed
money from a bank. Three times this amount utilized seller financing, while the
remaining sales were consummated with cash, stock or other collateral sources. Getting
out of your Independent Agency seems easy on paper, however, with the risk of little
to no cash being received at closing, this decreases the value of Independent Agency
Ownership based on my desire to have an Entrepreneurial Opportunity that is easy
to get out of.
With Allstate Insurance, Agents are regularly selling their agencies for 2.0 to
2.5 times Commissions and are receiving the bulk of the sales price in cash at closing.
The availability of bank financing is relatively strong for Allstate Agents, so
true value is often transferred in the form of cash at closing from Buyer to Seller.
As a worst-case liquidation value of the business, Allstate will purchase the agency
back from the agency owner for 1.5 times qualified commissions (Termination Payment
Provision or TPP Value). Only 90 days’ notice is required for agents to put
their agency back to Allstate. This represents a very unique base floor value, which
may often allow an agent to get cash for their business in excess of what an Independent
Agent may receive without any hassle of finding a buyer or going through the sales
process.
State Farm has essentially a “Defined Benefit Plan”, which they call
the Annual Investment Payment Program (AIPP). There is a five-year vesting period,
and then a percentage of your commission is returned to you in year seven, based
on year six performance. These in arrears payments can be received for up to 20-years,
so long as the individual remains an agent with State Farm during the entire time
period. To me, this plan seems more like a bonus program as agents do not continue
to receive additional contributions to their retirement from State Farm once they
reach retirement age.
*The SURVEY was produced in the book “Maximizing Agency Value II,” produced
by the Academy of Producer Insurance Studies.
Furthermore, State Farm Agents have no ability to sell their agency. This has resulted
in many State Farm agents hanging on to their agencies well past their desired retirement
age as they don’t have the opportunity to cash in their years of hard work
for a lump sum transition sales price.
AUTHOR’S GRADES (GETTING OUT OF THE BUSINESS):
Allstate Insurance = A
State Farm = C
Independent = B
OTHER BUSINESS ASPECTS
|
TERMINATION
|
SUPPORT
|
CORPORATE AD SPEND
|
SALES EXPECTATIONS
|
PRODUCT MIX?
|
FLEXIBILITY
|
ALLSTATE
|
With/Without Cause
|
Extensive
|
$32,000 p/Agent
|
Yes
|
Bonus contingent
|
Low/Medium
|
STATE FARM
|
With/Without Cause
|
Extensive
|
$30,000 p/Agent
|
Yes
|
Required
|
Low
|
INDEPENDENT
|
Carrier Discretion
|
Extensive
|
None
|
Yes
|
Owner Discretion
|
High
|
With all three business opportunities, carriers can terminate your contract with
or without cause at any time. This means more risk for Allstate and State Farm Agents
as they are both exclusive with a single carrier. In my experience, both State Farm
and Allstate have been relatively consistent and conservative in using their rights
to terminate agents.
All three business opportunities also come with Sales Expectations from their carrier(s).
Bonus money and trips are at stake, along with the ability to stay with the carrier
if base sales goals are not met for extended periods of time.
State Farm is a little unique with regards to the product mix as State Farm agents
are not only expected to sell P&C / Life, but also Health Insurance, Mutual
funds, and various banking products (through State Farm Bank), including auto loans,
CD’s and saving accounts.
At the end of the day, Independent Agents possess the most freedom and flexibility
to run their business how they see fit. Independent Agents can set their own hours
of operation, can choose to sell or not sell any product, they staff in accordance
with their own standards, market at their own discretion, and can move a customer
to another carrier if it benefits themselves and their customer.
Support for the individual agent is very strong at both Allstate and State Farm.
Not only does each of these two major carriers provide various levels of management
whose sole job is to assist the agents, each of these major carriers spends millions
of dollars in advertising each year without charging a franchise fee to the individual
agent. Per the
J. D. Power and Associates Insurance Information Institute, State Farm spent approximately
$30,000 per agent in 2009, while Allstate Insurance spent approximately $32,000
per agent during the same time period. In contrast to Independent Agency owners
who shoulder 100% of their advertising burden, the spending by Allstate and State
Farm allows the individual agents to realize strong close rates in price proxy markets,
while maintaining very profitable businesses.
AUTHOR’S GRADES (OTHER BUSINESS ASPECTS):
Allstate Insurance = B
State Farm = B-
Independent = A

FINAL ANALYSIS
ALLSTATE INSURANCE:
Pros:
- Very Profitable Businesses Model
- Relatively Easy to get in and out of the business
- Financing Readily available
- Corporate Support / Marketing
- Worst case liquidation value of agency is 1.5X qualified commissions back to Allstate
Cons:
- Exclusive Agreement with Single Carrier
- Some Restrictions on business management & product mix sold

INDEPENDENT:
Pros:
- Freedom to Manage Business Operations
- Very Easy to get in the business
- Can shop clients with various carrier relationships
Cons:
- Lack of Consistent / Quality Financing Available, which often results in true value
not always transferred at the time of closing in the form of cash from buyer to
seller
- Not as profitable to the agency owner as Allstate or State Farm
STATE FARM:
Pros:
- Relatively Profitable Business Model
- Corporate Support and Marketing
Cons:
- Hard to get into the business
- No Ability to Sell the business
- Little reward at the time you get out of the business
- Restrictions on business management & product mix sold

If I had to rank these three opportunities based on my guidelines listed above,
here would be my list:
- Allstate Insurance
- Independent Agency Ownership
- State Farm
When looking at State Farm I really don’t see Agents as truly owning their
businesses. Yes, State Farm Agents get paid as independent contractors, but they
never have the ability to sell their business. In theory, they can never truly actualize
the effort they put in to grow their business. Would you borrow money to spruce
up a house you were renting? I do not understand why State Farm Agents take on debt
to operate a business they truly rent and will never own. State Farm simply just
doesn’t meet the sniff test when it comes to a true entrepreneurial opportunity.
For me the dollars and cents associated with owning an Allstate Agency outweigh
the freedoms that Independent Agency Owners have. With Allstate, I like the profit
margins Agency Owner’s realize. With the right sized agency and good expense
management, it gives the owner an opportunity to substantially save for the future.
This strong profit margin also gives Allstate Agents the ability to weather through
times, assuming the individual agent is not spending all of their take home pay
during the good times. Being frugal is always recommended in any of these business
opportunities.
Citations:
- “Maximizing Agency Value II,” produced by the Academy of Producer Insurance
Studies.
- Insurance Agents & Brokers of America annual Best Practice Study.
- J. D. Power and Associates Insurance Information Institute