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2016 Q2

Second Quarter 2016

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Large Agency Sales Spark Increase in Agency Values

The Second Quarter of 2016 boasts the largest number of agencies with over $5 million in Earned Premium transitioned since the Second Quarter of 2010. This surge in larger sized agency sales dramatically increased the simple average multiple from 2.35 times in the First Quarter of the year to 2.59 times in the current Quarter.

Allstate Agency Price to 12MM Earned Premium Ratio (National Average)

$0 to $100,000

$100,001 to $200,000

$200,001 to $300,000

$300,001 and up

Simple Average

Low

High

2000
N/A
N/A
N/A
N/A

0.202

0.117
0.262

2001
N/A
N/A
N/A
N/A

0.209

0.133
0.311

2002
N/A
N/A
N/A
N/A

0.197

0.119
0.255

2003
N/A
N/A
N/A
N/A

0.199

0.147
0.254

2004
N/A
N/A
N/A
N/A

0.236

0.157
0.393

2005
N/A
N/A
N/A
N/A

0.259

0.175
0.398

2006
N/A
N/A
N/A
N/A

0.298

0.188
0.402

2007
2.37
2.65
2.92
3.01

2.96

1.21
4.56

2007
N/A
N/A
N/A
N/A

0.292

0.121
0.456

2008
2.32
2.41
2.74
3.13

2.71

1.45
4.06

2008
N/A
N/A
N/A
N/A

0.271

0.145
0.406

2009
2.14
2.35
2.50
2.78

2.46

0.82
3.97

2009
N/A
N/A
N/A
N/A

0.247

0.082
0.397

2010
N/A
N/A
N/A
N/A

0.24

0.106
0.353

2010 1st QTR
1.94
2.29
2.52
2.91

2.39

1.06
3.53

2010 2nd QTR
2
2.27
2.47
2.8

2.37

1.17
3.16

2010 3rd QTR
2.22
2.26
2.5
2.74

2.43

1.42
3.31

2010 4th QTR
1.94
2.33
2.49
2.76

2.41

1.95
3.28

2011 4th QTR

N/A

0.231

0.12

0.366

2011 1st QTR
1.78
2.36
2.49
2.73

2.47

1.2
3.57

2011 2nd QTR
1.99
2.37
2.41
2.53

2.33

1.2
3.66

2011 3rd QTR
1.89
2.16
2.45
2.7

2.25

1.5
3.66

2011 4th QTR
2.05
2.23
2.45
2.52

2.34

1.62
3.37

2012 4th QTR

N/A

0.229

0.127

0.336

2012 1st QTR
1.87
2.2
2.41
2.54

2.3

1.47
3.07

2012 2nd QTR
1.84
2.27
2.4
2.56

2.3

1.46
3.29

2012 3rd QTR
1.96
2.22
2.33
2.59

2.28

1.27
3.24

2012 4th QTR
2.14
2.21
2.43
2.55

2.39

1.53
3.36

2013 4th QTR

N/A

0.247

0.107

0.349

2013 1st QTR
2.1
2.15
2.38
2.51

2.3

1.28
2.95

2013 2nd QTR
N/A
1.99
2.3
2.57

2.34

1.88
3.07

2013 3rd QTR
2.19
2.18
2.39
2.68

2.5

1.59
3.07

2013 4th QTR
N/A
2.2
2.48
2.74

2.5

1.07
3.49

2014 4th QTR

N/A

0.264

0.107

0.352

2014 1st QTR
1.74
2.32
2.35
2.7

2.38

1.07
3.16

2014 2nd QTR
N/A
2.43
2.47
2.76

2.62

1.73
3.52

2014 3rd QTR
N/A
2.52
2.54
2.77

2.66

1.97
3.45

2014 4th QTR
N/A
2.43
2.54
2.79

2.69

1.94
3.52

2015 4th QTR

N/A

0.251

0.126

0.431

2015 1st QTR
N/A
1.99
2.45
2.66

2.5

1.69
3.35

2015 2nd QTR
1.48
2.4
2.5
2.85

2.54

1.34
4.31

2015 3rd QTR
1.26
2.04
2.71
3.05

2.55

1.26
3.66

2015 4th QTR
1.86
2.22
2.39
2.91

2.43

1.68
3.31

2016 1st QTR
1.53
2.09
2.47
2.61

2.35

0.81
3.01

2016 2nd QTR
N/A
2.1
2.51
2.79

2.59

1.61
3.78

Use the arrows to see agency values over time.

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Existing Agents Buying Big

Forty-three percent of agencies with over $5 million in Earned Premium that transitioned in the Second Quarter of 2016 were sold to an existing agency owner. Existing agency owners paid an average of 3.38 times to execute these large-sized purchases, while Outside Buyers paid an average multiple of 3.10 times for greater than $5Million in Earned Premium.

As has been stated in previous editions of the AAVI, existing agency owners typically possess greater purchasing power than Outside Buyers depending on the level of equity they hold in their existing agencies. In fact, the Third Quarter edition of the AAVI in 2014 noted two key concepts that are occurring in the Second Quarter of 2016. These two concepts from 2014 are listed below:

“Many Existing Allstate Agency Owners around the country have voiced their desire for ownership of additional Allstate premium dollars. This significant desire to own additional Premium dollars is now an opportunity many top performing agents can execute on, and they are viewing the opportunity as “too good to pass up.” As a result, existing Allstate agents are making aggressive purchase offers when a quality buying opportunity presents itself….”
“Beyond just their desire to purchase additional premium dollars, existing Allstate Agency Owners are in a unique buying position as they simply are able to pay more for a purchase than your typical outside buyer. Utilizing the equity in their existing agency contributes to an agent’s purchasing power, something an Outside Buyer does not have at his or her disposal.
In most instances, an existing Allstate agency owner is providing for their personal living needs from the cash flow of their existing agency, and any profits from a satellite purchase simply represents “gravy.” This is not the case with Outside Buyers, as they typically need every dollar of cash flow to support their personal living obligations and pay business overhead, along with business purchase loan payments.”

As noted above, the two main themes from the 2014 Third Quarter AAVI are both prevalent today, as (1) Existing Agency Owners are executing a purchase that they view as “too good to pass up”, and (2) they are also utilizing equity in their existing agency to maximize their purchasing power. Both of these factors certainly contributed to the solid values realized in the Second Quarter of 2016 – specifically for agencies with over $5 million in Earned Premium.

Size Matters to Value Well Beyond $3Million in Earned Premium

With an increased number of larger-sized agencies transitioning this Quarter, it is worthwhile to take a deeper look at the multiples those agencies with over $4 million and $5 million in Earned Premium garnered during the Second Quarter of 2016:

As you can see, agencies with $3 million in Earned Premium command a solid value; however, as agency Premium grows, the value of the agency continues to increase. For those not yet at scale, this chart can only serve to strengthen the argument for reinvesting free cash flow into the business for growth purposes.

Why is the market paying a higher multiple for larger sized agencies? One explanation might be that buyers of the largest-sized agencies are able to take a long-term view of their investment as the abundance of cash flow they have at their disposal allows them to weather the usual ups and downs of the insurance industry that occur over time.

Smaller-sized agencies (those with revenues less than $200,000) are focused on the here and now (a short-term view) where covering the costs of business overhead along with personal owner salary leaves minimal cash flow for growth investment and marketing. Having peace of mind when purchasing a larger-sized agency as to the certainty of cash flow has allowed both existing agency owners and Outside Buyers to pay a multiple of greater than 3.0 times and do so comfortably while realizing business success.

Smaller Sized Groups Values Stable in Q2

Those agencies with less than $3 million in Earned Premium saw nominal increases in value, which is a good sign coming off of recent value drops. It is certainly worth noting that agencies with between $200,000 and $300,000 commission income realized a value of 2.51 times this Quarter, eclipsing the 2.50 times threshold for the first time in three quarters.

Percentage of Agency Sales by Size Group

$0 to $100,000

$100,001 to $200,000

$200,001 to $300,000

$300,001 and up

2007 1st QTR

N/A

2007 2nd QTR

N/A

2007 3rd QTR

N/A

2007 4th QTR

N/A

2008 1st QTR

N/A

2008 2nd QTR

N/A

2008 3rd QTR

N/A

2008 4th QTR

N/A

2009 1st QTR

N/A

2009 2nd QTR

N/A

2009 3rd QTR

N/A

2009 4th QTR

N/A

2010 1st QTR

N/A

2010 2nd QTR

N/A

2010 3rd QTR

N/A

2010 4th QTR

N/A

2011 1st QTR

N/A

2011 2nd QTR

N/A

2011 3rd QTR

N/A

2011 4th QTR

N/A

2012 1st QTR

N/A

2012 2nd QTR

N/A

2012 3rd QTR

N/A

2012 4th QTR

N/A

2013 1st QTR

17%

28%

27%

28%

2013 2nd QTR

N/A

21%

38%

41%

2013 3rd QTR

15%

26%

52%

2013 4th QTR

N/A

25%

42%

33%

2014 1st QTR

15%

58%

21%

2014 2nd QTR

N/A

17%

29%

54%

2014 3rd QTR

N/A

43%

52%

2014 4th QTR

N/A

36%

61%

2015 1st QTR

N/A

12%

41%

47%

2015 2nd QTR

22%

44%

30%

2015 3rd QTR

32%

27%

36%

2015 4th QTR

14%

31%

24%

31%

2016 1st QTR

31%

24%

31%

2016 2nd QTR

N/A

14%

35%

51%

Use the arrows to see agency values over time.

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The Second Quarter of 2016 saw a large number of agencies with over $3 million in Premium sell (51%), with agencies over $4 Million in Premium representing 50% of this size group. Fewer ADB qualifying agencies were financed in the Second Quarter, and it will be interesting to watch going forward if this becomes a trend.

Allstate Agency Value Ratios

Agency Price to New/Renewal Commissions

Agency Price to Total Revenues

2007 1st QTR

2.95

2.37

2007 2nd QTR

2.74

2.39

2007 3rd QTR

2.75

2.35

2007 4th QTR

2.49

2.18

2008 1st QTR

2.95

2.38

2008 2nd QTR

2.74

2.39

2008 3rd QTR

2.75

2.35

2008 4th QTR

2.49

2.18

2009 1st QTR

2.65

2.28

2009 2nd QTR

2.5

2.22

2009 3rd QTR

2.42

2.17

2009 4th QTR

2.37

2.17

2010 1st QTR

2.39

2.08

2010 2nd QTR

2.37

2.09

2010 3rd QTR

2.43

2.13

2010 4th QTR

2.41

2.09

2011 1st QTR

2.47

2.18

2011 2nd QTR

2.33

2.05

2011 3rd QTR

2.25

2011 4th QTR

2.3

2.06

2012 1st QTR

2.3

2.02

2012 2nd QTR

2.32

2.05

2012 3rd QTR

2.28

2.05

2012 4th QTR

2.39

2.11

2013 1st QTR

2.3

2.06

2013 2nd QTR

2.33

2.11

2013 3rd QTR

2.5

2.21

2013 4th QTR

2.5

2.19

2014 1st QTR

2.38

2.17

2014 2nd QTR

2.62

2.28

2014 3rd QTR

2.66

2.31

2014 4th QTR

2.69

2.32

2015 1st QTR

2.5

2.19

2015 2nd QTR

2.54

2.21

2015 3rd QTR

2.55

2.24

2015 4th QTR

2.43

2.14

2016 1st QTR

2.35

2.06

2016 2nd QTR

2.59

2.32

Use the arrows to see agency values over time.

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For those Agency Owners residing in a state where a good portion of the homeowners insurance is written through a third party brokerage company (primarily coastal counties), looking at the multiple of revenues may be your best measuring stick for agency value as it takes into consideration both Allstate and brokered (i.e. non-Allstate) revenues. Certainly, the brokerage book is a reliable source of renewal income and has a level of value that is not presented in the traditional multiple applicable to Allstate commissions.

The following article is a reprint from the fourth quarter of 2011 and is presented again because of it's continuing relevance to Allstate agencies.

Businesses are Meant to be Profitable

I understand Allstate's desire to have its agents reinvest in their agencies in order to stimulate growth. I also understand the desire of individual agents to meet those goals set forth by Allstate, since doing so means greater commission income and job security.

However, I think some agents lose sight of the real goal in owning their own business, which is to maximize shareholder value. Yes, you are likely the only shareholder of your business, but that doesn't lessen the obligation to maximize your own shareholder wealth. Yet, many agents are busy maximizing shareholder value for Allstate Insurance at the expense of their own shareholder value.

I can hear NAPAA now. What about the threat of termination? What about quotas? I know about all this. I didn't say it was easy to maximize shareholder value for individual Allstate Agents. I am saying there are many agents who need to spend a lot more time developing a real plan for doing business, a plan that includes a healthy mix of meeting Allstate's goals while also maximizing personal income.

So, how is shareholder value maximized for an Allstate agent? This needs to be answered individually by each agency owner. However, I do know that spending nearly every penny you make on growing your business is not the way to maximize value. Living off of a spouse's wages and borrowing on a home equity loan or credit cards, with the hope of one day getting your money back on a sale, is not a smart strategy for maximizing your personal shareholder value.

Wealth in the Service Sector

The most tried and true way to get wealthy owning a service sector business is through the accumulation of cash during your years and decades of ownership. Run the numbers and you will find this strategy produces a much higher return than putting all your hopes into getting top dollar for the sale of your agency.

Let's compare an Allstate Agency sale to a sale of a home in your neighborhood. Everyone wants to know what homes are selling for in their own neighborhood and the benchmark is the Price Per Square Foot. Most homes in a neighborhood will sell for just under or just over the average Price Per Square Foot for the area. Little increase is realized for having a highly desirable floor plan, a large lot, or a new pool. These "perks" need to have been enjoyed fully by the seller, because at the time of sale, you are unlikely to get your money back on these items.

The same is true for Allstate Agencies. A great retention ratio, low loss ratio or excellent business profit will result in some increase in price for the selling agent, but it will be nominal. This is the main reason why agents should take a good portion of their business profits to save for the future and diversify their wealth. Failure to do so will result in significant loss in value. As we have already determined, a well-run agency only realizes a nominal increase in the sale price, at best.

Diversification

What would you say if I told you to take all your free cash-flow, retirement and personal liquid savings and put it into a really hot stock that is a sure winner? Would you think I was crazy? I hope so. You might even mention diversification of wealth. And I would agree, however, I regularly see Allstate Agents with 80-90% of their personal net worth tied up in their Allstate Agency and it is usually a result of an extended period of "reinvesting all free capital back into the business."

Don't get me wrong, I think Allstate Agencies are a great investment. I have assisted in lending over $500 Million in Loans to Allstate Agencies. They are successful businesses that repay their loans on time. In fact, there may be a year or year(s) where neglecting retirement savings or wealth diversification in the name of "growing at all costs" may be a good short-term strategy. However, I can't see this as a one-size-fits-all long-term strategy.

Follow the Leader

Allstate holds Investor Days, which provide commentary on how Allstate as a company is going to maximize shareholder value and why potential investors should invest in Allstate's stock. If you held an Investor Day, what would you say? Call me at (281) 419-0400 and let's practice. Do you think I would be interested in investing in your business? Or do you think I would hear a lot of talk that would be more for the ears of Allstate Management and less for someone wanting to invest in your business.

So, why all the fuss? Why am I talking about this subject? Because I know there are many great Allstate Agents out there who are struggling to survive. It's not because they paid too much for their agency. It's not because Allstate isn't competitive enough. It's because they keep banging their heads against the wall by not making wise decisions about how to run their business.

What's at Stake?

I know how important an Allstate Agent's business is to its owner. It's personal, it's emotional and there is a lot on the line. These are not passive investments where an individual might be willing to "walk away" if things don't work out. The majority of Allstate Agents are self-employed and their agency serves as their sole source of income and the means by which they provide for their families. Let's all do some early year planning in 2012 and position ourselves to meet our personal, as well as Allstate's goals.