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Values Remain Strong Thanks to Mergers and Existing Agents Purchasing Satellites
Allstate Agency values remained strong in the Third Quarter of 2016 thanks in large part to both merger transactions being executed by Outside Buyers and Existing Agency owners purchasing a satellite location. Recent trends have seen top-performing existing Allstate Agency Owners receive approval to acquire a satellite, along with the occasional Outside Buyers being granted approval to purchase and merge two or more locations when such action is deemed to support Regional business objectives. Although the majority of Allstate Agency sales continues to be to Outside Buyers, the sheer existence of both Outside Buyers completing a merger and Existing Agency owners purchasing a satellite (regardless of their frequency or lack thereof), has been an important part of Allstate Agency values maintaining their current levels – a concept that will be discussed in greater detail below.
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The premise above, which states that Allstate Agency values are at their strongest when mergers are on the table and Existing Agents can pursue approval to purchase a satellite, is supported by these occurrences of the Third Quarter of 2016:
Supply and Demand
The inclusion of Existing Allstate Agency owners as part of the approved buyer pool has increased demand for Allstate Agencies and has been great for Allstate Agency values. This has been a long-standing trend and is very apparent in this quarter’s numbers, as Outside Buyers paid an average multiple of 2.56 times for agencies with $3 Million in Earned Premium or greater, while Existing Allstate Agency owners paid 3.19 times. The chart below depicts how movements in demand affect the Price/Value of Allstate Agencies.
Limited Market Demand
In the chart below, the “Limited Market Demand” line depicts a price equilibrium or average sales multiple of 2.56 times for agencies with over $3 Million in Earned Premium. This demand line reports Allstate Agency sales only consummated by Outside Buyers and is labeled as the “Limited Market Demand” line, as it excludes those agencies that were purchased by an Existing Agent.
Open Market Supply and Demand
The above chart also depicts the “Open Market Demand Line,” which illustrates how Allstate Agency values increase when you have a larger pool of approved buyers. Open Market Demand is defined as the inclusion of both high-performing Existing Agents along with Outside Buyers as approved purchasers who are looking to acquire an established Allstate Agency. The resulting sales multiple is 2.74 times, a much higher multiple as greater demand proves to equate to a higher Price / Value.
It is interesting to note that just the inclusion of a few highly qualified existing agency owners as purchasers of established satellites can have a significant effect on Allstate Agency values (Existing Agency owner’s represented 21% of the transactions in this Quarter). Certainly, each Region reserves the right to approve or disapprove any Agent wanting to purchase based on the business objectives of the Region or even the character or performance of the individual agent requesting approval to purchase. It is refreshing to see top performing agents get the opportunity to oversee larger volumes of premium dollars on behalf of Allstate Insurance, something that is undoubtedly good for shareholders and customers alike.
Why are Existing Agents Paying More?
It all comes down to purchasing power. Outside Buyers looking to purchase an established agency are purchasing a good paying job, which in most instances will be the only source of income used to provide for their family. Outside Buyers have to pay their mortgage, car notes, child expenses, etc. out of this newly purchased business, so they bring a unique level of scrutiny to the due diligence process, primarily when analyzing the cash flow of the business and what they can afford to pay as an Outside Buyer.
Existing agents almost always have their “grocery money” covered from their existing agency cash flow. As a result, their purchasing power is greater than an Outside Buyer, as the additional satellite business they are purchasing amounts to “gravy” on top of an already well performing and cash flow positive business.
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The Third Quarter of 2016 saw a large number of agencies with over $2 million in Premium sell, with agencies over $3 Million in Premium representing 43% of this size group. Fewer ADB qualifying agencies were financed in the Third Quarter, and it will be interesting to watch going forward if this becomes a trend.
Allstate Agency Value Ratios | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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.