Decline in Values Driven by ECP, 9% Commission & Split Book Sales
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Use the arrows to see agency values over time. | prev next |
Let’s tackle the three items that had a measurable effect on agency values in the first quarter of 2019:
1. ECP AGENCIES
Recent start-up agencies under Allstate’s lucrative Enhanced Commission Program (ECP) transitioned this quarter for an average sales multiple of right at 2.0 times. This not only caused a decrease in the simple average this quarter, it was also a driving factor in the larger-sized agencies seeing a drop in value. The burning question is why would a very large agency that was recently started, sell for such a lower than average sales multiple?
Prospective Allstate agency buyers going scratch instead of purchasing due to ECP opportunity?
The ECP start-up opportunity is so great, that it is driving approved buyers away from purchasing smaller sized agencies (typically those with $2 million in earned premium or less). With approved agency purchasers viewing the ECP opportunity as far superior to purchasing a small agency, those Allstate agencies with Earned Premium of between $1 million and $2 million realized a significant drop in value this quarter.
2. 9% COMMISSION AGENCIES
If you aren’t hitting baseline expectations to the point that your agency is receiving only a 9% commission, very few buyers are going to want to purchase your agency at full market value. And, if there are parties interested in purchasing your agency, these likely sophisticated buyers are unlikely to give you as a 9% commission selling agent the sale value they would for a better performing agency.
This quarter there were multiple agencies with 9% commission that drove down average values.
3. SPLIT BOOK SALES
Split books are great for Allstate as they bring in two outside buyers and allow for another store front location. However, it will be a rare occurrence where a seller receives the same or a higher sales multiple for his or her agency if the book is split. The only scenario I can see is if Allstate starts allowing small agencies to receive the full benefits of ECP.
Split book sales can have various outcomes – Increase in value, more cash at closing (since two buyers, two loans two down payments), but often the additional expense of two location, even though split by two separate owners, results in an overall lower value for the seller of an agency that becomes split at the time of sale.Â
Not All Agencies Created Equally
This quarter is a great reminder, that even though all agencies are selling a common product (home auto and life insurance), they are all very different. These differences will drive buyers to pay very different values, depending on various attributes of a specific agency.
If your agency is receiving 10% commission and was not a recent start-up you should feel very good about the value of your agency, especially if you have reached scale and have a great customer retention ratio.Â
Sellers call me all the time – usually to tell me that they are planning on selling their business for the average multiple listed on my report. My response is always the same: the Allstate Agency Value Index is a great place to start when trying to set a price on your agency. From there, you have to decide if the various attributes of your business make it worth more or less than the average. If you are selling, take the time to list out the strengths and weaknesses of your business. If you want to sell for more than they average, be prepared to validate your expectations.
$0 to $100,000 in New/Renewal Commission
No agencies were financed in this size group by PPC LOAN in the First Quarter of 2019.
$100,000 to $200,000 in New/Renewal Commission
On the surface, the ECP program appears to be making these sized books unattractive if the agency being sold is not part of a merger transaction.Â
The average sales multiple for this size group decreased from 2.39 times the previous quarter (driven by merger activity), to 1.46 times this quarter. Additionally, hurting this size group is the presence of agencies being sold that were receiving 9% commission.Â
$200,000 to $300,000 in New/Renewal Commission
Agencies in this size group maintained a healthy multiple of 2.47 times, which is favorable compared to 2.49 times in the final quarter of 2018. Assisting in maintaining this relatively strong value for this size group was a healthy mix of outside buyer and existing agents serving as agency purchaser. In fact, 50% of the agencies sold in this size group were to an existing agency owner.
$300,000+ in New/Renewal Commission
After a sizeable decrease in value in the final quarter of 2018, it was expected that this largest size group would realize an increase in value as we entered 2019. However, this size group experienced all three of the initial talking points in this memo – ECP agency sale, 9% commission agency sale, and split book sale. Despite this, the value of the largest sized agencies only saw a nominal drop in their average value.
It is important to note that excluding ECP agencies, split books, and 9% commission agencies, the multiple for this size group was a very healthy 2.86 times for the first quarter of 2019.
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Percentage of Agency Sales by Size Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Use the arrows to see agency values over time. | prev next |
The Allstate buy/sell market in the first quarter of 2019 was dominated by agencies with over $2 million in earned premium. These represented 89% of the agencies financed by PPC LOAN. The split between the three largest sized groups was very even, resulting in very reliable sales multiple results for each.
Allstate Agency Value Ratios | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Use the arrows to see agency values over time. | prev next |
For those agency owners residing in a state where a good portion of the homeowner’s 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.