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2011 Q2

Second Quarter 2011

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Mergers Abound

The debt ceiling is currently being negotiated by Congress with an August 2nd deadline, the stock market is coming off a relatively flat Second Quarter, and Greece is still working to finalize a bailout plan. Change is in the air, and that includes Allstate Insurance. Rumors of changes to the current compensation plan for Allstate Agents is all the buzz and Agency Values have moved significantly in the Second Quarter of 2011.

Why this move in agency values? One could look to the below excerpt from the Third Quarter 2010 AAVI Report which tells the story we seem to be currently living:

“It does appear that the increase in value of smaller agencies may be affecting the value of larger agencies, as more Outside Buyers are opting to purchase and merge multiple smaller agencies instead of purchasing an existing large agency. With the option in some regions to purchase and merge multiple smaller Agencies, Outside Buyers are essentially picking up a larger Allstate Agency on the cheap. Sellers of larger agencies now have competition from not only other large agency sellers, but also two or three small agencies that might be geographically appropriate for a merger.”

The increase in allowed mergers of small to medium sized agencies during the Second Quarter of 2011 has significantly increased the supply of available agencies with Renewal Commissions of $300,000+. Simple supply and demand economics tells us that an increase in supply will drive down price. The most affected agencies are those with Renewal Commissions of $300,000 or greater, which realized a decrease in value from 2.73 times to 2.53 times over the last quarter. It will be interesting to watch where larger sized agency values trend in the future. One could speculate that these larger agencies are primed for an increase in value in the near future as the current robust market for agency mergers is not sustainable over the long term.

The numbers don’t lie:

100% of agencies transitioned with renewal commissions of $100,000 or less were part of a merger transaction.
96% of agencies transitioned with renewal commissions between $100,000 and $200,000 were part of a merger transaction.
50% of agencies with renewal commissions between $200,000 and $300,000 were part of a merger transaction.
18% of agencies transitioned with over $300,000 in renewal commissions were part of a merger transaction.

Keep in mind that the numbers above only include Allstate agency acquisition transactions that PPC LOAN was involved with from a financing standpoint. Although not inclusive of all agencies transitioned during this quarter, the effect on agency values from Allstate’s expanded allowance of merger transactions is very apparent. We have certainly moved a long way from agency mergers being limited strictly to those with an earned premium of $800,000 or less. These developments show Allstate’s commitment to allowing agencies to grow to Ideal Size via means outside of organic growth.

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 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

Use the arrows to see agency values over time.

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Agency Analysis by Size Group

$0 to $100,000 in New/Renewal Commission

As mentioned above, 100% of these agencies were part of a merger transaction, which likely served as the driving force behind increasing values relative to the first quarter of 2011. A healthy mix of existing agents and Outside Buyers were able to participate in purchasing and merging agencies in this group.

$100,000 to $200,000 in New/Renewal Commission

96% of the agencies in this group were part of a merger transaction for either an existing agent or an Outside Buyer. Although slight, these agencies continue to experience an increase in value, which can be directly attributed to the growing number of allowed merger transactions. Historically, the majority of agencies transitioned as part of a merger transaction was limited to the smallest agencies. Recently, however, agencies in this size group have been part of merger transactions.

$200,000 to $300,000 in New/Renewal Commission

50% of the agencies transitioned in this size group were part of a merger transaction, with the majority going to an Outside Buyer who was also merging in another smaller agency. For the first time in quite a while, this group experienced its first negative movement away from a 2.50 multiple. It will be interesting to see where the values of these agencies trend in the future.

$300,000+ in New/Renewal Commission

As mentioned above, this size group continues to compete against not only other larger agencies, but against two to three smaller agencies, which can be merged at the time of sale. Since buyers have a preference for larger agencies, this group remains the most valuable. Only time will tell if the current dip in value is the new reality for larger agency owners, or if it’s attributable to the recent increase in supply of larger agencies due to robust merger activity, with a correction on the horizon.

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

Use the arrows to see agency values over time.

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Second Quarter 2011

I want to start 2011 off a little different by presenting my editorial as the start piece to the Allstate Agency Value Index. Excuse me for my selfishness in this matter, but I feel this piece addresses the current, pressing issue that Allstate Agents and Allstate Managers bring to our attention, and that is "What is PPC LOAN really lending?" I hope this information is helpful, as I not only share the numbers, but the method behind our madness. Our goal as a company is longevity. We have been lending to Allstate Agents for over 10 years, and we want to continue doing that for 20 and even 30 years from now.

Editorial - From the Desk of Paul Clarke

I want to start this Quarters editorial by saying thanks to those of you who provided the great feedback regarding my coverage of covenant not to compete agreements, and the need for strict language to protect Allstate Agency Purchasers from the threat of potential injurious seller activity. It seems that those offering comment generally observed/noted some firsthand knowledge of a covenant violation, and were appreciative of the subject being brought to light.

What is PPC LOAN really lending?:

I constantly receive calls from Allstate Agents, Prospective Agents and various members of Allstate Management interested in understanding more about, or concern with, the following elements of PPC LOAN's Allstate Agency Acquisition Lending Program:

How much cash should an agency seller expect to receive at closing?
How much money does a purchaser typically put down?
What about seller financing?
Is 100% financing really available?

My goal with this Quarter's editorial is to answer all of these questions. First, I must point out the criteria a loan had to meet to be included in this analysis:

Outside Purchasers only (transactions involving existing agency owners were excluded as they use the availability of their existing agency’s equity in lieu of cash down or a seller note, etc.)
The agency being acquired has Earned Premiums ranging between $2,000,000 & $4,000,000
No distressed agency sales
No Family Member to Family Member, or discount sales

During the first quarter of 2011, Allstate Agency acquisition transactions meeting these conditions, which were financed by PPC LOAN, exhibited an average earned premium total of under $3,000,000, and were sold for an average of approximately $750,000 or 2.51 times renewal commission income.

Highlights:

Buyers in these transactions put an average of roughly 4% towards the purchase price for the agencies
Sellers retained roughly 10% of the purchase price in the form of a seller note
PPC LOAN provided financing for roughly 86% of the purchase price. Including the 4% down payment from the buyer, Sellers received roughly 90% of the value for which their agencies were sold in the form of cash at closing.
On average, PPC LOAN also provided buyers with an additional $23,000 in funds to support their sundry costs associated with the acquisition transaction and post-closing working capital needs
In total, PPC LOAN extended on average 2.24 times the renewal commissions of the agency being purchased

Additional Data:

To provide further data regarding PPC LOAN's lending program, the chart below shows the amount of financing received by Funded Outside Buyers, as a percentage of the agent's agreed purchase price with their seller. As you can see, over 50% of Allstate agents who received loans through PPC LOAN received a minimum of 90% total financing of their purchase price, with 23% of Outside Buyers receiving financing greater than 100% of their agreed purchase price, i.e., these agents received 100% financing plus additional working capital.

These are the facts, but despite this we continue to hear the periodic rumors from Allstate Management and Agents in various parts of the country, such as, "I hear PPC LOAN is not lending in certain states," or, "I hear PPC LOAN does not provide financing greater than 80% of the purchase price." Why the rumors? It's because at the root of them each has a kernel of truth. We all tend to experience reality on our doorstep and if you were declined by PPC LOAN for financing that is your reality. The problem arises when you decide your reality is everyone else's reality and spread the word of this false assumption.The bottom line is that since April of 2000 PPC LOAN has provided and continues to provide financing to Allstate agents secured by their commissions. To date, PPC LOAN has financed roughly $425 million in loan fundings in all 50 states. It is PPC LOAN's goal to thoroughly investigate each and every financing request involving an Allstate agency that is brought to our attention.

However, it is a fact that virtually no two Allstate agency acquisition transactions are exactly alike. This because of the myriad of mixes of Allstate agency locations, markets, staffing, and reasons for sale, combined with the variety of buyers in terms of the mix of their professional experience, personal liquidity, personal wealth, personal credit history, and more. Consequently, though frustrating or at the least confusing to some buyers and sellers, the mere fact that two agencies generating $300,000 in commissions are being sold for $600,000 and are located in the same ZIP Code, does not make them equal when it comes to securing approval for financing. Some deals represent an ill fit of buyer experience and/or personal financial condition with the agency acquisition target, and others represent an ill fit of buyer experience with agency operational and sales demands. This very necessary "fit" issue in business acquisition transactions is often dealt with through the structure of the acquisition transaction and thus calls into play seller financing, buyer cash down, purchase price modifications, additional collateral, supporting guarantors and more. The idea is to fund agency acquisition transactions where both the lender and the buyer have the opportunity to come out of the process in one piece and in terms of the buyer — healthier and wealthier.

I am proud to say that thus far PPC LOAN has been true to, and effective in, pursuit of this core aim of our financing activities as our instances of loan loss involving Allstate agency acquisition transactions has been extremely small. Rather, we have had the tremendous opportunity to have participated in the creation of hundreds of millions of dollars of personal wealth for Allstate agents across the country and look forward to the opportunity to do the same for many more in the coming years.

As always, I welcome feedback from Allstate agents and the executives and management of Allstate Insurance Company. Thanks, Paul Clarke [email protected]