Posted on 28 Sep 2011
Eight years ago Allstate Corp. pushed for growth by bringing on hundreds of new agents. Now the insurer is looking for results by thinning its ranks.
The company is planning an overhaul of its compensation structure that will increase rewards for its best agents while pushing less-successful ones out the door.
The Northbrook, Ill., company says it will cut base pay by 20% for all its agents—who are contractors, not employees—so more money can be paid in additional performance bonuses to the top tier. Allstate also has ramped up an initiative to give its better agents loans to help them buy up less-successful agencies and take over their client lists. The overhaul will be rolled out over the next two years. An Allstate spokeswoman couldn't immediately say by how much the insurer expects to cut its numbers of agents and agencies. It now has about 11,500 agents.
The goal of the changes: to have a sales force better at finding and retaining customers and more capable of cross-selling, that is, selling a bundle of products to each customer instead of just a single policy. The company says larger agencies are more able to achieve those goals, though some smaller agencies have expressed skepticism that the company's solution is the best way to improve results.
The move to consolidate agencies is a reversal from a push Allstate made to add agents from 2003 to 2007, leading to an excess of agencies that are too small to thrive. Allstate agents bring in an average of about $1.9 million in premiums each year, while the agents at State Farm Mutual Automobile Insurance Co., a larger rival owned by its policyholders, bring in about $2.9 million on average.
Allstate's new pay structure, which won't take full effect until 2013, will reduce agents' base commissions to 8% of their premiums from 10%. Agents have to pay office staff, rent and other expenses out of those commissions and are eligible for additional incentive compensation.
At stake is Allstate's spot as the second-largest home-and-auto insurer in the U.S. by premiums. The company has been losing market share for years and ranks behind some rivals in recent customer-satisfaction surveys. The number of drivers buying Allstate's standard auto policy has fallen 4% in the past three years, while the number of home-insurance customers have dropped 12% under an initiative to limit the company's exposure to natural disasters.
Chief Executive Tom Wilson says he hopes a more-effective sales force will reverse the decline in policyholders and help return the company to the profit levels it had before the financial crisis. Allstate's stock fell by roughly half in the three years through Monday. Allstate's shares rose 27 cents, or 1.2%, to $23.80 in 4 p.m. composite trading Tuesday on the New York Stock Exchange.
"If you're a small agency and you have 1,000 accounts, you can't afford the kind of support staff you need, you can't have the broad product knowledge you need, so you're going to have trouble being an expert" in all the products Allstate sells, Mr. Wilson says in an interview. "You have to have enough size and scale and revenue flow to invest in what you need to."
Mr. Wilson says the company has internal measures of agent performance that show which ones will be successful, and it can lend those agents the funds to buy out underperformers.
Among the program's recent sellers is Patrick Campbell, a longtime agent in Novato, Calif., who sold his book of $1.5 million in annual premiums last month.
"It worked out for us," he says. But with a growing number of sellers and Allstate's veto power over sales, Mr. Campbell says he expects that the prices that agents can get will decline. "I think I got out just in time."
Some agents have objected to the company's plans to alter the commission structure. The National Association of Professional Allstate Agents in August voted to affiliate with the Office and Professional Employees International Union, a decision NAPAA said was driven by anger over the changes.
NAPAA Executive Director Jim Fish said some agents see opportunity in Allstate's changes. "The top tier of agents is going to do very well," Mr. Fish said. "But in general, morale is very low. People want out."
Mr. Wilson said in a conference call last month that morale wasn't a problem. He said many agents are "highly supportive of our strategy," he said.
Analyst Robert Glasspiegel of the Langen McAlenney unit of Janney Capital Markets says implementation will be a key to Allstate's success. "It all comes down to execution," he says. "Morale can be turned around by good performance.…They need better earnings…before anything can happen with respect to morale."