How are they impacting the availability of capital to agents?
Melanie Otto, First Mid Bank & Trust Director of Agency Finance
Allstate’s recent move to once again adjust compensation has many agents and consultants calling us to ask are we still lending to Allstate agencies. The answer is YES. Allstate has been transparent with lenders about the changes after they roll them out to the agent force. This allows lenders to understand the impact and model those changes to stress test an agency’s P&L and lending capacity.
Many lenders reaction to the changes implemented in 2023 was simply to cap their exposure or loan amount to TPP value. Compensation changes may not have been the sole driver of that approach, but may have been a result of situations where agents were terminated, unable to affect a sale of the agency, and upside down on their loan (loan amount greater than TPP). Those situations may cause losses for lenders when the agency owner doesn’t have sufficient other assets or income to pay off the loan balance in excess of TPP. Therefore, the easy reaction from the lender’s perspective is to cap the exposure at TPP on future transactions to help eliminate those riskier situations. The problem with capping exposure at TPP is that TPP today isn’t what TPP will be worth tomorrow. Given the latest compensation changes announced for 2025, that fact couldn’t be more true. Lenders like consistency and predictability, neither of which exist for many Allstate agent’s compensation today. With the announced 2025 changes, some lenders are sitting on the sidelines as they evaluate the impact of the changes. First Mid is not sitting on the sidelines, but we are gathering more information and ensuring that the agent has a good understanding of the new comp plan, how it’s going to impact their revenue, and their strategy to compensate for any negative impact the new plan may have.
As a general rule, it appears renewal income will decline. The two data points that impact the significance of that decline are (1) mix of business between auto/home and (2) bundling. Obviously if you are jumping tiers from Pro to Elite or Elite to Pro, it can impact renewal shifts as well, and there are other factors at play depending on your mix of when the business was written and bonus for third and fourth lines written.
On the new business side, the variable compensation rates are going down, and it appears that decline is intended to offset the rising premiums over the last couple years. Additionally, minimum production goals for variable compensation continue to rise, and there’s expectation of that rising again in March.
If all your production and retention metrics stay the same as 2024, you’ll likely see less in your bottom line unless you reduce expenses. You’ll need to shift the mix of business and/or increase the number of new policies written to keep variable compensation and TPP at last year’s level. You’ll need to understand what marketing and staffing costs are necessary to achieve the goals that you set.
What does it mean for your ability to get a loan? The simple answer is “It depends.” Lending ability is impacted by several metrics, the most important of which is how much cash flow does the agency produce. Given the complexity of the commission structure and Allstate’s changes in three concurrent years, the risk of Allstate “moving the needle” is greater which may make lenders tighten their belts. Being transparent with your lender may help mitigate that tightening to ensure that they are looking at the business from all angles.
Renewal revenue may adjust, but share variable compensation, bundling and bonus metrics with your lender to ensure they are getting a full picture of how you are adapting. Growth in new premium, retention and loss rates are metrics that you should also share. And even if those metrics aren’t going in the direction you want, have open dialogue about them. Spend time going through your plan for operating expense growth or reduction depending on your situation because it’s more about cash flow and net operating income than it is about topline revenue. Agencies who run more efficiently should be valued higher and have more ability to leverage. In the end, it’s a numbers game, and you need to know your numbers
Seasoned lenders have seen cyclicality in the market before. The key is for you to have conversations early with a lender who’s been in this market for a long time and seen those cycles, like First Mid Agency Finance. Lending isn’t getting easier in this environment, but we are lending with open dialogue and information sharing to help us fully evaluate your unique situation in a consultative manner.
Melanie Otto is Senior Vice President of Agency Finance at First Mid Bank & Trust. For over 15 years, she has successfully supported insurance agencies with growth capital, debt restructuring, and acquisition financing. To speak to Melanie directly, reach out at motto@firstmid.com and learn more on First Mid Agency Finance’s website at www.firstmid.com/agency-finance/ or reach them at 877.294.8785.
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