--Jeffrey M. Yates, CEO, industry and state relations, IIAA
There was a time, just two short decades ago, when the property/casualty independent insurance agent looked upon direct writing and captive agent companies as "the enemy." Companies such as GEICO, State Farm and Allstate had been making strong inroads into the P-C personal lines business and, by the late 1970s, had been moving into the small commercial lines arena as well. Independent insurance agents, long considered the distribution arm of the P-C business, were understandably concerned. Insurance trade periodicals contained lengthy articles about the threat to the American Agency System coming from non-independent agent companies.
In fact, when an old line agency company, Insurance Co. of North America (now Cigna), announced back in the mid-1970s that it would experiment with direct writing personal lines auto insurance in Indiana, agents associations rose up in protest. We will take away your Big "I" symbol, said members of the Independent Insurance Agents of America (then the National Association of Insurance Agents), shaking their fists in anger.
But times have changed in the insurance business in the last 20 years, more so than one might have thought when one considers that the industry had remained relatively unchanged for centuries. This summer, Allstate announced that it was acquiring the personal lines business of CNA. That's right. A company that has primarily remained a captive agent insurer has bought the personal lines business of an old-line agency firm.
Now, in times past, agent associations would have called Allstate an "invader" and CNA a "deserter." But that's not the response that came from agents associations this time around. In fact, agents associations have come out in praise of the deal.
Jeffrey M. Yates, CEO for industry and state relations for the Independent Insurance Agents of America (IIAA) said his association is "excited about Allstate's major expansion into the independent agency system. We believe that it is good news for both customers and independent agents," he said. "Independent agents have undergone a resurgence in recent years because of the unique advantages they offer to the public, including independent advice, a choice of companies, and a local advocate willing to go to bat for the consumer. It is encouraging to see Allstate make this substantial investment in the future of our distribution system."
The National Association of Professional Insurance Agents (PIA National) was just as enthusiastic. "We applaud Allstate for its commitment to professional insurance agents," said PIA President Arthur I. Moll. "Allstate's agreement to acquire the auto and homeowners business of CNA is further proof that when companies seek to boost their market reach, they turn first to independent agents."
Nevertheless, such enthusiasm aside, the deal between Allstate and CNA raises some interesting questions. Why is the deal structured in such a way that Allstate will be the underwriter on the personal lines business taken over, but the business will be written on CNA paper via an entity that retains CNA's name? Why do the agents associations believe that this development is a shot in the arm for the American Agency System? How will the regulatory environment entertain such an unorthodox business arrangement? And, most important, does the Allstate-CNA deal signal the advent of future similar arrangements between heretofore philosophically competing entities?
With the announcement of the deal, separate but obviously carefully coordinated statements came from Allstate and CNA. Allstate called the deal "a series of moves--starting with the acquisition of the personal lines business of Chicago-based insurer CNA--designed to help it reach its goal of becoming the leading provider of auto and homeowners insurance in the $45 billion independent agent market."
Allstate: A $3 billion agency system partner
Allstate said it had agreed with CNA to acquire its personal lines auto and homeowners business in a transaction valued at $1.2 billion, a move that will increase Allstate's total annual premium revenue from the independent agent channel to approximately $3 billion. Specifically, Allstate will make a $140 million cash payment to CNA for the business and for company "shells" to support the rating structure. In addition, Allstate will utilize about $650 million of its capital to support the premium and will pay a "marketing royalty" to CNA Insurance for the use of its brand name for the next six years.
The sale calls for Allstate to establish a new business, CNA Personal Insurance, that will sell CNA personal lines insurance under its current brand name and through the 3,800 independent agents licensed to sell CNA products. The new initiative will be headed by Bruce W. Marlow, formerly chief operating officer of The Progressive Corp. In its statement, Allstate said that Marlow, while with Progressive, helped the company become the largest personal lines insurance company in the independent agent channel in the United States. Marlow will report to Allstate Chairman Edward M. Liddy and has been named to a seat on Allstate's senior management team. The approximately 2,000 employees of the existing CNA personal lines operation will transfer to the new business, according to statements from Allstate and CNA.
Allstate's Liddy said of the transaction: "We have outlined a clear strategy for the future, which sees the Allstate corporation as being multi-channel, multi-brand, multi-product and multi-national. This transaction is an important and complementary step in Allstate's goal of becoming the major force in the independent agent personal lines market. The total personal lines insurance market is over $130 billion, and we already have $20 billion in annual premium revenue. In today's marketplace, we have to listen to the customer, and provide our product where and how the customer wants it. We are going to grow the number of channels we use to meet the needs of our customers, and we intend to be the market leader in every channel in which we compete," he said.
CNA Chairman and Chief Executive Officer Bernard L. Hengesbaugh, in his company's own statement regarding the new deal struck, had this to say: "This transaction offers a winning combination for our stockholders, our agents and their customers, and our employees. For our investors, we've been clear that our strategy is to sharpen our focus in those businesses where we are now or where we can become a market leader. As a result of this transaction, we can re-deploy and refocus the company's capital to help maximize CNA's rates of return.
"For our agents and their customers," continued Hengesbaugh, "CNA Personal Insurance will be able to provide an expanded product line with more competitive price and service features than would be possible by CNA alone. And for our employees, this new business offers an opportunity to be associated with a personal lines market leader."
Allstate's two approaches to selling personal lines
So, after trimming away all the hurrahs from the agents associations and the promises from the two companies involved in this transaction, what do we have here? Allstate is buying the personal lines business of CNA, but it will continue to write the business through CNA agents, on CNA paper, via a new company bearing CNA's name. Will this cause some confusion among CNA insureds? CNA customers, currently insured by CNA will, when the transaction is completed, actually be insured by Allstate. But there will be separate rating systems for Allstate direct customers and those who will be insured via the new CNA Personal Insurance entity, a necessary differentiation because of the agents' commissions that will have to be paid. Will that cause customers to opt for the direct route since they will be insured by Allstate in either case and so why pay the agents' commission?
Ernie Lausier, currently president of CNA's personal lines business, and Don Lofe, group vice president of finance for CNA, do not see problems in either of these areas. "We don't see the name thing as a problem," they said. "This is no different from doing business with a company that is a member of a holding company with a different name. There will be separate rating systems. Allstate will have its rates and CNA Personal Insurance will have its rates. The point here is that the customer still has a choice of whether to go direct or go through the independent agent. And that is no different from what exists today."
Also, Lausier and Lofe emphasize that both CNA and Allstate recognize that the independent agency system is a viable force in the personal lines insurance industry. And Allstate's Liddy agrees. "While the Allstate agent remains the core strength of the Allstate brand, expanding our presence under different names in the independent agent channel bolsters our goal to become multi-channel and multi-brand," he said. "We know from our research that there is a significant segment of the insurance market--as much as 20%--that will only buy through the independent agent market. These are customers Allstate is currently not able to access through our direct agents channel. The initiatives that we have announced give us the platform for accelerated growth in the market. Importantly, they give us the ability to leverage the things we are very good at across a wider customer base and generate significant benefit from the synergies between the two organizations."
As for regulatory approval, Lofe said that both companies are currently in discussions with state regulatory bodies to explain the venture and obtain approval. Clearly, it is not going to happen overnight, he said.
How will the new venture shake out in the next few years? All anybody can do is wait and see. *
©COPYRIGHT: The Rough Notes Magazine, 1999