ALLSTATE the Darker Side 2010 Condensed

xclusive f E xclusive  focus ocus

Summer 2010

An Official Publication of the National Association of Professional Allstate Agents, Inc.

Is Allstate Really the Best? page 18  From Good Hands to Boxing Gloves  –  – Two Agent Reviews of the Controversial Book page 41

Allstate’s Hidden Agenda page 44 The Comprehensive Recreational Activity Policy – Allstate’s Secret Weapon to Becoming #1? page 22 

State Farm Exploits Allstate Agent Terminations page 14 

AMagazine Magazinefor forAllstate AllstateAgency AgencyOwners Ownersand andAllstate AllstatePersonal PersonalFinancial FinancialRepresentatives  Representatives  AA Magazine for Allstate Agency Owners and Allstate Personal Financial Representatives 

E xclusive xclusive focus Summer 2010

An Official Publication of the National Association of Professional Allstate Agents, Inc.

BUSINESS Tommy, 14 Atta Boy, Tommy, but not so fast…

FEATURES 18 Are We Really the Best?

28 How Download Delivers Value BY DOUG JOHNSTON

BY THE “ANDY ROONEY” OF NAPAA

24 Can “ALI” be an Agent’s Best Friend? BY ROB LOOMIS

to Joe Richardson from a California Agent 27 An Open Letter to

31 Selling your Agency? Consider Advisors Who Understand the Allstate Process

34 An Extraordinary Event 41 BOOK REVIEW: “From Good Hands to Boxing Gloves: The Dark Side of Insurance ”

44 Allstate’s Hidden Agenda 53 The End of Another Promising Career

32 How Hurricane-proof are Your Business Records? BY STEVE MOHR

Improvemen t in Your 51 One Improvement Agency can Keep you Ahead of the Rest BY TODD MCINDOO

55 Objection Handling for the Rookies and Especially for Veterans BY SEAN HOWELL

HUMOR 22 Ed Liddy Saves the Day 50 I Promise Results with

MARKETING 16 Getting Your Agency on Facebook BY ROBYN SHARP

My Customer Relationship Management (CRM) Database… Money Back Guaranteed! BY HESH REINFELD

20 Our Real Business is... Marketing! BY ALLSTATE ALLSTATE AGENCY OWNER BILL GOUGH

Guarantee d to Increase your Quote Volume Volume 40 3 Tips Guaranteed BY DAVID NEUENSCHWANDER

A Magazine for Allstate Agency Owners and Allstate Personal Financial Representatives 

4 — E xclusivefocus xclusivefocus

DEPARTMENTS 6 10 58 59 62

President’s President ’s Letter Letters to NAPAA Membership Application NAPAA Market Place Index to Advertisers

Summer 2010

book review

“From Good Hands to Boxing Gloves:  The Dark Side of Insurance”

In this issue of Exclusivefocus magazine, we are presenting two reviews of this controversial book about Allstate. The following reviews were independently written by two active Allstate agents who do not know each other’s identities. Both of them wish to remain anonymous.

Review Number 1  Trial  Trial attorney David Berardinelli’s book, From Good Hands to Boxing Gloves , tells about a side of the Allstate business plan that company management would prefer to keep secret. Starting with a recap of an accident involving Jose and Olivia Pincheira, Berardinelli progresses to Allstate’s handling of their claim and Summer 2010

details how his experience as their trial lawyer leads to uncovering a business practice that, in his words, is “The dark side of insurance.”  After Berardinelli Berardinelli quickly relates the facts of the Pincheiras’ accident, he introduces us to McKinsey and Company, a high profile consulting firm hired by  Allstate  Allstate in 1992, ostensibly ostensibly to help redesign the company’s core business plan  with special emphasis emphasis on claims handling. Berardinelli spends the rest of the book describing McKinsey’s new claim process, designed specifically for Allstate. McKinsey calls it “Claims Core Process Redesign,” or CCPR. It has since become  Allstate’  Allstate’ss standard standard for claims processing.  According  According to Berardinelli, Berardinelli, the CCPR plan

 would provide provide Allstate Allstate with with record record profits profits  while, at the same time, deny financial benefits to its policyholders. Berardinelli further likens the McKinsey philosophy,  which he says has become benchmark benchmark for the Allstate corporate philosophy, to  Wall  Wall Street’s Gordon Gekko’s Gekko’s claim that “Greed is good.” During the first few chapters, I initially found myself railing against Berardinelli’s supposition that Allstate was purposefully and maliciously denying the Pincheiras’ claim. After all, being a good “Allstater,” “Allstater,” I  was naturally naturally going to come come to the corpocorporation’s defense. Not knowing the explicit facts of the case, and instead relying on the summary Berardinelli presented, it seemed highly unlikely Allstate would engage in a process which not only involved an Allstate agent’s purported lies, but the use of a then-secret formula for defrauding Allstate’s own clients. As impatient as I was to quickly dismiss this book as a sour grapes retribution for running his client through the “mill,” Berardinelli patiently tells a story that, in the end, makes a compelling case. It was breathtaking to read about the depth and breadth the company went through in order to manipulate and, in essence, “invent” a new way to process claims. Previously implemented in other industries, the McKinsey “Greed is Good” philosophy successfully merged  Allstate’s pursuit for ever-increasing profits at any cost with the new CCPR claims process. Berardinelli goes on to say that when used as the new standard, CCPR relegates insurance customers to nuisance status and treats them as an impediment to profits rather than the financial focal point they deserve to be. In Chapter nine, Berardinelli reproduces a slide from McKinsey’s February 16, 1994 presentation to Allstate. The E xclusivefocus xclusivefocus — 41

slide depicts a “Current Game” graph showing gradually declining payouts of bodily injury claims over a 1250-day period. The intent is to show that early in a claim’s history; BI payouts tend to be higher, followed by a tapering off and a gradual step-down effect until most claims are settled by the end of the 1250-day period. The same slide also depicts a graph entitled “New Game” in  which McKinsey recommends Allstate settle 90% of its claims in less than 180 days, or the “Good Hands” segment, followed by a deliberate delay of about four more years to settle the remaining 10%. McKinsey labels this segment “Boxing Gloves.” Berardinelli estimates that by giving customers the “Boxing Glove” treatment, Allstate can rack up billions in profits through this new delay tactic.  According to Berardinelli, this strategy involves keeping clients away from attorneys, promising forthcoming fair settlement offers, but not delivering, and exploiting policyholders’ financial  vulnerability by making lowball initial settlement offers. Berardinelli’s logical presentation in  aligns From Good Hands to Boxing Gloves  aligns the Allstate philosophy with McKinsey and Company’s credo of “Greed is good.” It appears that encouraging Allstate’s pursuit of financial gains at the expense of the very customers it purports to serve is child’s play for McKinsey. Berardinelli reminds us that lest we forget one of the biggest financial scams of our time, one would do well to remember Enron.  While the Enron name is synonymous  with greed and corruption, it is McKinsey that provided them with the necessary internal mechanics required to pull off their ascent to the top of Wall Wall Street.  And while Enron ultimately ultimately took the the big fall, McKinsey quietly slipped out the back door to pursue its next high-paying client.  conFrom Good Hands to Boxing Gloves  concisely chronicles Allstate’s connection to and its use of McKinsey and Company’s “Greed is good” philosophy. It defines  Allstate’s current direction, which may  well serve to dissuade new clients from ever coming close to Allstate’s “Good “ Good Hands ” for fear they may have to wear boxing gloves instead. 42 — E xclusivefocus xclusivefocus

Review Number 2 “I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Cor porations can exist for purposes other than simply maximizing profits.” John Mackey, Whole Foods Market CEO “The time is always right to do what is right.” ~Martin Luther King, Jr. Sears - “Satisfaction Guaranteed or  your money back.” Allstate - “You’ “You’re re in good hands.” Reputation. Integrity. Doing the right thing. These are, or were, the driving forces of business. Yet we as agents, and especially long-term agents,  who have lived by these attributes attributes for years have seen these same virtues disappear at  Allstate.  Allstate. We sense it like like we sense a storm coming by the wind shifting in the trees. Something’s amiss in our corporation.  Just who is the the corporation’ corporation’s customer? customer? As agents, we know who our customer is, but  who is Allstate’s Allstate’s customer? customer? In the must-read book From Good Hands to Boxing Gloves: The Dark Side of  Insurance , attorney and author David J. Berardinelli exposes what agents know all too well: the shareholder is Allstate’s customer and enhancing shareholder return is its underlying operating principle. Mr. Berardinelli is a trial lawyer  who worked to become the first person to obtain the now infamous “McKinsey Documents.” The book talks about how the documents “teach insurers to profit by denying or delaying claims,” and how  Allstate’s “Good “ Good Hands ” treatment of its customers has been supplanted with a more aggressive and adversarial approach  which, metaphorically speaking, requires the policyholder to don a pair of boxing gloves to spar with the company in order to reach a fair claim c laim settlement.  As agents, we know the traditional rules of insurance. Our customers believe us when we tell them that their homes, autos, property and their lives are in Good Hands . We are the face and heartbeat of

the insurance contract to our customers.  They pay their premiums and when when they have a covered loss, they believe those   will make them whole. ReGood Hands  will place the home damaged by a hurricane, tornado or fire; reimburse them for medical expenses or horrible injuries from an auto accident, especially if caused by an uninsured motorist. The customer naturally believes that Allstate will settle their claim fairly and promptly and will keep the policyholder’s best interests at the center of the process.  According to Berardinelli, “Casualty insurance is indemnity coverage. It doesn’t  pay a set benefit. It pays as much as the  policyholder needs, up to the policy polic y limit to restore an insured to the same financial position after the loss that he or she was in prior to the loss.” loss.” I don’t know about you, but these days I have a sense of dread and uncertainty every time a customer calls to report a claim. I never know what to expect anymore. After all, we know Allstate wants to settle the claim as quickly as possible for the least amount of money. My fear is that Allstate will lowball the customer  with a “take it or leave it” settlement offer. And when this happens, the boxing gloves come out and I get caught in the middle, trying to do the right thing for my customer. Naturally, the company usually  wins and and I lose another customer. customer. Allstate Hires McKinsey: 1992

First, a little background on McKinsey.  They do not not solicit clients. Clients have to seek them out, just as Enron did. So why did Allstate seek and then adopt McKinsey’s business model and what motives did senior executives at Allstate have?  As you may recall, in 1992 Sears, trying to prop up its suffering retail business, decided to spin off Allstate, Cold well Banker and Dean Witter. Sears, of course, didn’t make the official announcement of its plan until 1993, but some senior executives at Allstate seem to have been tipped off to the then-secret restructuring plan. Enter Ed Liddy

In 1992, Sears’ CFO was Ed Liddy. Just two years later he becomes president and CEO of Allstate. Coincidence? While at Summer 2010

Sears, Liddy’s executive compensation  was mostly mostly in the form of Sears stock and options, which were dependent on the entire performance of four separate businesses. All that changed when Allstate  was spun off and became the nation’s largest publicly traded personal lines insurance company. Thereafter, executive stock options would depend solely on  Allstate’s ability to increase net profits and build the value of Allstate stock. McKinsey urged Allstate to align the interests of its employees and management  with those of the shareholder. shareholder. According According to Berardinelli, “Proof of McKinsey’s plan to  put shareholders shareholders ahead of policyholders policyholders isn’t isn’t hard to find. Allstate’s 2005 Proxy Statement clearly spells out this plan: ‘Because we believe strongly in linking the interests of management with those of our shareholders, we first instituted stock ownership goals in 1996 for executives at the vice president level and above.’” Therefore, “Allstate CEOs are required to own company stock worth seven times their annual salary. Senior management executives are required to own stock worth four times their annual salary.”   You  You do the math. If you owned millions of Allstate shares whose interest would  you protect? Who would your customer be, the policyholder or the shareholder? “At the time of his retirement on December 31, 2006 Liddy owned almost 4 million shares of Allstate worth approximately $250,000,000 at the market price of $65.11”  But   But wait, there’s more! “In more!  “In all, Liddy’s move to Allstate in 1994 netted a PERSONAL FORTUNE of approximately $350 million upon retirement on December 31, 2006 - much of it due to McKinsey’s business model.”  For Liddy and other executives, including current president and CEO Tom  Wilson, it was, was, and still is, a sweet, sweet, sweet deal indeed. For policyholders, it means excessive premiums combined with reduced claim payments. And it continues to mean rate increase upon rate increase for our customers. No hard “talking path” can explain away the obvious: Executive endorsed, expertly entrenched, corporate-sponsored greed. Mr. Berardinelli’s book reads like a murder mystery in which he delves into the  whodunit  whodunit of Allstat Allstatee and McKinsey McKinsey like Sir Arthur Conan Doyle’s Sherlock HolSummer 2010

mes. Among chapter titles and sub-titles: • Good Hands or Boxing Boxing Gloves • An Alternative Explanation of Earnings • McKinsey and the Greed is Good Model • McKinsey’s Solution to the Allstate Problem • Changing Employee Behavior • We get What we Measure • Litigation as a tool • Colossus • Redefining the Game Eye-opening for agents will not be  what Allstate’s culture is, as we experience this out of control beast on a daily basis. What will be eye-opening is the “smoking gun” itself; the subpoenaed McKinsey slides from the presentation in  which the profitability profitability to be had - by basically turning the claims process into an adversarial, litigious profit center – was revealed. The “keep ‘em running, keep ‘em guessing” human resource policy that has affected agents and employees since 1994, when most agents were employees, continues to fester as RFG for today’s so-called ‘independent contractor’ Exclusive Agents. As the McKinsey report states: “We states: “We get what we measure. The new measurement approach will be based on the  processes and activities required to achieve the desired outcomes (increasing profits).” Does this sound a bit like Expected Results or RFG?  While the the main main subject subject of Mr. Mr. Berardinelli’s book deals with McKinsey and the claims paying process changes to increase profitability at Allstate using CCPR, it isn’t a stretch at all for us to surmise that McKinsey must have been asked for other  ways to increase profitability profitability in Allstate’ Allstate’ss distribution sector – the agency system.  At the time, the vast majority of agents  were Allstate Allstate employees employees who began to feel the effects of the company’s costshifting plan. The costs of running an office, which the corporation previously assumed, were slowly shifted to agents through the Neighborhood Office Agent (NOA) program and then in 2000, Allstate completely shifted its costs, including pensions, employment taxes, health insurance, etc. to its newly-converted “entrepreneurial” agent work force. Thus, the greatest oxymoronic title in Allstate his-

tory: the Independent Contractor Exclusive Agency Owner! Enter 2010. Agents are being terminated for lack of production, for AFS, agency standards and perhaps most absurdly - for ALI. Now the Ideal Agency Model, part of the Sales and Customer Service Roadmap, threatens threatens to eliminate thousands of agents as they struggle to grow their agencies to meet this new $4 million per agency corporate standard. Indeed, the future looks bleak for the agency force. Yes, some will make it, but most will fail for a number of reasons, including rates, MMGs and a lack of capital. McKinsian in its goals and objectives, the Ideal Agency Model was described as follows by Joe Richardson in an announcement released to the field: • “Based on agency agency feedback and modeling, Allstate has determined an ideal scale that puts an agency in an optimal financial  position while still encouraging growth and sustainability.”  • “An agency’s progress progres s toward this ‘ideal agency model’ will be measured, and tools are being built to support agencies in their efforts to maintain a positive ‘trajectory’ towards the model.”  • “For agencies agencies who have already already met or exceeded the ideal model, Allstate will continue to provide extensive support to encourage  growth and and sustained sustained success.”  success.”   The future for many small to medium size agencies is clear: grow or go. Zero tolerance.  While the Good Hands to Boxing Gloves business model is being applied to the detriment of policyholders, it is helping to achieve the “expected results” that company leaders need to enhance their compensation levels and, of course, increase shareholder value. It is very clear to this writer that this same Good Hands to Boxing Gloves business model has, and will continue to be, applied to the agency force. Make no mistake. At a minimum, Allstate has a 10-year plan on just when and  where they are going. going. It’s common common knowlknowledge that the company plans to reduce the number of existing agents by up to 3,300 existing agents over the next few years. If  you don’t plan accordingly, accordingly, you may just be knocked out of the ring whether it’s  your first or your your fiftieth fight. E xclusivefocus xclusivefocus — 43

feature

 Allstate’  Allstate ’s Hidden Agenda  ONE AGENT’S OPINION 

 WHAT  WHAT WOULD YOU YOU do if someone stole something from you? What would  your reaction be if someone lied to you?  What if, in the course of a business relationship, both of these things happened to you? Doubtless you would seek to quickly end such a relationship. You might even consider legal action if the elements of both cost and outcome were decidedly in your favor. But if the offenses aren’t easily quantifiable, or if over time, they have grown from an annoyance to outright unethical, when does your level of awareness trigger a response?  Allstate has declared its agent sales force independent. Yet in clear contradiction to an IRS Private Letter Ruling, IRS standards and Allstate’s own words of a promise of independence, Allstate 44 — E xclusivefocus xclusivefocus

agents are anything but independent. On the IRS Website under the heading of  Behavioral Control , the IRS stipulates an employee relationship exists  when a certain amount of control exists. The  very first point of control listed under the sub-heading “Types of Instruction Given” is “When and where to do the work.” Allstate agents know the company dictates the number of hours required (44 hours per week) as well as the work  week schedule (Allstate defines the acceptable holiday schedule) and where the company finds it suitable for an agent to locate their offices. Allstate’s corporate advertising for new agents declares one’s ability to “Be your own boss.” If agents have to conform to corporately-defined office hours, work week schedules, and

corporately approved locations, clearly agents are not their own boss. Issues such as these and more comprise the  lie part of the equation. In 1999 and 2000, Allstate promised its then-employee agents the ability to replace the growing equity of their employee pensions with the value of their future book of business under the new “Independent Contractor Exclusive  Agent” program. This promise, used as an inducement for employee agents to quickly convert to the new contract has seldomly been delivered on. Newly-hired agents are promised the future value of their book as a secure retirement income  vehicle as well. As we now know, know, values of agent’s books are shrinking, but it is not the U.S. economy that is taking its toll on their values. Values for books of business have been bee n severely curtailed by Allstate management through various forms of interference. Chief among the types of interference is the 90 day termination notice. Resulting in the confiscation of an agent’s book of business at bargain basement prices, Allstate frequently employs this method of contract termination and then parks the departing agent’s book at the CIC or at another agent location at a discounted commission schedule. Agents are often harassed with relentless emails or phone calls decrying their performance and are advised to sell even before any formal notices are delivered. Many times this ploy is used even when no warning or termination notice is forthcoming. When Allstate gains control over an agent’s book in this manner, it is the  theft part of the equation. Every Allstate agent should realize by now that they are not “independent contractors.” This article is not about the agents’ “status” as employees; it is about Allstate’s motivation for misclassifying agents as independent. Summer 2010

Greed and its Partner  A lie, in and of itself, is not necessarily damaging. “White lies” are told with predictable frequency at dinner parties or during bragging sessions after a fishing trip. Anyone can stand up in a crowded movie theater and declare he is the best tennis player on the planet, in spite of the fact he is not   Roger Federer. However, However, this  not  Roger example would result in an embarrassing moment for the individual as opposed to creating a beneficial outcome for the liar. It is when the result of telling a lie benefits be nefits the liar at the expense of the recipient recipien t that things begin to get more serious. In the book, From Good Hands to Boxing Gloves  (reviewed  (reviewed in this issue), we learned that Allstate customers Jose and Olivia Pincheira were involved in a disputed claim with Allstate beginning in 1999.  The book’s author, author, David Berardinelli, Berardinelli, explains that the Pincheira’s agent admitted she told Mr. Pincheira that medical payments coverage was the same as uninsured motorist except that uninsured motorist coverage paid for lost wages. Clearly this is not the case. As the Pincheiras were retired, they were “sold” on eliminating this valuable coverage because the agent falsely explained the coverage. Likely, the agent’s intent was not to harm the client, and had Allstate admitted the error, the resulting lawsuit and public disclosure of  Allstate’s  Allstate’s connection connection with with McKinsey and Company may have never seen the light of day. But according to Berardinelli,  Allstate’s  Allstate’s choice to defend the lie rather than resolve the dispute is totally founded in a level of greed that is so profound, it is breathtaking. Nearly eight years earlier, Allstate had already entered into an agreement with McKinsey and Company, Company, an international business consulting company. McKinsey  was hired to perform a “top to bottom” bottom” redesign of Allstate’s business operations. McKinsey was to concentrate initially on the claims portion of Alls Allstate’s tate’s operations.  As related related in the book, book, it was McKinsey’s Claims Core Process Redesign or CCPR that the company used to derail the Pincheira’s claim. It was also clearly Allstate’s choice to implement the CCPR mandates or not. For Allstate, it became the pursuit of profit over contractual obligation. Greed over compassion. Summer 2010

Greed does not exist without a “ plan.”  You  You might say they are partners. Most of us understand it is not a bad thing to  want more of something. After Af ter all, who  wouldn’t  wouldn’t want more dessert, or more love or more money? It becomes a different issue, however, when our desire for something is conjoined with a plan that,  when implemented, harms someone else. If I’m greedy and I want more dessert, I

Enron is not McKinsey’ McKi nsey’ss only controversia controversiall connection. McKinsey has been associated with a lawsuit related to Hurricane Katrina, Swissair’s bankruptcy, the British railway financial collapse, Allstate’s claims practices, and more. might plan a way to distract you so I can take the last piece of birthday cake. All in good fun, of course. But when greed in volves money, money, the potential for schemes or “plans” would seem to be limitless. As  we will see, some plans end with with a different than expected outcome.

 Why McKinsey? It would shock most of us if it was reported that the CEO of a prominent corporation called a press conference and publically declared, “I think I‘m going to

be greedy today!” Rather, we hope he declares a hopeful future for his company that is consistent with sound business ethics and mindful of his fiduciary responsibilities toward company employees, shareholders and the general public. But when the CEO has a plan that enriches him at the expense of others, an ethical line has been crossed that ought to land him in jail. Any plan a CEO undertakes that breaches the ultimate fiduciary responsibility of putting employees and shareholders first is a defacto lie.  And therefore, for greed to exist there must also be a lie at some level. Most of us remember the Enron scandal. At the time it represented the premier example of corporate cor porate greed. To To then-Enron CEO Jeff Skilling, the potential for immense wealth was so overpowering that the lies he was willing to tell were practically boundless. In the end, greed blinded him so much that he was even  willing to risk an “insider” stock trade for 500,000 Enron shares worth $15.5 million. It is doubtful Skilling set out to defraud Enron at the beginning of his tenure with the company. Rather, it was his Harvard MBA, combined with his training at McKinsey as one of their top executives that offered him the insight to recognize the opportunity. Said another  way; knowledge, plus greed, plus the lie equaled the potential for untold wealth. In all, the Enron collapse represented the loss of more than $60 billion in market  value, $2.1 billion in retirement savings and 5,600 jobs. Skilling S killing wasn’t willing to think about the consequences of his actions, he only saw the cash. If the old adage of the apple not falling far from the apple tree is true of people, it likely has a similar adage for corporations. In 1979, fresh from getting his MBA from Harvard, Skilling was recruited by McKinsey and Company.  There he enjoyed a kinship-like bond and a plethora of business skills unri valed in his industry. By 1987, he was a top executive for McKinsey and proved his considerable talents while working as a consultant to Enron. In 1990 he was recruited by Enron’s Ken Lay to be CEO of Enron Finance Company. In 2001, Skilling became CEO of Enron Corporation. A scant few months later, SkillE xclusivefocus xclusivefocus — 45

ing would resign, followed by the now famous investigation. Enron is not McKinsey’s only contro versial connection. McKinsey has been associated with a lawsuit related to Hurricane Katrina, Swissair’s bankruptcy, the British railway financial collapse,  Allstate’s claims practices, and more. Several books have been written detailing Mckinsey’s controversial activities including From Good Hands to Boxing Gloves . So the question then becomes, are there just a few bad apples or is the apple tree producing the bad fruit?  When Allstate hired McKinsey and Company in 1992 to help redesign (“plan”) its business processes, it is likely they had a specific set of problems in need of addressing. After suffering more than $2.5 billion in losses from Hurricane Andrew, anticipating going public in the largest initial public offering ever in the United States, and dealing with IRS scrutiny over its captive agents filing Schedule C, Allstate likely could use the expertise they felt McKinsey had to offer. But just as likely was the fact that  Allstate viewed McKinsey’s expertise in dramatically increasing executive compensation as a most coveted benefit. Unlike a marriage or even a dating situs ituation, opposites do not attract in the business world. A partnership of like-minded entities run by like-minded individuals is essential if success is to be attained. Likely, the millions of dollars Allstate paid to 46 — E xclusivefocus xclusivefocus

McKinsey didn’t hurt either, but there also had to be more. McKinsey’s Har vard business school school mentality mentality,, combined combined  with its considerable considerable connections, connections, represents the core of its philosophy and was aptly summed up in a January 17, 2002  Wall  Wall Street Journal article that said, “For “For decades, McKinsey has been revered - even  feared  feared - for its influence in boardrooms boardrooms and its extensive and powerful old-boy network among major corporations. Its alumni list reads like a who’s who of the Fortune 500, including the likes of IBM Corp. Chief Executive Lou Gerstner. In recent years, that network has helped privately held McKinsey win lucrative consulting contracts from com panies run by its former partners. partners.””  Allstate knows a thing or two about old-boy networking as Former Sears CEO Ed Brennan, and Ed Liddy can attest. And lest we forget, Tom Wilson served as Sears’ Vice President of Strategy and Analysis. All of these men evene ventually “found” their way to very powerful positions at Allstate.

Dear Shareholders:  What is yours, is mine If corporate profits are the primary focus of a CEO, can greed be far behind?  What differentiates a successful CEO from one that is going the way of Enron’s Enron’s  Jeff Skilling? Shareholders would argue that the former enriches the value of a company and takes care of his employees. The latter enriches himself and takes

advantage of his employees. McKinsey and Company was hired during Jerry Choate’s tenure with Allstate. It is assumed Jerry Choate, then President of Allstate’s Personal Property unit, at least had a hand in hiring McKinsey and Company. Choate later became CEO. His successor, Ed Liddy, then retained McKinsey and continued implementing their plan with equal enthusiasm. In thusiasm. In From Good Hands to Boxing “We do know Gloves , Berardinelli writes, “We that Choate and Liddy immediately im plemented McKinsey’s McKinsey’s recommendation to create executive compensation plans at Allstate based on a strong belief in ‘linking the interests of management with those of our shareholders.’ Together, Choate and Liddy used the Sears IPO and their adoption of  McKinsey’s  McKinsey’s business plan, to create lotterysized personal fortunes for themselves.” themselves.” Choate had accumulated stock and options worth an estimated $63 million and retired in 1998, receiving an estimated $10 million more. Liddy retired in 2006 with 3,823,255 shares of Allstate  worth $250 million, plus an additional $71 million in retirement package benefits. Not bad parting gifts for two graduates of the McKinsey business plan for  Allstate CEOs.  Apparently,  Apparently, Tom Wilson is just getting ramped up with his wealth accumulation plan because his total compensation for 2008 was $9.51 million and $10.4 million in 2009. And even though the stock has tanked recently, his 2010 compensation looks to be going up. All this is occurring as Wilson lays off or fires thousands of employees and agents, and while giving up market share to GEICO, State Farm and Progressive.

Dear Agents: What is yours, never really was yours. Therefore, it was always mine But Allstate and Wilson couldn’t earn a dime if it weren’t for the blood, sweat and cash that Allstate agents have in vested into their agencies. The way the company goes through agents, it would seem more correct to classify them as “useful idiots” instead of the key component they are. And much like the lazy child is maligned for sloppy schoolwork; the Allstate agent is derided for failing Summer 2010

to meet corporately-imposed quotas. In spite of this, Allstate agents are pit bulls  when it comes to making their agencies successful. They are highly talented professionals who run agencies that provide  Allstate and themselves a decent income stream. The agent’s overarching motivation is to succeed as a business and pro vide a decent income for their families. But in addition to the annual profit they take from their agencies, every agent also expects a final return on their investment (when they retire) in the form of the sale of their book of business. It is safe to assume that every EA has been told by management, at one time or another, that they “own” “own” their book of business. Of course, what they’re referring to is that nebulous, albeit ingenious, creation the company has dubbed “economic interest.” This clever terminology was doubtless meant to fool agents into thinking they actually own something. The company took the independent agent model,  where agents own their books lock stock and barrel, and morphed it into a lookalike with little substance. Of course, it is  Allstate’s intent to imply that that agents have control (ownership) over the disposition of the accumulated value of their books of business, but ultimately, it is Allstate that holds all the cards. It’s also crystal clear that Allstate, along with some other captive carriers, rejects the notion that its ‘independent contractor’ agents own their client lists, customers or books of business. This, of course, is not true in the independent agent world, where agents are also independent contractors and, without question, own it all.  As if to emphasize the point, Allstate CEO, Tom Wilson, made an interesting declaration during the company’s 4th Quarter 2009 Earnings Call. Vinay Misquith from Credit Suisse asked Wilson the following: “So “ So on store’s policy, does Allstate own those policies for which the agents are leaving and therefore you run the risk in the short term you might have lower policy in force count?” Wilson responded, “Vinay,  I would start with the concept that nobody owns the customer. The customer owns themselves and their own relationship.” relationship.”  What Wilson Wilson real really ly said in two short sentences is that Allstate agents do not Summer 2010

now, nor will they ever, own their books of business. He goes on to try to qualify his misstep, but if we are to take Wilson at his  word,  word, then everything everything Allstat Allstatee has ever promised an agent in this regard is untrue Now Wilson might argue that his metaphor of the customer owning himself is

It is difficult  to say say when when Allstate’s plan will fail. This is because so much is riding on  the outcom outcome e of what Allstate started with McKinsey. Millions, if not billions, of dollars are at stake for Allstate management. really just a way describing how careful  we must be in assuming a client will be loyal to our company. But the context in which the question was asked and answered left no doubt that in Allstate management’s eye, a departing agent does not own his client list. And this is a key moment, if ever there was one, in our ability to understand how Allstate views its relationship with the agent. Because if  Allstate proceeds on the the assumption that that agents have minimal or no real rights to the economic interest in their books of business, then its right to confiscate the agents’ books is a forgone conclusion.

How do they do it? Like an audience member mesmerized by a magician on a stage, agents are lulled into participating in a business plan developed and implemented by Allstate. While RFG, quotas, office hours,

annual reviews, and more are the magician’s “lovely assistants” that distract the agents, it is the carefully crafted, hidden elements of the “trick” that make everything possible. Here are the elements Allstate doesn’t  want the agent to see: • Establish a complex set of everchanging guidelines which are geared for only partial success, constantly forcing agent turnover. • Manage agent turnover rate so that the constant outflow of agents provides the company with a specified premium base that has no commission expense against it. • Require a constant infusion of newlyhired agents that are channeled to sell life and annuity products as a requirement to keep their jobs, thereby providing Allstate  with ever-increasing ever-increasing sales contributions contributions to its financial services goals. • Deny approval approval of qualified buyers. • Deny or limit purchase of books by  Allstate agents. • Require sales sales management management compensation to be directly related to the agents’ RFG bonus structure. If agents achieve certain bonus levels, managers will be compensated accordingly. When agents fail to qualify for bonuses, a manager’s  will be affected bonus as well. • Urge agents to invest substantial amounts of money so that they cannot easily walk away from their agencies. • Require senior management to be financially committed by making them purchase a percentage of their salary in Allstate stock. From Allstate’s 2005 Proxy statement: “Stock ownership requirement  Because we believe strongly in linking the interests of management with those of our shareholders, we first instituted stock ownership goals in 1996 for executives at the vice president level and above. These goals were increased in 2004 to require these executives to own, within five years of the date the executive position is assumed, common stock worth a multiple of base salary: Chief Executive Officer 7 times salary  Senior Management Executives 4 times salary  Other Executives 2 times salary  E xclusivefocus xclusivefocus — 47

 Existing executives were given three years to reach the new levels of ownership.”   This requirement alone demonstrates that there will be no tolerance for poor performance from agents who might  jeopardize management’s personal fortunes. Further, Allstate never intended to give up any of the controls it exerted over its employee agents once they were forcibly converted to ‘independent contractor’ status in the year 2000. On the contrary, once once the agents were converted, it was much easier to fire them for little or no reason, giving the company more incentive to tighten, rather than relax, its  vice-like grip over the agents.  Today  Today,, any semblance of “independence” allowed with its current agent distribution program is merely window dressing. Berardinelli put it most succinctly when he stated, “Whose “ Whose interests do you think Mr. Wilson and other senior  Allstate executives subject to such a stock ownership plan are more likely to be interested in protecting? ” The answer is clearly not the agents.  As entrepreneurs, agents deal with

the known factors of running their businesses, such as competition, changing expenses, market conditions, etc. They are adept at adjusting for the unexpected, and make decisions based on sound business ethics. But these are overt elements of running a business that are easily discernable. When a business relationship is tainted by one side’s hidden agenda, the relationship is doomed to fail. It is difficult to say when Allstate’s plan will fail.  This is because so much is riding on the outcome of what Allstate started with McKinsey. Millions, if not billions, of dollars are at stake for Allstate management. CEO’s Liddy and Choate knew how to play the game and amassed staggering fortunes, some would say on the backs of Allstate customers. Tom Wilson looks to better his predecessors’ performances by combining their efforts with his vision of the new Allstate agency of the future. It is unfortunate that until now, not a single agent perceived the possibility that, not only is there a hidden agenda , but that they are unwitting and unwilling participants.

 This issue is not just about McKinsey and its vision for Allstate. The fact of the matter is that Allstate has a choice in the direction it chooses to move the company. It has purposefully cost-shifted multiple programs to the agency force and has implemented a carefully crafted “employee” agent program which is multifaceted and complex. Because a tenured agent sales force is not intended to be a permanent component of Allstate’s vision, the company refuses to open a dialogue with any representative voice, including NAPAA. But all of this is a conscious choice that  Allstate has made. If ever there were a test of whose best interest the company is dedicated to protecting; all you have to do is follow the money.  And finally, finally, here is the epiphany epiphany moment this article is attempting to convey:  Allstate  Allstate can can never allow its business model to include true independent contractors. Once the company becomes incapable of terminating agents at will, management loses its ability to control the fate of their own personal fortunes, and that, my friends, will never happen. Ef 

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