Brooke: A Franchise Player

Jack Cassell “was pretty happy just being a producer,” and he had been since entering the insurance business in 1979. But he saw an opportunity when the agency he was working for, Wichita, Kan.-based Manning & Smith Insurance was acquired by Arthur J. Gallagher & Co. for its specialty in hotel risks.

Cassell (rhymes with castle) wanted to purchase the nonhotel property/casualty book of business and have it serve as the foundation for his own independent agency. But he faced a problem many have faced when trying to enter or expand in the insurance agency world — getting access to credit.

For Cassell and more than 200 other agencies, the answer was to become members of the Brooke Franchise Corp., a subsidiary of Overland Park, Kan.-based Brooke Corp. Brooke provides its franchisees with easier access to credit to make acquisitions and expand their operations and by aggregating the agencies’ premium volume offers access to a slate of national carriers.

“I bought [the agency] through Brooke,” Cassell told Insurance Journal. “It’s probably the strongest thing they have to offer besides markets. They can help someone who wouldn’t normally be able to buy an agency to buy an agency.”

Brooke’s loan portfolio exceeds $100 million, and the company reported $4.16 million in earnings in 2003, a 186 percent jump from 2002’s $1.45 million.

Banker’s background

Brooke’s CEO, Robert D. Orr, worked for a bank-owned agency during the hard market of the 1980s and told IJ the company started as a group of small bank-owned agencies in 1986 in an attempt to aggregate premium volume — more like a traditional agency cluster — and survive the market shift.

Over time, Orr said, he found that bank agencies had more of an underwriter’s approach to the business and he brought traditional independent agencies into the mix because he found their owners better understood how to actually sell insurance.

“From there, we kind of moved into relationship that was more encompassing,” Orr said. “Instead of just doing [the cluster] for market purposes to protect us from being canceled during hard market. I had a credit background and I found out that credit was not universally available to independent insurance agents. And I worked to find ways we could make credit more universally accessible to independent agents.”

The lending is done through another Brooke subsidiary, Brooke Credit Corp., which Orr said is able to appreciate the real value of an agency’s book of business for lending purposes, unlike traditional lenders. While Brooke’s franchisees — called master agents — retain ownership over their books of business, all premiums and commissions are placed in a third-party trust account and the loan and premium payments are made first before any money gets into the agencies’ hands.

This system of cash management is the most important tool in recognizing the book of business’ value as collateral, according to Orr.

“This is why we can grant access to credit that others can’t,” he said. “Cash management is important because the franchisees, the agents, never have chance to get their hands on the money that belongs to the customers and the lender gets their payments first.”

Another collateral preservation tool is direct monitoring of franchisees’ commission levels by Brooke on a monthly basis. In its promotional literature, Brooke promises that agencies will get at least 85 percent of all commissions.

“You can imagine that sometimes our direct involvement with these things from agents is not very popular,” Orr admitted. “But it does help make them more successful. After a couple of years they’re even more successful. After five or 10 years they’ve paid off their note.”

But if the note isn’t paid off, the Brooke system affords one more level of collateral for lenders because the assets of the agency “can be transferred to a lender or another agent very easily,” Orr said.

“What we found out is that the default rate on insurance agency loans is pretty good,” explained. “But the recovery rate when they go into default and the lender tries recover those assets is pretty lousy. If you don’t already have a mechanism for getting licensed and having the business assigned to you, then the ability to recover in the event of a default is minimal.” …

Editor’s note: To read the rest of this story, see the April 5 issue of Insurance Journal Midwest, which covers Ohio, Michigan, Indiana, Wisconsin, Illinois, Missouri, Minnesota, Iowa, North Dakota, South Dakota, Nebraska and Kansas.

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