Brooke: This Franchise Player is Making an Impact

Jack Cassell “was pretty happy just being a producer,” as 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 non-hotel property/casualty book of business and have it serve as the foundation for his own independent agency. But he faced a problem many have encountered 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, with franchisees in 21 states and five regional offices in Kansas City, Dallas, Nashville, Denver and Sacramento, serves more than 700 licensed agents who work in Brooke’s franchisees.

The company provides its franchisees with 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. He said 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.”

The market access shuffle
When an agency joins Brooke as a franchisee, it gains access to all of Brooke’s insurance markets, but must surrender its own direct company appointments “to avoid adverse selection,” Orr said. “We sell this as a plus because with this volume consolidated or aggregated we can negotiate for more contracts and better contracts than they can on their own. This is foundation of what we do. Without market censure, we couldn’t do it.”

Orr clarified, “This doesn’t mean agencies have to roll their book of business in order to join.”

Cassell, whose name was provided to IJ by the company, didn’t seem to mind giving them up.

He said his Wichita agency, known as Cassell-Brooke Insurance, only produces $4 million in premium volume annually (60 percent Commercial lines), but still has access to top-notch markets thanks to Brooke.

“We can do pretty nicely with the companies we have through Brooke,” he said. Most small-time agencies don’t have this many companies. We can be a pretty competitive agency.

“Then there are some things they do that save time,” Cassell added. “We’re just dealing with the field rep or the underwriter—that simplifies our lives. We don’t have to worry about the politics of negotiating with companies.”

Joel Jennings, managing partner for franchisee Brooke Insurance & Financial Services Inc. in Metropolis, Ill., echoed the sentiment.

“Your agency is strengthened considerably when you go with Brooke,” Jennings said. “Now we have several national carriers we could not touch before. Now I’ve got products to sell that allow me to go out and compete in a way I could never do before.”

Jennings said the markets include Hartford, Safeco, Allstate’s independent-agency subsidiary Encompass and MetLife, among others. He added that because the carriers look at Brooke as a whole rather than each individual component, unfortunate loss ratios one year due to natural catastrophe won’t result in a slew of appointment cancellations.

“Last year we had a very damaging tornado come through our territory,” Jennings said. “If I was standing on my own, who knows? But they look at the profits for big Brooke picture, not just me.”

Jennings said he didn’t resent the level of involvement by Brooke in his agency’s operations because “they have a vested interest in the success of our business. I know they’re not going to try to pressure me into doing things that aren’t best in the long-term. Their best interest is mine. We’re in this game together now.”

Another advantage to becoming a Brooke franchisee, according to the agents interviewed for this story, is that the company carries some of the administrative load leaving the agency with more time and resources to focus on selling.

“If you’re in a regular agency you’re looking at a statement from each company,” Cassell said. “With Brooke, you’ve only got to reconcile one statement. That’s another simplification.”

Perpetuation? Not a problem.
Aside from offering easier access to credit, Orr said Brooke has simplified the acquisition process between Brooke-affiliated agencies, making it easier for agents near retirement to find a buyer.

Because the Brooke cash-management system, technology, etc. are already in place in the franchisees—most of whom are “mom-and-pop/Main Street” type agencies with less than $1 million in annual premium volume, according to Orr.—the entire transaction goes much more smoothly.

Jennings said perpetuation was a principal reason he decided to join Brooke. “I was working on a business continuation plan,” he said. “I’m a 14-hour-a-day man. My family’s grown and other than this and my outside hobbies this is life for me. I was working on how I could perpetuate my business and simplify my life at the same time. I was packing a lot of pressure managing and being financially responsible for everything that goes on around here.”

Now Jennings’ daughter, Christy McDaniel, manages the agency’s property/ casualty operations and he said his mind is at ease about the future.

Who are you?
While the cornerstone of the independent agency system—ownership of the book of business—is preserved in the Brooke franchise concept, it’s clear that a good deal of autonomy is given up in return for the company’s benefits. It’s not for everybody, Brooke’s own agents will admit.

“My personality blends well,” said Jack Cassell. “I’m not a wild-haired type guy that takes off in different directions all the time. A lot of salespeople are not as conservative as I am. I could see how [giving up some control] could be a problem for some people.”

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