For a time, Brooke Insurance appeared to have developed one of the most ambitious models for building a nationwide network of independent insurance agencies. At its peak, the company operated a franchise system with hundreds of locations across the country, giving smaller agency owners access to carriers, technology, financing and back-office services normally associated with much larger organizations.
Then, in 2008, the Brooke organization collapsed with remarkable speed, leaving franchise owners, lenders and investors dealing with the aftermath.
The Brooke story began in 1986, when Robert Orr founded Brooke Financial Services in Kansas. The company acquired its first property and casualty insurance agency that year. A decade later, in 1996, Brooke adopted a franchise model and created a lending program designed to finance insurance agency ownership transfers. The concept had considerable appeal.
An independent agency joining Brooke could gain access to numerous insurance carriers, marketing assistance, centralized administrative services and financial management tools. Brooke aggregated the premium volume of its agencies, allowing relatively small agencies to access carrier relationships that might otherwise have been difficult to obtain individually.
Brooke also provided something particularly valuable in the insurance agency acquisition market: financing.
Its affiliated finance operation, Brooke Credit Corporation—later known as Aleritas Capital Corporation—loaned money to entrepreneurs to purchase existing agencies or establish new Brooke franchises. Brooke could therefore participate in multiple parts of the transaction: helping arrange the agency sale, selling a franchise, providing financing and then receiving an ongoing percentage of the agency’s revenue.
The model produced extraordinary growth.
Brooke reported 234 franchise locations at the end of 2003, 370 in 2004 and 552 in 2005. By the end of 2006, the network had reached 737 locations. Those agencies generated approximately $741 million in insurance premium volume during 2006. Brooke Corporation reported approximately $179.7 million in operating revenue that year.
Brooke was becoming a major force in insurance distribution. Entrepreneur magazine even ranked the company first in its financial-services franchise category in 2006 and again in 2007, according to Brooke’s SEC filings.
But underneath that growth was an increasingly complicated financial structure. Brooke generally collected commissions directly from insurance companies, deducted its approximately 15% share of agency revenue along with loan payments and other amounts owed, and then distributed the remainder to franchise owners. Meanwhile, its lending affiliate originated hundreds of millions of dollars in loans, many involving Brooke franchisees. Those loans could then be sold, participated or packaged into securitizations for outside investors and financial institutions.
That created substantial interdependence. The franchising operation helped generate borrowers for the lending operation, while financing helped generate new franchises.
Problems became increasingly serious during 2007 and 2008. The SEC later alleged that Brooke executives concealed the number of failed and abandoned franchises, provided significant financial assistance to struggling franchisees without adequately disclosing the extent of the problems, and presented investors with a financial picture that was stronger than the underlying business justified. The SEC also alleged serious problems within Aleritas, including deteriorating loans, liquidity problems, double-pledging of collateral and diversion of funds.
The structure began unraveling rapidly in 2008. In September, Bank of New York Mellon, acting as trustee for certain securitization investors, went to federal court. A special master was subsequently appointed to oversee major Brooke entities and assets.
Brooke Corporation and Brooke Capital filed for Chapter 11 bankruptcy in October 2008. The companies were ultimately unable to reorganize, and the proceedings were converted to Chapter 7 liquidation. Hundreds of Brooke franchise agencies were affected, and the SEC later said several regional banks also failed partly as a result of losses associated with Aleritas loans.
There was also a personal legal consequence for Brooke’s founder. In 2013, Robert Orr pleaded guilty to one count of making false statements in an SEC filing. He admitted that Brooke’s 2007 annual report omitted material information concerning failed franchise locations and financial assistance being provided to underperforming franchises.
The Brooke story remains an important lesson for the insurance agency industry. Rapid growth alone does not necessarily indicate a healthy organization. When a network simultaneously controls agency commissions, provides acquisition financing, depends heavily on continued franchise expansion and finances that expansion through outside lenders and securitizations, problems in one part of the organization can quickly spread throughout the entire system.
However, Brooke’s collapse should not be viewed as an indictment of the agency network model. In the years since Brooke’s 2008 collapse, the insurance industry has not experienced another widely comparable agency-network failure of this magnitude. Today’s agency networks, aggregators, clusters and alliances have continued to expand and have become an increasingly important part of independent insurance distribution.
In fact, agency networks arguably thrive today more than at any previous point in the independent agency marketplace. They provide thousands of agencies with carrier access, increased premium leverage, technology, education, marketing assistance and other resources while allowing agency owners to remain independent. The concept has stood the test of time and agencies should not be relucted to become part of such organizations. Nevertheless every agency should do their due diligence before signing any agreement.
Brooke demonstrated how effectively scale, carrier access and shared resources can help smaller independent agencies grow. Its failure demonstrated something equally important: those benefits must be supported by transparent accounting, sound financial practices, sustainable cash flow and appropriate oversight.
The broader lesson from Brooke is not that the agency network model was flawed. Brooke’s most serious problems came from its lending operations and the financial instability surrounding the loans used to fuel agency acquisitions and franchise growth. Rapid expansion may have added pressure, but the much larger issue was a lending structure that became financially unsound. That distinction is important because the agency network system itself was not what brought Brooke down.
Well-managed agency networks have continued to grow and provide independent agencies with carrier access, market leverage, technology, support and other resources that can be difficult to obtain alone. Brooke’s collapse reinforces the importance of choosing a financially sound, transparent and well-managed organization. When properly operated, an agency network can strengthen an independent agency rather than place it at unnecessary financial risk.
