Insurance agents learn tough lessons from Brooke Corp. - Kansas City Star
<table> </table> It wasn’t long after Rhonda Lobell bought an insurance agency in Gonzales, La., with the help of <strong>Brooke Corp. </strong>that she realized something was seriously wrong.</p><p>Lobell, who had been in the insurance business for 29 years, flew to Kansas City in February 2005 to attend Brooke’s three-day training academy in Overland Park and immediately ran into trouble.</p><p>“I had questions about things like commission statements — when could we see them, what if we had differences — and that’s when all heck broke loose,” she recalled. “They basically pulled me out and asked me if I wanted to prepare my exit strategy. And little did I know then that I should have done that.”</p><p>Against her better instincts, Lobell stuck it out. But her experience in Overland Park proved to be a harbinger of things to come.</p><p>Although she faxed Brooke copies of every check she sent the company — Brooke required the premium payments agents collected to be deposited in Brooke accounts — she didn’t get the commissions.</p><p>“So that’s what finally clued me in that something was not right and that they were robbing Peter to pay Paul,” Lobell said. “It looked to me like even back then they didn’t have the money to pay us commissions, so they fabricated reasons why they didn’t pay us.”</p><p>Lobell’s experience wasn’t unique — other franchisees said they ran into the same difficulties.</p><p>The idea behind Brooke — to finance and provide back-office support to entrepreneurial-minded people wanting to own their own insurance agencies — looked good on paper but proved disastrous in execution.</p><p>Wade Griffith, who owned several Brooke agencies in the Kansas City area and one in Lawrence, said: “Somebody knew something over there. Because when things would get questioned, they’d try to push you off to the next person. No one wanted to get cornered and tell you what was going on.”</p><p>Griffith had worked for several insurance companies, including <strong>GE Capital </strong>and <strong>AIG. </strong>With financing from a Brooke subsidiary, Griffith bought four agencies for a total of $3.1 million, putting down just $65,000 of his own money.</p><p>He also paid a franchise fee of $165,000 in each of the four transactions.</p><p>The franchise fee was one way Brooke made money. For example, after establishing a purchase price based on a multiple of the target agency’s renewable commissions, it would take a 10 percent broker fee and finance 90 percent of the purchase with a loan — usually at three points above prime. It also charged a 3 percent loan origination fee.</p><p>Most franchisees also had to purchase a buyers assistance plan, which was usually priced at 50 percent of the purchased agency’s previous 12 months of commissions — a fee that often amounted to several hundred thousand dollars.</p><p>After the purchase of the agency was completed, Brooke typically bundled the loan that financed the purchase with similar loans and marketed them to financial institutions. It also raised additional capital on the strength of the resulting numbers on its balance sheet.</p><p>The entire financial edifice began to totter last year after Brooke’s credit dried up and one bank, <strong>Bank of New York Mellon</strong>, accused it and company founder Robert Orr of fraudulently diverting money due the bank.</p><p>Brooke quickly agreed to the appointment by a federal judge of a special master to oversee its operations, but by then the horse had escaped the barn. Twenty years after it was founded, Brooke and a couple of its subsidiaries filed for Chapter 11 bankruptcy.
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