The Robert F. Driver Co., Inc. is a portfolio company of the 1818 Mezzanine Fund, L.P., an investment partnership managed by Brown Brothers Harriman & Co. (“BBH”). Since raising its first private equity fund in 1989, BBH-managed funds have invested in over 40 private companies. The Robert F. Driver Co., Inc. is one of BBH’s recent success stories.
Robert F. Driver Co., Inc. began operations in 1925 when a teenage Robert Driver began selling insurance out of another agent’s office. Today, Driver is San Diego’s largest independent insurance broker and the 31st largest insurance broker nationwide.1 The company is headquartered in a nine-story office building in downtown San Diego and has another eight locations in California, reaching as far north as Sacramento.
Driver’s focus is on serving the commercial insurance needs of mid-sized businesses and governmental entities. The company has established specialty programs aimed at niche markets (including tow truck operators, trash haulers, and restaurant workers, for example) and is the leading public entity broker in California. In fiscal 1999, Driver’s 330 employees brokered over $750 million in written premiums and the company reported revenues of $43 million, an increase of more than 26% versus fiscal 1998. Operating profitability, as measured by EBITDA (earnings before interest, taxes, depreciation, and amortization), was $8.3 million, 94% higher than the previous year. Driver’s performance in 1999 followed an equally impressive 1998, when revenues and EBITDA grew 17% and 69%, respectively.
But Driver has not always had such spectacular growth. From 1994 to 1997, for example, revenues grew at a compounded annual growth rate (“CAGR”) of only 4%.
So what happened? How has Driver accomplished such incredible growth in revenues and profitability recently?
At least four reasons can be readily identified: (1) a management-led buyout, (2) accretive acquisitions, (3) proper employee incentive programs, and (4) volume consolidation to maximize value.
Management Buyout
In 1997, Driver’s Chairman and CEO, Tom Corbett, identified the opportunity to purchase the company from a shareholder group controlled by Mr. Driver and an Employee Stock Ownership Plan (“ESOP”) which had been established in the 1970s. The ESOP was always considered to be primarily a retirement vehicle for Driver’s employees, and as it matured, along with Mr. Driver (then in his eighties), the ownership strategy was simple: avoid risk. But Corbett believed there was an opportunity to pursue a more aggressive growth strategy through strategic acquisitions and geographic expansion. So Corbett organized a core group of 13 executives who were willing to invest over $7 million in a management buyout of Driver in return for the opportunity to play a greater role in directing Driver’s future. The management buyout also afforded these executives the opportunity to own more of Driver’s stock than they had achieved individually through the ESOP. Believing that the company’s stock was likely to appreciate significantly over the next several years, the senior executives were eager to invest.
With the equity component in place, Corbett needed to round out his capital structure. After meeting with several other sources of junior capital, Corbett elected to partner with the 1818 Mezzanine Fund, L.P., a private investment partnership managed by Brown Brothers Harriman & Co. The 1818 Mezzanine Fund, L.P. invested $4 million in subordinated notes, which included warrants equal to a small percentage of the equity of Driver. The 1818 Mezzanine Fund, L.P. also received a seat on the company’s Board of Directors. Senior bank financing, which was provided by California-based Imperial Bank, was the final component of the capital structure. By May 1998 the management buyout was complete.
Accretive Acquisitions
Following the management buyout, Corbett and his management team immediately turned their attention to acquisition opportunities. The goal was to pursue a “buy and build” strategy, whereby Driver would acquire strong regional insurance brokers and build their books of business through the addition of Driver’s specialized programs. In fiscal 1999 alone Driver completed three major acquisitions and a number of leveraged hires (in a leveraged hire, a single broker may join the Driver organization and bring with him a book of business, which Driver then “acquires”). As a result of its acquisition strategy, Driver’s geographic reach has grown and the company has strengthened its existing core businesses with valued production and management talent. In particular, Driver’s presence in northern and central California has improved greatly.
Driver financed its acquisitions through a combination of cash and stock, and in all cases the target companies’ management teams were eager to join the Driver organization. Prior to each acquisition Driver’s Board of Directors is presented with an analysis demonstrating the financial logic of buying the target. In order to receive Board approval, all acquisitions must be immediately accretive to Driver’s existing shareholders.
Employee Incentives
The third component of Driver’s recent success is its ability to properly incent its employees. Driver’s most valuable asset is its employees, who have nurtured client relationships for years, and, in many cases, even decades. For this reason it is very important to create firm loyalty. Mr. Driver identified this need when he established the ESOP. In this way, all of Driver’s employees were also “shareholders,” aligning the interests of the employees and the owners.
With the management buyout Driver was repositioned to aggressively pursue a growth strategy. Still, with the elimination of the ESOP, Corbett and Driver’s Board of Directors recognized the need to find another way to properly incent the company’s employees. In 1998 management devised a plan in which broker commissions would be marginally reduced over time in exchange for giving employees Driver stock. In this way, Driver would benefit from greater profitability due to reduced commissions expense and the employees would benefit from the capital appreciation of Driver’s stock. The employees were essentially trading current income for capital gains.
Volume Consolidation to Maximize Value
The final component of Driver’s incredible growth has been its ability to better structure its relationships with key vendors to maximize value. As the company has grown in size, as measured by premiums written and revenues, it has earned greater clout with its many business partners. As a result, Driver has been asking for, and receiving, concessions from its business partners to the benefit of its clients and shareholders. For example, Driver places a substantial volume of its property and casualty insurance premiums with a single source. Eager to participate in Driver’s upside potential, the source has made concessions to Driver which have increased the company’s profitability significantly. Additionally, volume consolidation has driven the creation of several value added programs (better product, better price) with a few key carriers. Clearly, Driver’s management team has taken advantage of the company’s new growth strategy to maximize its relationships with its business partners.
Conclusion
Although Driver is a middle-market company with a limited geographic scope, Driver is a major force within its region in the insurance brokerage arena. With a strong management team and an employee DRIVER base that is committed to improving Driver’s financial performance every year, the company has found a strategy to greatly enhance the value of its stock. Add in future acquisitions and the ability to leverage its market position, and Driver appears poised for continued success.
Driver’s progress has not gone unnoticed in the marketplace. The insurance brokerage industry is consolidating rapidly, and Driver is a player in that consolidation. The company’s management has been approached by several suitors since the management buyout, and Driver is always considering its strategic alternatives. The value of Driver’s stock has appreciated significantly since the management buyout. What will happen next no one knows. Still, you can be sure that Driver is committed to continued growth and enhanced profitability, while providing advantaged products to its customers through ever-expanding programs.
Richard H. Witmer, Jr., partner, and Jean-Pierre Paquin, vice president, at Brown Brothers Harriman & Co. assist private and closely-held public companies on important financial and strategic issues through advising on merger or sales, or providing private equity. They may be reached at 59 Wall Street, New York, NY 10005, 212.493.8403 or www.bbhco.com/
