Cooling Off the Cash Burn

In 2005, just three years after the collapse of Arthur Andersen, the opportunities represented by the sudden exit of a giant professional-services firm loomed large in the minds of the founders of Integro, a privately held insurance-brokerage start-up. They looked around at the major insurance brokers — Marsh & McLennan, Aon, and Willis — and wondered if one of them might be a potential Andersen, the once–Big Five accounting firm that bit the dust in the wake of its dealings with Enron.

It was a time when the demise of at least one of the top brokers could well be envisioned. Early that year, Marsh & McLennan agreed to pay $850 million to settle charges of fraud and anticompetitive practices stemming from an investigation by then–New York State Attorney General Eliot Spitzer into bid-rigging in the insurance industry. Later Spitzer reached similar settlements with Aon and Willis for $190 million and $50 million, respectively.

Into the breach came former Marsh president and insurance-industry luminary Robert Clements and others looking to take advantage of the potential they saw in Spitzer's goring of the big brokers. In 2005 they managed to raise $320 million in capital in a private offering to form Integro, a firm they hoped would grow large enough, regionally and personnel-wise, to compete with the big boys. They proceeded to hire 400 employees — 75 of them at the home office — and open offices at major cities in the United States, the United Kingdom, and elsewhere.

Unfortunately, the Big Three brokers have proved more durable than Integro's founders were counting on. The fledgling broker found itself burning through cash at a faster rate than it was able to pick up revenues — largely on the basis of those big hiring costs. The result has been that the $320 million in initial capital now stands at $70 million, according to William Goldstein, the firm's CFO.

It was time to change direction. In the fall of 2008, the firm's board decided to make some leadership changes. The company's CEO and CFO left, and Goldstein, a former PricewaterhouseCoopers auditor who had Integro as a client, joined the brokerage as its first controller in February 2006. He was promoted to CFO in 2008.

Since then, Integro has sought to shrink the big footprint it established (by closing offices and cutting its workforce by 20%, to 265) and to refocus itself as a nimble specialty firm. In the process, he says, the $60 million firm has enjoyed yearly revenue growth of about 20%, although its cash flow is still flat. In an October 1 interview with CFO.com, he recounted what it was like to build a finance function from scratch and to move from public accounting to corporate finance, and how to extinguish cash burn at a small firm. An edited version of the interview follows.

What was the original idea in forming the company?
The idea was to create an insurance broker that would be an alternative to Marsh and Willis [and Aon]. Going back to 2005, [Spitzer] was banging away pretty hard at the major brokers. Bob [Clements], along with a couple of other people, had the idea of creating a platform so that if there's a sudden demise like there was to Andersen, there would be an entity and a vehicle that would quickly ramp up and capitalize. It would start by claiming none of the legacy problems.

We started to ramp up very quickly and went about hiring a number of employees in what we'd call national practice roles — product-line people who could help oversee the delivery of brokerage services to clients in certain industries or in certain fields like property, casualty, professional liability, health care. We also built out a very large corporate footprint, thinking that if 1,000 people were going to walk across the street in an 8-to-10-month period, we needed to have the backbone ready to support that.

As we've seen, Marsh has not crumbled. They're still a viable entity. Aon, if anything, has gotten stronger since 2005. They're both strong, solid financial institutions. But initially, we thought we needed to be ready for the rapid demise of these big brokers. In our first year, we grew from zero to about $25 million in client revenue, got a team in Bermuda, and also helped with the creation of an insurance entity called Ironshore, which focuses on complex risks.

We also did a small acquisition of a London wholesaler called Humphreys, Haggas, and Sutton, which has the ability to service very complex risks. It was a natural fit for us. Some of the folks had come from Marsh and had worked with some of our people in a prior life. So from '06 into '07 we started to really add head count, and we got up to 300 people by early '07 and to nearly 400 by the end of '07. Client revenue was about $45 million to $48 million at the time, but our expenses were significantly greater. Going into '08 we were still growing at a 15% to 20% clip, but our expenses were far greater than our revenue.

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