UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
| x |
ANNUAL REPORT PURSUANT
TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
|
| For the fiscal year ended December 31, 2005 | |
|
OR
|
|
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934.
|
|
For
the transition period from
___________to___________
|
|
Commission
file number 1-13619
BROWN
& BROWN, INC.
(Exact
name of Registrant as specified in its
charter)
|
Florida
(State
or other jurisdiction of incorporation or
organization)
220
South Ridgewood Avenue, Daytona
Beach, FL
(Address
of principal executive
offices)
|
 |
59-0864469
(I.R.S.
Employer Identification
Number)
32114
(Zip
Code)
|
Registrant’s
telephone number, including area code: (386) 252-9601
Registrant’s
Website: www.bbinsurance.com
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which
registered
|
|
COMMON
STOCK, $0.10 PAR
VALUE
|
NEW
YORK STOCK
EXCHANGE
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No
x
The
aggregate market value of the voting Common Stock held by non-affiliates of
the
registrant, computed by reference to the last reported price at which the stock
was sold on June 30, 2005 (the last day of the registrant’s most recently
completed second fiscal quarter), was $2,490,874,100.
The
number of outstanding shares of the registrant’s Common Stock, $.10 par value,
outstanding as of March 10, 2006 was 139,397,938.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of Brown & Brown, Inc.’s Proxy Statement for the 2006 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
Report.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2005
Disclosure
Regarding Forward-Looking Statements
Brown
& Brown, Inc., together with its subsidiaries (collectively, “we”, “Brown
& Brown” or the “Company”), make “forward-looking statements” within the
“safe harbor” provision of the Private Securities Litigation Reform Act of 1995
throughout this report and in the documents we incorporate by reference into
this report. You can identify these statements by forward-looking words
such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan” and
“continue” or similar words. We have based these statements on our current
expectations about future events. Although we believe the
expectations expressed in the forward-looking statements included in this Form
10-K and those reports, statements, information and announcements are based
on
reasonable assumptions within the bounds of our knowledge of our business,
a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made
by us
or on our behalf. Many of these factors have previously been identified in
filings or statements made by us or on our behalf. Important factors which
could cause our actual results to differ materially from the forward-looking
statements in this report include:
|
-
|
material
adverse changes in economic conditions
in the markets we serve;
|
|
-
|
future
regulatory actions and conditions in the
states in which we conduct our business;
|
|
-
|
competition
from others in the insurance
agency, brokerage and service business;
|
|
-
|
a
significant portion of business written by
Brown & Brown is for customers located in California, Florida,
Georgia, New Jersey, New York, Pennsylvania and Washington. Accordingly,
the occurrence of adverse economic conditions, an
adverse regulatory climate, or a disaster in any of these states
could
have a material adverse effect on our business, although no such
conditions have been encountered in the past;
|
|
-
|
the
integration of our operations with those of businesses or assets
we have
acquired or may acquire in the future and the
failure to realize the expected benefits of such integration; and
|
|
-
|
other
risks and uncertainties as may be detailed from time to time in
our public
announcements and Securities and Exchange
Commission (“SEC”) filings.
|
Forward-looking
statements that we make or that are made by others on our behalf are based
on a
knowledge of our business and the environment in which we operate, but because
of the factors listed above, actual results may differ from those in the
forward-looking statements. Consequently, these cautionary statements qualify
all of the forward-looking statements we make herein. We cannot assure you
that
the results or developments anticipated by us will be realized or, even if
substantially realized, that those results or developments will result in the
expected consequences for us or affect us, our business or our operations in
the
way we expect. We caution readers not to place undue reliance on these
forward-looking statements, which speak only as of their dates. We assume no
obligation to update any of the forward-looking statements.
General
We
are a
diversified insurance agency, brokerage and service organization with origins
dating from 1939, headquartered in Daytona Beach and Tampa, Florida. We
market and sell to our customers insurance products and services, primarily
in
the property, casualty and employee benefits areas. As an agent and broker,
we
do not assume underwriting risks. Instead, we provide our customers with quality
insurance contracts, as well as other targeted, customized risk management
products and services.
We
are
compensated for our services primarily by commissions paid by insurance
companies and fees paid by customers for certain services. The commission is
usually a percentage of the premium paid by the insured. Commission rates
generally depend upon the type of insurance, the particular insurance company
and the nature of the services provided by us. In some cases, a commission
is
shared with other agents or brokers who have acted jointly with us in a
transaction. We may also receive from an insurance company a “contingent
commission”, which is a profit-sharing commission based primarily on
underwriting results, but may also contain considerations for volume, growth
and/or retention. Fees are principally generated by our Services Division,
which offers third-party claims administration, consulting for the self-funded
workers’ compensation insurance market, and managed healthcare services.
The amount of our revenue from commissions and fees is a function of, among
other factors, continued new business production, retention of existing
customers, acquisitions and fluctuations in insurance premium rates and
insurable exposure units.
Premium
pricing within the property and casualty insurance underwriting industry has
historically been cyclical, displaying a high degree of volatility based on
prevailing economic and competitive conditions. From the mid-1980s through
1999,
the property and casualty insurance industry experienced a “soft market” during
which the underwriting capacity of insurance companies expanded, stimulating
an
increase in competition and a decrease in premium rates and related commissions.
The effect of this softness in rates on our revenues was somewhat offset by
our
acquisitions and new business production. As a result of increasing “loss
ratios” (the comparison of incurred losses plus adjustment expenses against
earned premiums) of insurance companies through 1999, there was a general
increase in premium rates beginning in the first quarter of 2000 and continuing
into 2003. During 2003, the increases in premium rates began to moderate
and, in certain lines of insurance, the premium rates decreased. In 2004,
as general premium rates continued to moderate, the insurance industry
experienced the worst hurricane season since 1992 when Hurricane Andrew hit
south Florida. The insured losses from the 2004 hurricane season were absorbed
relatively easily by the insurance industry and the general insurance premium
rates continued to soften during 2005. During the third quarter of 2005, the
insurance industry experienced the worst hurricane season ever recorded.
Primarily as a result of these hurricanes, including Hurricanes Katrina, Rita
and Wilma, the total insured losses are estimated to be in excess of $50
billion. The full impact that the 2005 insured losses will have on the insurance
premium rates charged by insurance companies for 2006 is unknown, however,
there
appears to be a general consensus that there will be upward pressure on at
least
the insurance premium rates on coastal property, primarily in the southeastern
part of the United States.
As
of
December 31, 2005, our activities were conducted in 170 locations in 34 states
as follows:
|
|
Florida
|
38
|
|
Arkansas
|
3
|
|
|
|
California
|
12
|
|
Minnesota
|
3
|
|
|
|
Georgia
|
11
|
|
Nevada
|
3
|
|
|
|
New
York
|
10
|
|
South
Carolina
|
3
|
|
|
|
Texas
|
10
|
|
Wisconsin
|
3
|
|
|
|
New
Jersey
|
8
|
|
Montana
|
2
|
|
|
|
Virginia
|
8
|
|
New
Hampshire
|
2
|
|
|
|
Colorado
|
6
|
|
North
Carolina
|
2
|
|
|
|
Washington
|
5
|
|
Connecticut
|
1
|
|
|
|
Arizona
|
4
|
|
Hawaii
|
1
|
|
|
|
Illinois
|
4
|
|
Kentucky
|
1
|
|
|
|
Indiana
|
4
|
|
Massachusetts
|
1
|
|
|
|
Louisiana
|
4
|
|
Missouri
|
1
|
|
|
|
Michigan
|
4
|
|
Nebraska
|
1
|
|
|
|
New
Mexico
|
4
|
|
Ohio
|
1
|
|
|
Oklahoma
|
4
|
Tennessee
|
1
|
|||
|
Pennsylvania
|
4
|
Utah
|
1
|
Business
Combinations
Beginning
in 1993 through 2005, we acquired 205 insurance intermediary operations,
excluding acquired books of business (customer accounts), that had aggregate
estimated annual revenues of $570.7 million for the 12 calendar months
immediately preceding the dates of acquisition. Of these, 32 operations
were acquired during 2005, with aggregate estimated annual revenues of $123.0
million for the 12 calendar months immediately preceding the dates of
acquisition. During 2004, 32 operations were acquired with aggregate
estimated annual revenues of $103.3 million for the 12 calendar months
immediately preceding the dates of acquisition. During 2003, 23 operations
were acquired, with aggregate estimated annual revenues of $42.6 million for
the
12 calendar months immediately preceding the dates of acquisition. Additionally
in 2003, we acquired the remaining 25% ownership of Florida Intracoastal
Underwriters, Limited Company that we previously did not own.
See
Note
2 to the Consolidated Financial Statements for a summary of our 2005
acquisitions.
From
January 1, 2006 through March 14, 2006, Brown & Brown acquired the assets
and assumed certain liabilities of three insurance intermediary entities. See
Note 17 to the Consolidated Financial Statements for a summary of our 2006
acquisitions.
DIVISIONS
Our
business is divided into four reportable operating segments: (1) the Retail
Division; (2) the National Programs Division; (3) the Brokerage Division; and
(4) the Services Division. The Retail Division provides a broad range of
insurance products and services to commercial, public entity, professional
and
individual customers. The National Programs Division is comprised of two units:
Professional Programs, which provides professional liability and related package
products for certain professionals; and Special Programs, which markets targeted
products and services designated for specific industries, trade groups, public
entities, and market niches. The Brokerage Division markets and sells
excess and surplus commercial insurance and reinsurance, primarily through
independent agents and brokers. The Services Division provides clients
with third-party claims administration, consulting for the workers’ compensation
insurance market, and comprehensive medical utilization management services
in
both workers’ compensation and all-lines liability arenas.
The
following table sets forth a summary of (1) the commissions and fees revenue
(revenues from external customers) generated by each of our reportable operating
segments for 2005, 2004 and 2003, and (2) the percentage of our total
commissions and fees revenue represented by each segment for each such period:
|
(in
thousands, except percentages)
|
2005
|
%
|
2004
|
%
|
2003
|
%
|
|||
|
Retail
Division
|
$489,566
|
63.1
|
% |
$457,936
|
71.8
|
% |
$395,385
|
72.5
|
% |
|
National
Programs Division
|
133,147
|
17.2
|
111,907
|
17.5
|
90,385
|
16.6
|
|||
|
Brokerage
Division
|
125,537
|
16.2
|
41,585
|
6.5
|
31,738
|
5.8
|
|
||
|
Services
Division
|
26,565
|
3.4
|
25,807
|
4.0
|
27,920
|
5.1
|
|||
|
Other
|
728
|
0.1
|
1,032
|
0.2
|
(141)
|
(0.0)
|
|||
|
Total
|
$775,543
|
100.0
|
% |
$638,267
|
100.0
|
% |
$545,287
|
100.0
|
% |
See
Note
16 to the Consolidated Financial Statements for additional segment financial
data relating to our business.
Retail
Division
As
of
December 31, 2005, our Retail Division operated in 27 states and employed 2,718
persons. Our retail insurance agency business provides a broad range of
insurance products and services to commercial, public entity, professional
and
individual customers. The categories of insurance principally sold by us
include: property insurance relating to physical damage to property and
resultant interruption of business or extra expense caused by fire, windstorm
or
other perils; casualty insurance relating to legal liabilities, workers’
compensation, commercial and private passenger automobile coverages; and
fidelity and surety bonds. We also sell and service group and individual life,
accident, disability, health, hospitalization, medical and dental insurance.
No
material part of our retail business is attributable to a single customer or
a
few customers. During 2005, commissions and fees from our largest single Retail
Division customer represented less than one percent of the Retail Division’s
total commissions and fees revenue.
In
connection with the selling and marketing of insurance coverages, we provide
a
broad range of related services to our customers, such as risk management
surveys and analysis, consultation in connection with placing insurance
coverages and claims processing. We believe these services are important factors
in securing and retaining customers.
National
Programs Division
As
of
December 31, 2005, our National Programs Division employed 645 persons. Our
National Programs Division consists of two units: Professional Programs and
Special Programs.
Professional
Programs.
Professional Programs provides professional liability and related package
insurance products for certain professionals. Professional Programs
tailors insurance products to the needs of a particular professional group;
negotiates policy forms, coverages and commission rates with an insurance
company; and, in certain cases, secures the formal or informal endorsement
of
the product by a professional association or sponsoring company. The
professional groups serviced by the Professional Programs include
dentists, lawyers, optometrists, opticians, insurance agents, financial service
representatives, benefit administrators, real estate title agents and escrow
agents. The Professional Protector Plan® for Dentists and the Lawyer’s
Protector Plan® are marketed and sold primarily through a national network of
independent agencies including certain of our retail offices, while certain
of
the professional liability programs of our CalSurance® and TitlePac® operations
are principally marketed and sold directly to our insured customers, in some
instances through certain of our retail offices. Under our agency agreements
with the insurance companies that underwrite these programs, we often have
authority to bind coverages (subject to established guidelines), to bill and
collect premiums and, in some cases, to adjust claims. For the programs
that we market through independent agencies, we receive a wholesale commission
or “override”, which is then shared with these independent agencies.
Below
are
brief descriptions of the programs offered to professional groups by the
Professional Programs unit of the National Programs Division.
|
|
•
|
Dentists:
The Professional Protector Plan® for Dentists offers comprehensive
coverage for dentists, oral surgeons, dental schools and dental students,
including practice protection and professional liability. This program,
initiated in 1969, is endorsed by a number of state and local dental
societies and is offered in 49 states, the District of Columbia,
the U.S.
Virgin Islands and Puerto Rico.
|
|
|
|
|
|
|
•
|
Lawyers:
The Lawyer’s Protector Plan® (LPP®) was introduced in 1983, 10 years
after we began marketing lawyers’ professional liability insurance in
1973. This program is presently offered in 43 states, the District
of
Columbia and Puerto Rico.
|
|
|
|
|
|
|
•
|
Optometrists
and Opticians: The
Optometric Protector Plan® (OPP®) and the Optical Services Protector Plan®
(OSPP®) were created in 1973 and 1987, respectively, to provide
professional liability, package and workers’ compensation coverages
exclusively for optometrists and opticians. These programs insure
optometrists and opticians nationwide.
|
|
|
|
|
|
|
•
|
CalSurance®: CalSurance®
offers professional liability programs designed for insurance agents,
financial advisors, registered representatives, securities broker-dealers,
benefit administrators, real estate brokers and real estate title
agents.
CalSurance® also sells commercial insurance packages directly to customers
in certain industry niches including destination resort and luxury
hotels,
independent pizza restaurants, and others. An important aspect of
CalSurance® is Lancer Claims Services, which provides specialty claims
administration for insurance companies underwriting CalSurance® product
lines.
|
|
|
|
|
|
|
•
|
TitlePac®:
TitlePac® provides professional liability products and
services designed for real estate title agents and escrow agents
in 47
states and the District of Columbia.
|
|
|
|
|
|
|
•
|
Physicians:
Initiated in 1980, the Physicians’ Protector Plan® offered professional
liability insurance for physicians, surgeons and other healthcare
providers in select states. The contract with the underwriting
insurance company on this program expired in March 2003. Since a
replacement insurance company or program could not be negotiated,
we
terminated this program in 2004.
|
Special
Programs.
Special Programs markets targeted products and services to specific industries,
trade groups, public entities, and market niches. All of the Special
Programs, except for Parcel Insurance Plan® (PIP®), are marketed and sold
primarily through independent agents, including certain of our retail
offices. Parcel Insurance Plan® markets and sells its insurance product
directly to insured customers. Under agency agreements with the insurance
companies that underwrite these programs, we often have authority to bind
coverages subject to established guidelines, to bill and collect premiums and,
in some cases, to adjust claims.
Below
are
brief descriptions of the Special Programs:
|
|
•
|
Florida
Intracoastal Underwriters, Limited Company
(FIU) is a managing general agency that specializes in providing
insurance
coverage for coastal and inland high-value condominiums and apartments.
FIU has developed a specialty reinsurance facility to support the
underwriting activities associated with these risks.
|
|
|
|
|
|
|
|
|
•
|
Public
Risk Underwriters®,
along with our offices in Ephrata, Washington, Norcross, Georgia,
and
Kokomo, Indiana are program administrators offering unique property
and
casualty insurance products, risk management consulting, third-party
administration and related services designed for municipalities,
schools,
fire districts, and other public entities on a national basis.
|
|
|
|
|
|
|
|
|
•
|
Proctor
Financial, Inc.
(“Proctor”) provides insurance programs and compliance solutions for
financial institutions who service mortgage loans. Proctor’s
products include lender-placed fire and flood insurance, full insurance
outsourcing, mortgage impairment, and blanket equity insurance.
Proctor also writes surplus lines property business for its financial
institutions clients and acts as a wholesaler for this line of
business.
|
|
|
•
|
American
Specialty Insurance & Risk Services, Inc.
provides insurance and risk services for the sports and entertainment
industry with clients in professional sports, motor sports, amateur
sports, and the entertainment industry.
|
||
|
|
|
|
|
|
|
•
|
Parcel
Insurance Plan®
(PIP®) is a specialty insurance agency providing insurance coverage to
commercial and private shippers for small packages and parcels with
insured values of less than $25,000 each.
|
|
|
•
|
Professional
Risk Specialty Group
is
a specialty insurance agency providing liability insurance products
to
various professional groups.
|
||
|
|
|
|
|
|
|
•
|
AFC
Insurance, Inc.
(“AFC”) is a managing general underwriter, specializing in unique
insurance products for the health and human service industry. AFC
works with retail agents in all states and targets home healthcare,
group
homes for the mentally and physically challenged, and drug and alcohol
facilities and programs for the developmentally disabled.
|
|
|
|
|
|
|
|
|
•
|
Acumen
Re Management Corporation
is
a reinsurance underwriting management organization, primarily acting
as an
outsourced specific excess workers’ compensation facultative reinsurance
underwriting facility.
|
|
|
|
|
|
|
|
|
•
|
Commercial
Programs serves the insurance needs of certain specialty trade/industry
groups. Programs offered include:
|
|
|
|
|
|
|
|
|
|
•
|
Wholesalers
& Distributors Preferred Program®.
Introduced in 1997, this program provides property and casualty protection
for businesses principally engaged in the wholesale-distribution
industry.
|
|
|
|
|
|
|
|
|
•
|
Railroad
Protector Plan®.
Also introduced in 1997, this program is designed for contractors,
manufacturers and other entities that service the needs of the railroad
industry.
|
|
|
|
|
|
|
|
|
•
|
Environmental
Protector Plan®.
Introduced in 1998, this program provides a variety of specialized
coverages, primarily to municipal mosquito control districts.
|
|
|
|
|
|
|
|
|
•
|
Food
Processors Preferred ProgramSM.
This program, introduced in 1998, provides property and casualty
insurance
protection for businesses involved in the handling and processing
of
various foods.
|
Brokerage
Division
The
Brokerage Division markets excess and surplus commercial insurance products
and
services to retail agencies (including our retail offices), and reinsurance
products and services to insurance companies throughout the United States.
Brokerage Division offices represent various U.S. and U.K. surplus lines
insurance companies and certain offices are also Lloyd’s of London
correspondents. The Brokerage Division also represents admitted insurance
companies for smaller agencies that do not have access to large insurance
company representation. Excess and surplus insurance products include many
insurance coverages, including, personal lines homeowners, yachts, jewelry,
commercial property and casualty, commercial automobile, garage, restaurant,
builder’s risk and inland marine lines. Difficult-to-insure general liability
and products liability coverages are a specialty, as is excess workers’
compensation coverage. Retail agency business is solicited through mailings
and
direct contact with retail agency representatives. At December 31, 2005, the
Brokerage Division employed 806 persons.
In
September 2001, we established Brown & Brown Re, Inc., a subsidiary
headquartered in New York, New York that specializes in treaty and facultative
reinsurance brokerage services. Brown & Brown Re had approximately
$2.0 million in commission revenues in 2005.
On
January 1, 2006, we acquired the assets of Axiom Intermediaries, LLC. (Axiom)
with estimated annualized revenues of $14.0 million. Brown & Brown Re will
be merged into Axiom. The Axiom acquisition will substantially increase our
treaty and facultative reinsurance brokerage services.
In
March
2005, we acquired the assets of Hull & Company, Inc. (Hull) with estimated
annualized revenues of $63.0 million which along with acquisitions of several
other larger brokerage operations, essentially tripled the 2005 revenues of
this
Division over 2004 revenues.
Services
Division
At
December 31, 2005, our Services Division employed 285 persons and provided
the
following services: (1) insurance-related services, including comprehensive
risk
management and third-party administration (TPA) services for insurance entities
and self-funded or fully-insured workers’ compensation and liability plans; and
(2) comprehensive medical utilization management services for both workers’
compensation and all-lines liability insurance plans.
The
Services Division’s workers’ compensation and liability plan TPA services
include claims administration, access to major reinsurance markets, cost
containment consulting, services for secondary disability, and subrogation
recoveries and risk management services such as loss control. In 2005, our
three
largest workers’ compensation contracts represented approximately 61.6% of
our Services Divisions commissions and fees revenue, or approximately
2.1% of our total consolidated commissions and fees revenue. In addition, the
Services Division provides managed care services, including medical networks,
case management and utilization review services, certified by the American
Accreditation Health Care Commission.
In
2004,
we sold our Louisiana-based employee benefits TPA. In 2003, we sold a
similar operation based in Florida. We currently have no operations in the
employee benefits TPA business and have no current plans to re-enter this area
of the services business.
Employees
At
December 31, 2005, we had 4,540 employees. We have agreements with our
sales employees and certain other employees that include provisions restricting
their right to solicit our insured customers and employees after separation
from
employment with us. The enforceability of such agreements varies from state
to
state depending upon state statutes, judicial decisions and factual
circumstances. The majority of these agreements are at-will and terminable
by
either party; however, the covenants not to solicit our insured customers and
employees generally continue for a period of two years after cessation of
employment.
None
of
our employees is represented by a labor union, and we consider our
relations with our employees to be satisfactory.
Competition
The
insurance intermediary business is highly competitive, and numerous firms
actively compete with us for customers and insurance markets. Competition
in the insurance business is largely based on innovation, quality of service
and
price. There are a number of firms and banks with substantially greater
resources and market presence that compete with us in the southeastern United
States and elsewhere. This situation is particularly pronounced outside of
Florida.
A
number
of insurance companies are engaged in the direct sale of insurance, primarily
to
individuals, and do not pay commissions to third-party agents and brokers.
In
addition, the Internet continues to be a source for direct placement of personal
lines business. To date, such direct writing has had little effect on our
operations, primarily because our Retail Division is commercially oriented.
In
addition, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
and regulations enacted thereunder permit banks, securities firms and insurance
companies to affiliate. As a result, the financial services industry has
experienced and may experience further consolidation, which in turn has resulted
and could further result in increased competition from diversified financial
institutions, including competition for acquisition prospects.
Regulation,
Licensing and Agency Contracts
We
and/or
our designated employees must be licensed to act as agents or brokers by state
regulatory authorities in the states in which we conduct business. Regulations
and licensing laws vary by individual state and are often complex.
The
applicable licensing laws and regulations in all states are subject to amendment
or reinterpretation by state regulatory authorities, and such authorities are
vested in most cases with relatively broad discretion as to the granting,
revocation, suspension and renewal of licenses. The possibility exists that
we
and/or our employees could be excluded or temporarily suspended from carrying
on
some or all of our activities in, or otherwise subjected to penalties by, a
particular state.
Available
Information
We
make
available free of charge on our website, at www.bbinsurance.com, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange
Act) and the rules promulgated thereunder, as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and
Exchange Commission.
The
charters of the Audit, Compensation and Nominating/Governance Committees of
our
Board of Directors as well as our Corporate Governance Guidelines are also
available on our website or upon request. Requests for copies of any of
these documents should be directed in writing to Corporate Secretary, Brown
& Brown, Inc., 3101 West Martin Luther King Jr. Blvd., Suite 400, Tampa,
Florida 33607, or by telephone to (813) 222-4277.
As
referenced, this Annual Report on Form 10-K includes certain
forward-looking statements regarding various matters. The ultimate correctness
of those forward-looking statements is dependent upon a number of known and
unknown risks and events, and is subject to various uncertainties and other
factors that may cause our actual results, performance or achievements to be
different from those expressed or implied by those statements. Undue reliance
should not be placed on those forward-looking statements. The following
important factors, among others, as well as those factors set forth in our
other
SEC filings from time to time, could affect future results and events, causing
results and events to differ materially from those expressed or implied in
our
forward-looking statements. The
risks and uncertainties described below are not the only ones facing Brown
&
Brown Inc. and its subsidiaries. Additional risks and uncertainties, not
presently known to us or otherwise, may also impair our business operations.
WE
CANNOT ACCURATELY FORECAST OUR COMMISSION REVENUES BECAUSE OUR COMMISSIONS
DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HISTORICALLY
HAVE
VARIED AND, AS A RESULT, HAVE BEEN DIFFICULT TO PREDICT.
We
are
primarily engaged in insurance agency and brokerage activities and derive
revenues principally from commissions paid by insurance companies. The amount
of
such commissions is highly dependent on premium rates charged by insurance
companies. We do not determine insurance premiums. Premium rates are determined
by insurance companies based on a fluctuating market. Historically, property
and
casualty premiums have been cyclical in nature and have varied widely based
on
market conditions. From the mid-1980s through 1999, general premium levels
were
depressed as a result of the expanded underwriting capacity of insurance
companies and increased competition. In many cases, insurance companies lowered
commission rates and increased volume requirements. Significant reductions
in
premium rates occurred during the years 1986 through 1999. As a result of
increasing "loss ratios" (the comparison of incurred losses plus loss adjustment
expenses against earned premiums) experience by insurance companies through
1999, there was a general increase in premium rates beginning in the first
quarter of 2000 and continuing into 2003. During 2004, there was a rapid
transition as previously stable or increasing rates fell in most markets. These
rate declines were most pronounced in the property and casualty market, with
rates falling between 10% and 30% by year-end. Rate declines continued through
2005, although the pace of decline moderated in the latter part of the
year.
As
traditional risk-bearing insurance companies continue to outsource the
production of premium revenue to non-affiliated brokers or agents such as us,
those insurance companies may seek to reduce further their expenses by reducing
the commission rates payable to those insurance agents or brokers. The reduction
of these commission rates, along with general volatility and/or declines in
premiums, may significantly affect our profitability. Because we do not
determine the timing or extent of premium pricing changes, we cannot accurately
forecast our commission revenues, including whether they will significantly
decline. As a result, our budgets for future acquisitions, capital expenditures,
dividend payments, loan repayments and other expenditures may have to be
adjusted to account for unexpected changes in revenues, and any decreases in
premium rates may adversely affect our operations.
OUR
BUSINESS PRACTICES AND COMPENSATION ARRANGEMENTS ARE SUBJECT TO UNCERTAINTY
DUE
TO INVESTIGATIONS BY GOVERNMENTAL AUTHORITIES AND RELATED PRIVATE
LITIGATION.
The
business practices and compensation arrangements of the insurance intermediary
industry, including us, are subject to uncertainty due to investigations by
various governmental authorities and related private litigation. The
legislatures of various states may adopt new laws addressing contingent
commission arrangements, including laws prohibiting such arrangements, and
addressing disclosure of such arrangements to insureds, and various state
departments of insurance may adopt new regulations addressing these matters.
While it is not possible to predict the outcome of the governmental inquiries
and investigations into the insurance industry’s commission payment practices or
the responses by the market and government regulators, any material decrease
in
our contingent commissions is likely to have an adverse effect on our results
of
operations.
WE
ARE SUBJECT TO A NUMBER OF INVESTIGATIONS AND LEGAL PROCEEDINGS WHICH, IF
DETERMINED UNFAVORABLY FOR US, MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
In
addition to routine litigation and disclosed governmental investigations and
requests for information, we have been named as a defendant in two purported
class actions brought against a number of insurance intermediaries and insurance
companies, and have received a derivative demand from counsel for a purported
shareholder which could result in a purported securities class action based
on
claimed improprieties in the manner in which we are compensated by insurance
companies. The final outcome of these and similar matters, and related costs,
cannot be determined. An unfavorable resolution of these matters could adversely
affect our results of operations.
OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE
MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS AND THE OUTCOME OF CERTAIN
FACTUAL AND POTENTIAL CLAIMS, LAWSUITS AND PROCEEDINGS.
We
may be
subject to various actual and potential claims, lawsuits and other proceedings
relating principally to alleged errors and omissions in connection with the
placement of insurance in the ordinary course of business. Because we often
assist clients with matters involving substantial amounts of money, including
the placement of insurance and the handling of related claims, errors and
omissions claims against us may arise which allege potential liability for
all
or part of the amounts in question. Claimants may seek large damage awards
and
these claims may involve potentially significant legal costs. Such claims,
lawsuits and other proceedings could, for example, include claims for damages
based on allegations that our employees or sub-agents improperly failed to
procure coverage, report claims on behalf of clients, provide insurance
companies with complete and accurate information relating to the risks being
insured or to appropriately apply funds that we hold for our clients on a
fiduciary basis. We have established provisions against these items which we
believe to be adequate in the light of current information and legal advice,
and
we adjust such provisions from time to time according to
developments.
While
most of the errors and omissions claims made against us have, subject to our
self-insured deductibles, been covered by our professional indemnity insurance,
our business, results of operations, financial condition and liquidity may
be
adversely affected if, in the future, our insurance coverage proves to be
inadequate or unavailable or there is an increase in liabilities for which
we
self-insure. Our ability to obtain professional indemnity insurance in the
amounts and with the deductibles we desire in the future may be adversely
impacted by general developments in the market for such insurance or our own
claims experience. In addition, claims, lawsuits and other proceedings may
harm
our reputation or divert management resources away from operating our business.
WE
DERIVE A SIGNIFICANT PORTION OF OUR COMMISSION REVENUES FROM TWO INSURANCE
COMPANIES, THE LOSS OF WHICH COULD RESULT IN ADDITIONAL EXPENSE AND LOSS OF
MARKET SHARE.
For
the
year ended December 31, 2005, approximately 8.0% and 5.4%,
respectively, of our total revenues were derived from insurance policies
underwritten by two separate insurance companies, respectively. Should either
of
these insurance companies seek to terminate their arrangements with us, we
believe that other insurance companies are available to underwrite the business,
although some additional expense and loss of market share could possibly result.
No other insurance company accounts for 5% or more of our total revenues.
BECAUSE
OUR BUSINESS IS HIGHLY CONCENTRATED IN CALIFORNIA, FLORIDA, GEORGIA, NEW JERSEY,
NEW YORK, PENNSYLVANIA AND WASHINGTON, ADVERSE ECONOMIC CONDITIONS OR REGULATORY
CHANGES IN THESE STATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
A
significant portion of our business is concentrated in California, Florida,
Georgia, New Jersey, New York, Pennsylvania and Washington. For the years ended
December 31, 2005 and December 31, 2004, we derived $554.8 million, or 70.6%,
and $468.7 million, or 72.5%, of our commissions and fees from our operations
located in these states, respectively. We believe that these revenues are
attributable predominately to clients in these states. We believe the regulatory
environment for insurance agencies in these states currently is no more
restrictive than in other states. The insurance business is a state-regulated
industry, and therefore, state legislatures may enact laws that adversely affect
the insurance industry. Because our business is concentrated in a few states,
we
face greater exposure to unfavorable changes in regulatory conditions in those
states than insurance agencies whose operations are more diversified through
a
greater number of states. In addition, the occurrence of adverse economic
conditions, natural or other disasters, or other circumstances specific to
or
otherwise significantly impacting these states could adversely affect our
financial condition and results of operations.
OUR
GROWTH STRATEGY DEPENDS IN PART ON THE ACQUISITION OF INSURANCE AGENCIES, WHICH
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS IN THE FUTURE AND WHICH, IF
CONSUMMATED, MAY NOT BE ADVANTAGEOUS TO US.
Our
growth strategy includes the acquisition of insurance agencies. Our ability
to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into our operations, and expand into new markets
will require us to continue to implement and improve our operations, financial,
and management information systems. Integrated, acquired entities may not
achieve levels of revenue, profitability, or productivity comparable to our
existing locations, or otherwise perform as expected. In addition, we compete
for acquisition and expansion opportunities with entities that have
substantially greater resources. Acquisitions also involve a number of special
risks, such as: diversion of management's attention; difficulties in the
integration of acquired operations and retention of personnel; entry into
unfamiliar markets; unanticipated problems or legal liabilities; and tax and
accounting issues, some or all of which could have a material adverse effect
on
the results of our operations and our financial condition.
OUR
CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF INCREASED COMPETITION FROM
INSURANCE COMPANIES AND THE FINANCIAL SERVICES INDUSTRY.
The
insurance agency business is highly competitive and we actively compete with
numerous firms for clients and insurance companies, many of which have
relationships with insurance companies or have a significant presence in niche
insurance markets, that may give them an advantage over us. Because
relationships between insurance agencies and insurance companies or clients
are
often local or regional in nature, this potential competitive disadvantage
is
particularly pronounced outside of Florida. A number of insurance companies
are
engaged in the direct sale of insurance, primarily to individuals, and do not
pay commissions to agents and brokers. In addition, as and to the extent that
banks, securities firms and insurance companies affiliate, the financial
services industry may experience further consolidation, and we therefore may
experience increased competition from insurance companies and the financial
services industry, as a growing number of larger financial institutions
increasingly, and aggressively, offer a wider variety of financial services,
including insurance, than we currently offer.
PROPOSED
TORT REFORM LEGISLATION, IF ENACTED, COULD DECREASE DEMAND FOR LIABILITY
INSURANCE, THEREBY REDUCING OUR COMMISSION REVENUES.
Legislation
concerning tort reform has been considered, from time to time, in the United
States Congress and in several states. Among the provisions considered for
inclusion in such legislation have been limitations on damage awards, including
punitive damages, and various restrictions applicable to class action lawsuits.
Enactment of these or similar provisions by Congress, or by states in which
we
sell insurance, could result in a reduction in the demand for liability
insurance policies or a decrease in policy limits of such policies sold, thereby
reducing our commission revenues.
WE
COMPETE IN A HIGHLY REGULATED INDUSTRY, WHICH MAY RESULT IN INCREASED EXPENSES
OR RESTRICTIONS ON OUR OPERATIONS.
We
conduct business in most states and are subject to comprehensive regulation
and
supervision by government agencies in the states in which we do business. The
primary purpose of such regulation and supervision is to provide safeguards
for
policyholders rather than to protect the interests of stockholders. The laws
of
the various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to, among other things, licensing to transact
business, licensing of agents, admittance of assets, regulating premium rates,
approving policy forms, regulating unfair trade and claims practices,
establishing reserve requirements and solvency standards, requiring
participation in guarantee funds and shared market mechanisms, and restricting
payment of dividends. Also, in response to perceived excessive cost or
inadequacy of available insurance, states have from time to time created state
insurance funds and assigned risk pools, which compete directly, on a subsidized
basis, with private insurance providers. We act as agents and brokers for such
state insurance funds in California and certain other states. These state funds
could choose to reduce the sales or brokerage commissions we receive. Any such
event, in a state in which we have substantial operations, such as Florida,
Arizona or New York, could substantially affect the profitability of our
operations in such state, or cause us to change our marketing focus. State
insurance regulators and the National Association of Insurance Commissioners
continually re-examine existing laws and regulations, and such re-examination
may result in the enactment of insurance-related laws and regulations, or the
issuance of interpretations thereof, that adversely affect our business.
Although we believe that we are in compliance in all material respects with
applicable local, state and federal laws, rules and regulations, there can
be no
assurance that more restrictive laws, rules or regulations will not be adopted
in the future that could make compliance more difficult or expensive.
Specifically, recently adopted federal financial services modernization
legislation could lead to additional federal regulation of the insurance
industry in the coming years, which could result in increased expenses or
restrictions on our operations.
PROFIT
SHARING CONTINGENT COMMISSIONS AND OVERRIDES PAID BY INSURANCE COMPANIES ARE
LESS PREDICTABLE THAN USUAL, WHICH IMPAIRS OUR ABILITY TO PREDICT THE AMOUNT
OF
SUCH COMMISSIONS THAT WE WILL RECEIVE.
We
derive
a portion of our revenues from profit sharing contingent commissions and
overrides paid by insurance companies. The aggregate of these commissions
generally accounts for 5.4% to 7.1% of the previous years total annual revenues
over the last three years. Profit sharing contingent commissions are special
revenue-sharing commissions paid by insurance companies based upon the volume
and the growth and/or profitability of the business placed with such companies
during the prior year. We primarily receive these commissions in the first
and
second quarters of each year. Override commissions are paid by insurance
companies based on the volume of business that we place with them and are
generally paid over the course of the year. Due to recent changes in our
industry, including the agreement of at least one carrier with government
regulators to cease payment of certain of such commissions and including changes
in underwriting criteria due in part to the high loss ratios experienced by
insurance companies, we cannot predict the payment of these commissions as
well
as we have been able to in the past. Further, we have no control over the
ability of insurance companies to estimate loss reserves, which affects our
ability to make profit-sharing calculations. Because these commissions affect
our revenues, any decrease in their payment to us could adversely affect the
results of our operations and our financial condition.
OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE
MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS.
We
have
extensive operations and are subject to claims and litigation in the ordinary
course of business resulting from alleged errors and omissions. Because we
often
assist our clients with matters, including the placement of insurance coverage
and the handling of related claims, that involve substantial amounts of money,
errors and omissions claims against us may in turn allege our potential
liability for all or part of the amounts in question, claimants can seek large
damage awards and these claims can involve potentially significant defense
costs. Errors and omissions could include, for example, our employees or
sub-agents failing, whether negligently or intentionally, to place coverage
or
to notify insurance companies of claims on behalf of clients, to provide
insurance companies with complete and accurate information relating to the
risks
being insured or to appropriately apply funds that we hold for our clients
on a
fiduciary basis. It is not always possible to prevent and detect errors and
omissions and the precautions we take may not be effective in all cases. While
most of the errors and omissions claims made against us have, subject to our
self-insured deductibles, been covered by our professional liability insurance,
our results of operations, financial condition or liquidity may be adversely
affected if in the future our insurance coverage proves to be inadequate or
unavailable or there is an increase in liabilities for which we self-insure.
In
addition, errors and omissions claims may harm our reputation or divert
management resources away from operating our business.
WE
HAVE NOT DETERMINED THE AMOUNT OF RESOURCES AND THE TIME THAT WILL BE NECESSARY
TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY, WHICH
MAY
ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.
Frequent
technological changes, new products and services and evolving industry standards
are all influencing the insurance business. The Internet, for example, is
increasingly used to transmit benefits and related information to clients and
to
facilitate business-to-business information exchange and transactions. We
believe that the development and implementation of new technologies will require
additional investment of our capital resources in the future. We have not
determined, however, the amount of resources and the time that this development
and implementation may require, which may result in short-term, unexpected
interruptions to our business, or may result in a competitive disadvantage
in
price and/or efficiency, as we endeavor to develop or implement new
technologies.
QUARTERLY
AND ANNUAL VARIATIONS IN OUR COMMISSIONS THAT RESULT FROM THE TIMING OF POLICY
RENEWALS AND THE NET EFFECT OF NEW AND LOST BUSINESS PRODUCTION MAY HAVE
UNEXPECTED EFFECTS ON OUR RESULTS OF OPERATIONS.
Our
commission income (including contingent commissions but excluding fees), can
vary quarterly or annually due to the timing of policy renewals and the net
effect of new and lost business production. The factors that cause these
variations are not within our control. Specifically, consumer demand for
insurance products can influence the timing of renewals, new business and lost
business, which includes generally policies that are not renewed, and
cancellations. In addition, as discussed, we rely on insurance companies for
the
payment of certain commissions. Because these payments are processed internally
by these insurance companies, we may not receive a payment that is otherwise
expected from a particular insurance company in one of our quarters or years
until after the end of that period, which can adversely affect our ability
to
budget for significant future expenditures. Quarterly and annual fluctuations
in
revenues based on increases and decreases associated with the timing of policy
renewals have had an adverse effect on our financial condition in the past,
and
we may experience such effects in the future.
WE
MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR INVESTMENT.
The
market price of our common stock may be subject to significant fluctuations
in
response to various factors, including: quarterly fluctuations in our operating
results; changes in securities analysts' estimates of our future earnings;
and
our loss of significant customers or significant business developments relating
to us or our competitors. Our common stock's market price also may be affected
by our ability to meet analysts' expectations and any failure to meet such
expectations, even if minor, could cause the market price of our common stock
to
decline. In addition, stock markets have generally experienced a high level
of
price and volume volatility, and the market prices of equity securities of
many
companies have experienced wide price fluctuations not necessarily related
to
the operating performance of such companies. These broad market fluctuations
may
adversely affect our common stock's market price. In the past, securities class
action lawsuits frequently have been instituted against companies following
periods of volatility in the market price of such companies' securities. If
any
such litigation is instigated against us, it could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on our business, results of operations and financial
condition.
THE
LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT TEAM, PARTICULARLY OUR CHAIRMAN
AND
CHIEF EXECUTIVE OFFICER, J. HYATT BROWN, COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND FUTURE OPERATING RESULTS.
We
believe that our future success depends, in part, on our ability to attract
and
retain experienced personnel, including its senior management, brokers and
other
key personnel. The loss of any of our senior managers or other key personnel,
or
our inability to identify, recruit and retain such personnel, could materially
and adversely affect our business, operating results and financial condition.
Although we operate with a decentralized management system, the loss of the
services of J. Hyatt Brown, our Chairman, and Chief Executive Officer, who
beneficially owned approximately 16% of our outstanding common stock as
of February 2, 2006, and is key to the development and implementation of
our business strategy, could adversely affect our financial condition and future
operating results. We maintain a $5 million "key man" life insurance policy
with
respect to Mr. Brown. We also maintain a $20 million insurance policy on the
lives of Mr. Brown and his wife. Under the terms of an agreement with Mr. and
Mrs. Brown, at the option of the Brown estate, we will purchase, upon the death
of the later to die of Mr. Brown or his wife, shares of our common stock owned
by Mr. and Mrs. Brown up to the maximum number that would exhaust the proceeds
of the policy.
CERTAIN
OF OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL.
At
February 2, 2006, our executive officers, directors and certain of their family
members collectively beneficially owned approximately 20% of our outstanding
common stock, of which J. Hyatt Brown, our Chairman and Chief Executive Officer,
beneficially owned approximately 16%. As a result, our executive officers,
directors and certain of their family members have significant influence over
(1) the election of our Board of Directors, (2) the approval or
disapproval of any other matters requiring stockholder approval, and
(3) the affairs and policies of Brown and Brown.
RECENTLY
ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS MAY TO INCREASE OUR
COSTS.
The
Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes
in
some of our corporate governance, securities disclosure and compliance
practices. In response to the requirements of that Act, the Securities and
Exchange Commission and the New York Stock Exchange have promulgated new rules
on a variety of subjects. Compliance with these new rules has increased our
legal and financial and accounting costs, and we expect these increased costs
to
continue indefinitely. We also expect these developments to make it more
difficult and more expensive for us to obtain director and officer liability
insurance, and we may be forced to accept reduced coverage or incur
substantially higher costs to obtain coverage. Likewise, these developments
may
make it more difficult for us to attract and retain qualified members of our
board of directors or qualified executive officers.
DUE
TO INHERENT LIMITATIONS, THERE CAN BE NO ASSURANCE THAT OUR SYSTEM OF DISCLOSURE
AND INTERNAL CONTROLS AND PROCEDURES WILL BE SUCCESSFUL IN PREVENTING ALL ERRORS
OR FRAUD, OR IN INFORMING MANAGEMENT OF ALL MATERIAL INFORMATION IN TIMELY
MANNER.
Our
management, including our CEO and CFO, does not expect that our disclosure
controls and internal controls and procedures will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system reflects that there
are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty and that breakdowns can occur simply because of error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
IF
WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2006 AND FUTURE
YEAR-ENDS AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002,
INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS,
WHICH COULD RESULT IN A DECREASE IN THE VALUE OF YOUR
SHARES.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission adopted rules requiring public companies to include
an
annual report on internal control over financial reporting on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal control over financial reporting. In addition, the public accounting
firm auditing the company’s financial statements must attest to and report on
management’s assessment of the effectiveness of the company’s internal control
over financial reporting. While we continuously conduct a rigorous review of
our
internal control over financial reporting in order to assure compliance with
the
Section 404 requirements, if our independent auditors interpret the
Section 404 requirements and the related rules and regulations differently
from us or if our independent auditors are not satisfied with our internal
control over financial reporting or with the level at which it is documented,
operated or reviewed, they may decline to attest to management’s assessment or
issue a qualified report. A qualified opinion could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements.
THERE
ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS
USED
IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH GAAP IN THE UNITED
STATES OF AMERICA ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS COULD
HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
The
consolidated and condensed Consolidated Financial Statements included in the
periodic reports we file with the Securities and Exchange Commission are
prepared in accordance with accounting principles generally accepted in the
United States (“US GAAP”). The preparation of financial statements in accordance
with GAAP in the United States of America involves making estimates, judgments
and assumptions that affect reported amounts of assets (including intangible
assets), liabilities and related reserves, revenues, expenses and income.
Estimates, judgments and assumptions are inherently subject to change in the
future, and any such changes could result in corresponding changes to the
amounts of assets, liabilities, revenues, expenses and income. Any such changes
could have a material adverse effect on our financial position and results
of
operations.
None.
We
lease
our executive offices, which are located at 220 South Ridgewood Avenue, Daytona
Beach, Florida 32114, and 3101 W. Martin Luther King Jr. Blvd., Suite 400,
Tampa, Florida 33607. We lease offices at each of our 170 locations with the
exception of the following, where we own the buildings in which our offices
are
located: Dansville and Jamestown, New York. In addition, we own a building
in Loreauville, Louisiana where we no longer have an office, as well as a parcel
of undeveloped property outside of Lafayette, Louisiana. There are no
outstanding mortgages on our owned properties. Our operating leases expire
on various dates. These leases generally contain renewal options and rent
escalation clauses based on increases in the lessors’ operating expenses and
other charges. We expect that most leases will be renewed or replaced upon
expiration. We believe that our facilities are suitable and adequate for
present purposes, and that the productive capacity in such facilities is
substantially being utilized. From time to time, we may have unused space
and seek to sublet such space to third parties, depending on the demand for
office space in the locations involved. In the future, we may need to
purchase, build or lease additional facilities to meet the requirements
projected in our long-term business plan. See Note 13 to the Consolidated
Financial Statements for additional information on our lease commitments.
See
Note
13 to the Consolidated Financial Statements for information regarding our legal
proceedings.
No
matters were submitted to a vote of security holders during our fourth quarter
ended December 31, 2005.
Our
common stock is listed on the New York Stock Exchange (NYSE) under the symbol
“BRO”. The table below sets forth, for the quarterly periods indicated, the
intra-day high and low sales prices for our common stock as reported on the
NYSE
Composite Tape and dividends declared on our common stock. All per share amounts
have been restated to give effect to the two-for-one common stock split effected
on November 28, 2005.
|
High
|
Low
|
Cash
Dividends
Per
Common
Share
|
||||||||
|
2004
|
||||||||||
|
First
Quarter
|
$
|
19.72
|
$
|
16.01
|
$
|
0.035
|
||||
|
Second
Quarter
|
$
|
21.84
|
$ |
18.47
|
$
|
0.035
|
||||
|
Third
Quarter
|
$
|
23.08
|
$
|
20.18
|
$
|
0.035
|
||||
|
Fourth
Quarter
|
$
|
23.38
|
$
|
19.30
|
$
|
0.040
|
||||
|
2005
|
|
|||||||||
|
First
Quarter
|
$
|
24.27
|
$
|
21.13
|
$
|
0.040
|
||||
|
Second
Quarter
|
$
|
23.75
|
$
|
21.00
|
$
|
0.040
|
||||
|
Third
Quarter
|
$
|
25.39
|
$
|
21.31
|
$
|
0.040
|
||||
|
Fourth
Quarter
|
$
|
31.90
|
$
|
23.85
|
$
|
0.050
|
||||
On
March
10, 2006, there were 139,397,938 shares of our common stock outstanding, held
by
approximately 1,238 shareholders of record.
We
intend
to continue to pay quarterly dividends, subject to continued capital
availability and a determination that cash dividends continue to be in the
best
interests of our stockholders. Our dividend policy may be affected by, among
other items, our views on potential future capital requirements, including
those
relating to creation and expansion of sales distribution channels and
investments and acquisitions, legal risks, stock repurchase programs and
challenges to our business model.
Equity
Compensation Plan Information
The
following table sets forth information as of December 31, 2005, with
respect to compensation plans under which the Company’s equity securities are
authorized for issuance:
|
Plan
Category
|
Number
of Securities to be issued
upon
exercise
of outstanding
options,
warrants
and
rights (a)
|
Weighted-average
exercise price
of
outstanding
options,
warrants
and
rights (b)
|
Number
of securities remaining available for
future
issuance under equity compensation
plans
(excluding securities reflected
in
column (a)) (c)
|
|||
|
|
||||||
|
Equity
compensation plans approved
by shareholders
|
2,016,988
|
$10.69
|
15,187,482
|
|||
| Equity compensation plans not approved by shareholders |
-
|
-
|
-
|
|||
|
Total
|
2,016,988
|
$10.69
|
15,187,482
|
Sales
of Unregistered Securities
We made
no sales of unregistered securities during the fourth quarter of 2005.
Issuer
Purchases of Equity Securities
We
did
not purchase any shares of Brown & Brown, Inc. common stock during the
fourth quarter of 2005.
ITEM
6. Selected
Financial Data.
The
following selected Consolidated Financial Data for each of the five fiscal
years
in the period ended December 31, 2005 have been derived from our Consolidated
Financial Statements. Such data should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of Part II of this Annual Report and with our Consolidated
Financial Statements and related Notes thereto in Item 8 of Part II of this
Annual Report.
| (in thousands, except per share data, number of employees and percentages) (1) |
Year
Ended December
31,
|
|||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
REVENUES
|
||||||||||||||||
|
Commissions
& fees (2)
|
$
|
775,543
|
$
|
638,267
|
$
|
545,287
|
$
|
452,289
|
$
|
359,697
|
||||||
|
Investment
income
|
6,578
|
2,715
|
1,428
|
2,945
|
3,686
|
|||||||||||
|
Other
income
|
3,686
|
5,952
|
4,325
|
508
|
1,646
|
|||||||||||
|
Total
revenues
|
785,807
|
646,934
|
551,040
|
455,742
|
365,029
|
|||||||||||
|
EXPENSES
|
||||||||||||||||
|
Employee
compensation and benefits
|
374,943
|
314,221
|
268,372
|
224,755
|
187,653
|
|||||||||||
|
Non-cash
stock grant compensation
|
3,337
|
2,625
|
2,272
|
3,823
|
1,984
|
|||||||||||
|
Other
operating expenses
|
105,622
|
84,927
|
74,617
|
66,554
|
56,815
|
|||||||||||
|
Amortization
|
33,245
|
22,146
|
17,470
|
14,042
|
15,860
|
|||||||||||
|
Depreciation
|
10,061
|
8,910
|
8,203
|
7,245
|
6,536
|
|||||||||||
|
Interest
|
14,469
|
7,156
|
3,624
|
4,659
|
5,703
|
|||||||||||
|
Total
expenses
|
541,677
|
439,985
|
374,558
|
321,078
|
274,551
|
|||||||||||
|
Income
before income taxes and minority interest
|
244,130
|
206,949
|
176,482
|
134,664
|
90,478
|
|||||||||||
|
Income
taxes
|
93,579
|
78,106
|
66,160
|
49,271
|
34,834
|
|||||||||||
|
Minority
interest, net of tax
|
-
|
-
|
-
|
2,271
|
1,731
|
|||||||||||
|
Net
income
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
$
|
83,122
|
$
|
53,913
|
||||||
|
EARNINGS
PER SHARE INFORMATION
|
||||||||||||||||
|
Net
income per share - diluted
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
$
|
0.61
|
$
|
0.43
|
||||||
|
Weighted
average number of shares outstanding - diluted
|
139,776
|
138,888
|
137,794
|
136,086
|
126,444
|
|||||||||||
|
Dividends
declared per share
|
$
|
0.1700
|
$
|
0.1450
|
$
|
0.1213
|
$
|
0.1000
|
$
|
0.0800
|
||||||
|
YEAR-END
FINANCIAL POSITION
|
||||||||||||||||
|
Total
assets
|
$
|
1,608,660
|
$
|
1,249,517
|
$
|
865,854
|
$
|
754,349
|
$
|
488,737
|
||||||
|
Long-term
debt
|
$
|
214,179
|
$
|
227,063
|
$
|
41,107
|
$
|
57,585
|
$
|
78,195
|
||||||
|
Shareholders'
equity (3)
|
$
|
764,344
|
$
|
624,325
|
$
|
498,035
|
$
|
391,590
|
$
|
175,285
|
||||||
|
Total
shares outstanding
|
139,383
|
138,318
|
137,122
|
136,356
|
126,388
|
|||||||||||
|
OTHER
INFORMATION
|
||||||||||||||||
|
Number
of full-time equivalent employees
|
4,540
|
3,960
|
3,517
|
3,384
|
2,921
|
|||||||||||
|
Revenue
per average number of employees
|
$
|
184,896
|
$
|
173,046
|
$
|
159,699
|
$
|
144,565
|
$
|
144,166
|
||||||
|
Book
value per share at year-end
|
$
|
5.48
|
$
|
4.51
|
$
|
3.63
|
$
|
2.87
|
$
|
1.39
|
||||||
|
Stock
price at year-end
|
$
|
30.54
|
$
|
21.78
|
$
|
16.31
|
$
|
16.16
|
$
|
13.65
|
||||||
|
Stock
price earnings multiple at year-end
|
28.35
|
23.41
|
20.38
|
26.49
|
32.12
|
|||||||||||
|
Return
on beginning shareholders' equity
|
24%
|
|
26%
|
|
28%
|
|
47%
|
|
46%
|
|
||||||
|
(1)
|
All
share and per share information has been restated to give effect
to a
two-for-one common stock split that became effective November 28,
2005.
|
|
(2)
|
See
Note 2 to the Consolidated Financial Statements for information regarding
business purchase transactions which impact the comparability of
this
information.
|
|
(3)
|
Shareholders’
equity as of December 31, 2005, 2004, 2003, 2002 and 2001 included
net
increases of $4,446,000, $4,467,000, $4,227,000, $2,106,000 and
$4,393,000, respectively, as a result of the Company’s applications of
Statement of Financial Accounting Standards (SFAS) 115, “Accounting for
Certain Investments in Debt and Equity Securities,” and SFAS 133,
“Accounting for Derivatives Instruments and Hedging Activities.”
|
GENERAL
The
following discussion should be read in conjunction
with our
Consolidated Financial Statements and the related Notes
to
those Consolidated Financial Statements, included
elsewhere in this Annual Report. All share and per share information has been
restated to give effect to a two-for-one common stock split that become
effective November 28, 2005.
We are a diversified insurance agency, brokerage and services organization
headquartered in Daytona Beach and Tampa, Florida. Since 1993, our stated
corporate objective has been to increase our net income per share by at least
15% every year. We have increased revenues from $95.6 million in 1993 (as
originally stated, without giving effect to any subsequent acquisitions
accounted for under the pooling-of-interests method
of
accounting) to $785.8 million in 2005, a compound
annual
growth rate of 19.2%. In the same period, we increased net income from $8.0
million (as originally stated, without giving effect to any subsequent
acquisitions accounted for under the pooling-of-interests method of accounting)
to $150.6 million in 2005, a compound annual
growth
rate of 27.7%. We have also increased net income per share 15.0% or more for
13
consecutive years, excluding the effect of a one-time investment gain of $1.3
million in 1994 and favorable adjustments to our income tax reserves
of
$0.7
million in 1994 and $0.5 million in 1995, respectively.
Since 1993, excluding the historical impact of poolings, our
pre-tax margins (income before income taxes and minority interest divided by
total revenues) improved in all but one year, and in that year, the pre-tax
margin was essentially flat. These improvements
have resulted primarily from net new business
growth
(new business production offset by lost business), revenues generated by
acquisitions and continued operating efficiencies. Our revenue growth in 2005
was driven by: (i) net new business growth; and (ii) the acquisition of 32
agency entities and several books of business (customer accounts), generating
total annualized revenues of approximately $125.9 million.
Our
commissions and fees revenue are comprised of commissions paid by insurance
companies and fees paid directly by customers. Commission revenues generally
represent a percentage of the premium paid by the insured and are materially
affected by fluctuations in both premium rate
levels charged by insurance companies and the insureds’
underlying “insurable exposure units,” which are units that insurance companies
use to measure or express insurance exposed to risk (such as property values,
sales and payroll levels) so as to determine what premium to charge the insured.
These premium rates are established by insurance companies based upon many
factors, including reinsurance rates, none of which we control. Beginning in
1986 and continuing through 1999, commission revenues were adversely influenced
by a consistent decline in premium rates resulting from intense competition
among property and casualty insurance companies for market share. Among other
factors, this condition of a prevailing decline in premium rates, commonly
referred to as a “soft market,” generally resulted in flat to reduced
commissions on renewal business. The effect of this softness in rates on our
commission revenues was somewhat offset by our acquisitions and net new business
production. As a result of increasing “loss ratios” (the comparison of incurred
losses plus adjustment expenses against earned premiums) of insurance companies
through 1999, there was a general increase in premium rates beginning in the
first quarter of 2000 and continuing into 2003. During 2003, the increases
in
premium rates began to moderate, and in certain lines of insurance, premium
rates decreased. In 2004, as general premium rates continued to moderate, the
insurance industry experienced the worst hurricane season since 1992 when
Hurricane Andrew hit south Florida. The insured losses from the 2004 hurricane
season were absorbed relatively easily by the insurance industry and the general
insurance premium rates continued to soften during 2005. During the third
quarter of 2005, the insurance industry experienced the worst hurricane season
ever recorded. Primarily as a result of these hurricanes, including Hurricanes
Katrina, Rita and Wilma, the total insured losses are estimated to be in excess
of $50 billion. The full impact that the 2005 insured losses will have on the
insurance premium rates charged by insurance companies for 2006 is unknown,
however, there appears to be a general consensus that there will be upward
pressure on at least the insurance premium rates on coastal property, primarily
in the southeastern part of the United States.
The
volume of business from new and existing insured customers,
fluctuations in insurable exposure units and changes in general
economic and competitive conditions further impact
our revenues. For example, the increasing costs of litigation settlements and
awards have caused some customers
to seek higher levels of insurance coverage. Conversely,
level
rates of inflation and the general decline of
economic activity in recent years have limited the increases
in the
values of insurable exposure units. Still, our revenues
continue to grow as a result of an intense focus on net new business growth
and
acquisitions. We anticipate that results of operations will continue to be
influenced by these competitive and economic conditions in 2006.
We
also
earn “contingent commissions,” which are profit-sharing
commissions based primarily on underwriting
results,
but may also reflect considerations for volume, growth and/or retention. These
commissions are primarily received in the first and second quarters of each
year, based on underwriting results and other aforementioned considerations
for
the prior year(s), and, over the last three years, have averaged approximately
6.0% of the previous year’s total commissions and fees revenue. Contingent
commissions are included in our total commissions
and fees in the Consolidated Statements of Income in the year received. The
term
“core commissions and fees” excludes contingent commissions and therefore
represents
the revenues earned directly from specific insurance
policies
sold, and specific fee-based services rendered.
Fee
revenues are generated primarily by our Services Division,
which provides insurance-related services, including
third-party administration and consulting for the self-funded workers’
compensation markets.
In each of the past three years, fee revenues generated by the Services
Division
have declined as a percentage of our total commissions and fees, from 5.1%
in
2003 to 3.4% in 2005. This declining trend is anticipated to continue as the
revenues from our other reportable segments grow at a faster pace.
Investment
income consists primarily of interest earnings on premiums and advance premiums
collected and held in a fiduciary capacity before being remitted to insurance
companies. Our policy is to invest available funds in high-quality, short-term
fixed income investment securities. Investment income also includes gains and
losses realized from the sale of investments.
Acquisitions
During
2005, we acquired the assets of 32 insurance
intermediary operations and several books of business (customer accounts).
The
aggregate purchase price was $288.6 million, including $244.0 million of net
cash payments, the issuance of $38.1 million in notes payable and the assumption
of $6.5 million of liabilities. These acquisitions had estimated aggregate
annualized revenues of $125.9 million.
During
2004, we acquired the assets of 29 insurance intermediary operations, several
books of business (customer accounts) and the outstanding stock of three general
insurance agencies. The aggregate purchase price was $199.3 million, including
$190.6 million of net cash payments, the issuance of $1.4 million in notes
payable and the
assumption of $7.3 million of liabilities. These acquisitions
had
estimated aggregate annualized revenues of $104.1 million.
During
2003, we acquired the assets and certain liabilities of 23 insurance
intermediary operations, as well as the remaining 25% minority interest in
Florida Intracoastal Underwriters, and several books of business (customer
accounts). The aggregate purchase price was $86.2 million including $84.5
million of net cash payments, the issuance of $1.5 million in notes payable
and
the assumption of $0.2 million of liabilities. These acquisitions had estimated
aggregate annualized revenues of $45.8 million.
Critical
Accounting Policies
Our
Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in
the
United States of America (GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses. We continually evaluate our
estimates, which are based on historical experience and on various other
assumptions that we believe to be reasonable
under the circumstances. These estimates form the basis for our judgments about
the carrying values of our assets and liabilities, which values are not readily
apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We
believe that, of our significant accounting policies (see “Note 1 - Summary of
Significant Accounting Policies” of the Notes to Consolidated Financial
Statements), the following critical accounting policies may involve a higher
degree of judgment and complexity.
Revenue
Recognition
Commission
revenues are recognized as of the effective date
of
the insurance policy or the date the policy premium is billed to the
customer,
whichever is later. At that date, the earnings process has been completed,
and
we can reliably estimate the impact of policy cancellations for refunds and
establish reserves accordingly. Management determines the policy cancellation
reserve based upon historical cancellation experience adjusted by known
circumstances. Subsequent commission adjustments are recognized upon
notification from the insurance
companies. Contingent commissions from insurance
companies are recognized when determinable, which is when such commissions
are
received. Fee revenues are recognized as services are rendered.
Business
Acquisitions and Purchase Price Allocations
We
have
significant intangible assets that were acquired through
business acquisitions. These assets consist of purchased
customer accounts, noncompete agreements, and the excess of costs over the
fair
value of identifiable net assets acquired (goodwill). The determination of
estimated useful lives and the allocation of the purchase price to the
intangible assets requires significant judgment and affects the amount of future
amortization and possible impairment charges.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
“Business Combinations,” all of our business combinations initiated after June
30, 2001 have been accounted for using the purchase method. In connection with
these acquisitions, we record the estimated value of the net tangible assets
purchased and the value of the identifiable intangible assets purchased, which
typically consist of purchased customer accounts
and noncompete agreements. Purchased customer accounts
include the physical records and files obtained from acquired businesses that
contain information about insurance policies, customers and other matters
essential to policy renewals, but it primarily represents the present value
of
the underlying cash flows expected to be received over the estimated future
renewal periods of insurance policies comprising those purchased customer
accounts. The valuation of purchased customer accounts involves significant
estimates and assumptions concerning matters such as cancellation frequency,
expenses and discount rates. Any change in these assumptions could affect the
carrying value of purchased customer accounts. Noncompete agreements are valued
based on the duration and any unique features of each specific agreement.
Purchased customer accounts and noncompete agreements are amortized on a
straight-line basis over the related estimated lives and contract periods,
which
range from five to 15 years. The excess of the purchase price of an acquisition
over the fair value of the identifiable tangible and intangible assets is
assigned to goodwill and is no longer amortized, in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets” (SFAS No. 142).
Intangible
Assets Impairment
Effective
January 1, 2002, we adopted SFAS No. 142, which requires that goodwill be
subject to at least an annual assessment for impairment by applying a fair-value
based test. Amortizable intangible assets are amortized over their useful lives
and are subject to lower-of-cost-or-market impairment testing. SFAS No. 142
requires us to compare the fair value of each reporting unit with its carrying
value to determine if there is potential impairment of goodwill. If the fair
value of the reporting unit is less than its carrying value, an impairment
loss
would be recorded to the extent that the fair value of the goodwill within
the
reporting unit is less than its carrying value. Fair value is estimated based
on
multiples of revenues, earnings before interest, income taxes, depreciation
and
amortization (EBITDA), and pre-tax income.
Management
assesses the recoverability of our goodwill on an annual basis, and of our
amortizable intangibles and other long-lived assets whenever events or changes
in circumstances
indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to historical
or projected future operating results; (ii) significant
negative
industry or economic trends; (iii) significant decline in our stock price for
a
sustained period; and (iv) significant decline in our market capitalization.
If
the recoverability of these assets is unlikely because of the existence of
one
or more of the above-referenced factors, an impairment analysis is performed.
Management must make assumptions regarding estimated future cash flows and
other
factors to determine the fair value of these assets. If these estimates or
related assumptions change in the future, we may be required to revise the
assessment and, if appropriate, record an impairment charge. We completed our
most recent evaluation of impairment for goodwill as of November 30, 2005 and
identified no impairment as a result of the evaluation.
Reserves
for Litigation
We
are
subject to numerous litigation claims that arise in the ordinary course of
business. In accordance with SFAS No. 5, “Accounting for Contingencies,” if it
is probable that an asset has been impaired or a liability has been incurred
at
the date of the
financial statements and the amount of the loss is estimable, an accrual for
the
costs to resolve these claims is recorded in accrued expenses in the
accompanying Consolidated Balance Sheets. Professional
fees
related to these claims are included in other operating expenses in the
accompanying Consolidated Statements of Income.
Management, with the assistance of outside counsel,
determines whether it is probable that a liability has been incurred and
estimates the amount of loss based upon analysis of individual issues. New
developments or changes in settlement
strategy in dealing with these matters may significantly
affect
the required reserves and impact our net income.
Derivative
Instruments
In
2002,
we entered into one derivative financial instrument - an interest rate exchange
agreement, or “swap” - to manage the exposure to fluctuations in interest rates
on our $90 million variable rate debt. As of
December
31, 2005, we maintained this swap agreement, whereby
we pay a fixed rate on the notional amount to a bank and the bank pays us a
variable rate on the notional amount equal to a base London InterBank Offering
Rate (LIBOR). We have assessed this derivative as a highly effective cash flow
hedge, and accordingly, changes in the fair market value of the swap are
reflected in other comprehensive income. The fair market value of this
instrument is determined by quotes obtained from the related counter-parties
in
combination with a valuation model utilizing discounted cash flows. The
valuation
of this derivative instrument is a significant estimate
that is
largely affected by changes in interest rates. If interest rates increase or
decrease, the value of this instrument will change accordingly.
New
Accounting Pronouncements
See
Note
1 of the Notes to Consolidated Financial Statements for a discussion of the
effects of the adoption of new accounting standards.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 2005, 2004 AND 2003
The
following discussion and analysis regarding results of operations and liquidity
and capital resources should be considered in conjunction with the accompanying
Consolidated Financial Statements and related Notes.
Financial
information relating to our Consolidated Financial Results is as follows (in
thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
|||||||||||||
|
REVENUES
|
|||||||||||||||||
|
Commissions
and fees
|
$
|
740,567
|
21.9
|
%
|
$
|
607,615
|
18.5
|
%
|
$
|
512,753
|
|||||||
|
Contingent
commissions
|
34,976
|
14.1
|
%
|
30,652
|
(5.8)
|
%
|
32,534
|
||||||||||
|
Investment
income
|
6,578
|
142.3
|
%
|
2,715
|
90.1
|
%
|
1,428
|
||||||||||
|
Other
income, net
|
3,686
|
(38.1)
|
%
|
5,952
|
37.6
|
%
|
4,325
|
||||||||||
|
Total
revenues
|
785,807
|
21.5
|
%
|
646,934
|
17.4
|
%
|
551,040
|
||||||||||
|
EXPENSES
|
|||||||||||||||||
|
Employee
compensation and benefits
|
374,943
|
19.3
|
%
|
314,221
|
17.1
|
%
|
268,372
|
||||||||||
|
Non-cash
stock grant compensation
|
3,337
|
27.1
|
%
|
2,625
|
15.5
|
%
|
2,272
|
||||||||||
|
Other
operating expenses
|
105,622
|
24.4
|
%
|
84,927
|
13.8
|
%
|
74,617
|
||||||||||
|
Amortization
|
33,245
|
50.1
|
%
|
22,146
|
26.8
|
%
|
17,470
|
||||||||||
|
Depreciation
|
10,061
|
12.9
|
%
|
8,910
|
8.6
|
%
|
8,203
|
||||||||||
|
Interest
|
14,469
|
102.2
|
%
|
7,156
|
97.5
|
%
|
3,624
|
||||||||||
|
Total
expenses
|
541,677
|
23.1
|
%
|
439,985
|
17.5
|
%
|
374,558
|
||||||||||
|
Income
before income taxes
|
$
|
244,130
|
18.0
|
%
|
$
|
206,949
|
17.3
|
%
|
$
|
176,482
|
|||||||
|
Net
internal growth rate - core commissions
and fees
|
3.1%
|
|
4.3%
|
|
5.9
|
||||||||||||
|
Employee
compensation and benefits ratio
|
47.7%
|
|
48.6%
|
|
48.7
|
||||||||||||
|
Other
operating expenses ratio
|
13.4%
|
|
13.1%
|
|
13.5
|
||||||||||||
|
Capital
expenditures
|
$
|
13,426
|
$
|
10,152
|
$
|
15,946
|
|||||||||||
|
Total
assets at December 31
|
$
|
1,608,660
|
$
|
1,249,517
|
$
|
865,854
|
|||||||||||
Commissions
and Fees
Commissions
and
fees
revenue, including contingent commissions, increased 21.5% in 2005, 17.1% in
2004 and 20.6% in 2003. Core commissions and fees revenue increased 3.1% in
2005, 4.3% in 2004 and 5.9% in 2003, when excluding commissions and fees revenue
generated from acquired operations and also from divested operations. The 2005
results reflect the continued moderation of the premium rate growth that began
in 2004 compared with the slightly higher premium growth rates that occurred
in
2003.
Investment
Income
Investment
income increased
to $6.6 million in 2005, compared with $2.7 million in 2004 and $1.4 million
in
2003.
The
increases in 2005 over 2004, and 2004 over 2003 were primarily the result of
higher
investment yields earned each sequential year along with higher average
available cash balances for each successive year.
Other
Income, net
Other
income consists primarily of gains and losses from the sale and
disposition of assets. In 2005, gains of $2.7 million were recognized from
the
sale of customer accounts as compared with $4.8 million and $4.0 million in
2004
and 2003, respectively. Although we are not in the business of selling customer
accounts, we periodically will sell an office or a book of business (one or
more
customer accounts) that does not produce reasonable margins or demonstrate
a
potential for growth. For these reasons, in 2004, we sold all four of our retail
offices in North Dakota and our sole remaining operation in the medical
third-party administration services business.
Employee
Compensation and Benefits
Employee
compensation and benefits increased
approximately 19.3% in 2005, 17.1% in 2004 and 19.4% in 2003, primarily as
a
result of acquisitions and an increase in
commissions paid on net new business. Employee compensation and benefits as
a
percentage of total revenues were 47.7%
in 2005,
48.6% in 2004 and 48.7% in 2003, reflecting a gradual improvement in personnel
efficiencies as revenues grow. We had 4,540 full-time equivalent employees
at
December 31, 2005, compared with 3,960 at December 31, 2004 and 3,517 at
December 31, 2003.
Non-Cash
Stock Grant Compensation
Non-cash
stock grant compensation expense represents the
expense required to be recorded under Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock
Issued to Employees,” relating to our stock performance
plan,
which is more fully described in Note 11 of the Notes to Consolidated Financial
Statements.
The
annual cost of this stock performance plan increases only when our average
stock
price over a 20-trading-day period increases by increments of 20% or
more
from
the price at the time of the original grant, or when additional
shares are granted and the average stock price increases.
Since
the
first vesting condition for performance stock grants issued in 2001 was
satisfied in 2002, when a 20-trading-day average stock price of $17.50 was
reached, we issued another significant set of performance stock grants in
January 2003 at a grant price per share of $17.50. There will be no expense
relating to this set of performance stock grants until the 20-trading-day
average stock price exceeds the $17.50 performance stock grant price by an
increment of 20%. Additionally, other grants are periodically issued to new
and
existing employees.
During
2004, the average stock price exceeded the $21.00 average price for a
20-trading-day period required for the first 20% of the shares granted in
January 2003 to be awarded, and therefore we began the annual expensing of
such
shares. As a result, the 2004 expense increased to $2.6 million from $2.3
million in 2003. During 2005, the average stock price exceeded the $28.00
average price for a 20-trading-day period required for the second and third
20%
increments of the shares granted in January 2003 to be awarded, and as a result,
the 2005 expense increased to $3.3 million from $2.6 million in
2004.
During
2003, since the average price of our stock never exceeded any of the 20%
thresholds of the grants priced at $17.50 per share, the only expense related
to
our stock performance plan was the annual expense of grants issued prior to
2003, which was then partially offset by expense credits from forfeitures.
As a
result, the 2003 expense decreased to $2.3 million from $3.8 million in
2002.
Other
Operating Expenses
As
a
percentage of total revenues, other operating expenses increased to 13.4% in
2005 from 13.1% in 2004, which in turn was a decrease from 13.5% in 2003. Legal
and professional fee expenses increased $4.4 million in 2005 over the amount
expended in 2004, which in turn was $1.2 million greater than what was expended
in 2003. The increase in legal and professional fee expenses was primarily
the
result of the various ongoing investigations and litigation relating to agent
and broker compensation, including contingent commissions, by state regulators
and, to a lesser extent, by the requirements of compliance with the
Sarbanes-Oxley Act of 2002. Offsetting these expenses in 2004 was approximately
$1.0 million in reductions to our litigation and claims reserve. Excluding
the
impact of these increased legal and professional fee expenses, other operating
expenses declined as a percentage of total revenues each year from 2003 to
2005,
which is attributable to the effective cost containment measures brought about
by our initiative designed to identify areas of excess expense. This decrease
is
also due to the fact that, in a net internal revenue growth environment, certain
significant other operating expenses such as office rent, office supplies,
data
processing, and telephone costs, increase at a slower rate than commissions
and
fees revenue increase during the same period.
Amortization
Amortization
expense
increased $11.1 million, or 50.1% in 2005, increased $4.7 million, or 26.8%
in
2004, and
increased $3.4 million, or 24.4% in 2003. As
part
of our annual impairment assessment as of November 30, 2004, management
determined that the maximum
amortization period for the intangible asset, purchased
customer accounts, should be reduced from 20 years
to
15 years. A change in accounting estimate was recognized
to reflect this decision, resulting in an increase in the 2005 and 2004
amortization expense of $6.4 million, and $0.5 million, a decrease in
net
income of $3.9 million and $0.3 million, and a decrease of $0.03 and nil ($0)
earnings per share, respectively. The
remaining increases
in 2005
and 2004 were due to the amortization of additional intangible assets as a
result of new acquisitions.
Depreciation
Depreciation
increased 12.9% in 2005, 8.6% in 2004 and 13.2% in 2003. These increases were
primarily due to the purchase of new computers, related equipment and software,
and the depreciation associated with new acquisitions.
Interest
Expense
Interest
expense increased
$7.3
million, or 102.2%, in 2005 and $3.5 million or 97.5% in 2004 as a result of
the
funding of $200 million of unsecured senior notes in the third quarter of 2004.
Income
Taxes
The
effective tax rate on income from
operations was 38.3% in 2005, 37.7% in 2004 and 37.5% in 2003. The higher
effective tax rate in 2005, compared with 2004 and 2003, was primarily the
result of increased amounts of business conducted in states having higher state
tax rates.
RESULTS
OF OPERATIONS - SEGMENT INFORMATION
As
discussed in Note 16 of the Notes to Consolidated Financial
Statements, we operate in four reportable segments: the Retail, National
Programs, Brokerage and Service Divisions. On a divisional basis, increases
in
amortization, depreciation
and interest expenses are the result of new acquisitions within that division
in
a particular year. Likewise, other
income in each division primarily reflects net gains on sales
of
customer accounts and fixed assets. Additionally, increases in non-cash stock
grant compensation is more dependent
on increases in the Company’s 20 trading-day average stock price than on the
divisional results. As such, in evaluating the operational
efficiency of a division, management places greater emphasis on the net internal
growth rate of core commissions and fees revenue, the gradual
improvement
of
the ratio of employee compensation and benefits to total revenues, and the
gradual improvement of the ratio of other
operating expenses to total revenues.
Retail
Division
The
Retail Division provides a broad range of insurance products
and services to commercial, public entity, professional
and individual insured customers. More than 96% of the Retail Division’s
commissions and fees revenue are commission-based.
Since the majority of our operating expenses do not
change as premiums fluctuate, we believe that most of any fluctuation
in the commissions that we receive
will be
reflected in our pre-tax income. The Retail Division’s commissions and fees
revenue accounted for 72.5% of our total
consolidated commissions and fees revenue in 2003 but declined to 63.1% in
2005,
mainly due to continued acquisitions in the National Programs and Brokerage
Divisions.
Financial
information relating to Brown & Brown’s Retail Division is as follows (in
thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
461,236
|
6.8
|
%
|
$
|
431,767
|
16.4
|
%
|
$
|
371,004
|
||||||||
|
Contingent
commissions
|
28,330
|
8.3
|
%
|
26,169
|
7.3
|
%
|
24,381
|
|||||||||||
|
Investment
income
|
159
|
(72.0)
|
%
|
567
|
930.9
|
%
|
55
|
|||||||||||
|
Other
income, net
|
1,477
|
(48.1)
|
%
|
2,845
|
(20.3)
|
%
|
3,570
|
|||||||||||
|
Total
revenues
|
491,202
|
6.5
|
%
|
461,348
|
15.6
|
%
|
399,010
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
233,124
|
3.4
|
%
|
225,438
|
15.4
|
%
|
195,323
|
|||||||||||
|
Non-cash
stock grant compensation
|
2,198
|
37.5
|
%
|
1,599
|
(12.9)
|
%
|
1,835
|
|||||||||||
|
Other
operating expenses
|
81,063
|
4.2
|
%
|
77,780
|
15.3
|
%
|
67,487
|
|||||||||||
|
Amortization
|
19,368
|
26.5
|
%
|
15,314
|
22.7
|
%
|
12,476
|
|||||||||||
|
Depreciation
|
5,641
|
(1.6)
|
%
|
5,734
|
(0.6)
|
%
|
5,771
|
|||||||||||
|
Interest
|
20,927
|
(4.2)
|
%
|
21,846
|
23.2
|
%
|
17,732
|
|||||||||||
|
Total
expenses
|
362,321
|
4.2
|
%
|
347,711
|
15.7
|
%
|
300,624
|
|||||||||||
|
Income
before income taxes
|
$
|
128,881
|
13.4
|
%
|
$
|
113,637
|
15.5
|
%
|
$
|
98,386
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
0.6%
|
|
2.7%
|
|
4.0%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
47.5%
|
|
48.9%
|
|
49.0%
|
|
||||||||||||
|
Other
operating expenses ratio
|
16.5%
|
|
16.9%
|
|
16.9%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
6,186
|
$
|
5,568
|
$
|
5,904
|
||||||||||||
|
Total
assets at December 31
|
$
|
1,002,781
|
$
|
843,823
|
$
|
623,648
|
||||||||||||
The
Retail Division’s total revenues in 2005 increased $29.9
million to $491.2 million, a 6.5% increase over 2004. Of this increase,
approximately $28.9 million related
to core commissions and fees revenue from acquisitions for which
there
were no comparable revenues in 2004. The remaining increase was primarily
due to
net new business growth. The Retail Division’s net internal growth rate in core
commissions and fees revenue was 0.6% in 2005, excluding revenues recognized
in
2005 from new acquisitions and the 2004 commissions and fees revenue from
divested business. The net internal growth rate of core commissions and fees
revenue for the Retail Division in 2004 and 2003 was 2.7% and 4.0%,
respectively. The decline in the net internal growth rate from core commissions
and fees revenue from 2003 to 2005 primarily reflects the softening of insurance
premium rates during that period.
Income
before income taxes in 2005 increased $15.2 million to $128.9 million, a
13.4%
increase over 2004. This increase was due to revenues from acquisitions,
a
positive net internal growth rate and the continued focus on holding our
general
expense growth rate to a lower percentage than our revenue growth rate.
The
Retail Division’s total revenues in 2004 increased $62.3
million to $461.3 million, a 15.6% increase over 2003. Of this increase,
approximately $59.9 million related
to core commissions and fees revenue from acquisitions for which
there
were no comparable revenues in 2003. The remaining increase was primarily
due to
net new business growth. During
2004, we sold our four retail offices in North Dakota and other books of
businesses in various offices. With
respect to these assets sold during 2004, $6.7 million
of
core
commissions and fees revenue were earned in 2003 for which there were no
revenues recognized in the comparable 2004 period. Therefore, the Retail
Division’s net internal growth rate in core commissions and fees revenue was
2.7% in 2004, excluding revenues recognized in 2004 from new acquisitions
and
the 2003 core commissions and fees revenue from divested business.
Income
before income taxes in 2004 increased $15.3 million to $113.6 million, a
15.5%
increase over 2003. This increase was due to revenues from acquisitions,
a
positive net internal growth rate and the continued focus on holding our
general
expense growth rate to a lower percentage than our revenue growth
rate.
National
Programs Division
The
National Programs Division is comprised of two units: Professional Programs,
which provides professional liability and related package products for certain
professionals
delivered through nationwide networks of independent
agents;
and Special Programs, which markets targeted products and services designated
for specific industries, trade groups, public entities and market niches. Like
the Retail Division, the National Programs Division’s revenues
are primarily commission-based.
Financial
information relating to our National Programs
Division
is as follows (in thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
131,149
|
18.1
|
%
|
$
|
111,080
|
28.0
|
%
|
$
|
86,787
|
||||||||
|
Contingent
commissions
|
1,998
|
141.6
|
%
|
827
|
(77.0)
|
%
|
3,598
|
|||||||||||
|
Investment
income
|
367
|
164.0
|
%
|
139
|
(2.8)
|
%
|
143
|
|||||||||||
|
Other
income (loss), net
|
416
|
804.3
|
%
|
46
|
(154.8)
|
%
|
(84
|
)
|
||||||||||
|
Total
revenues
|
133,930
|
19.5
|
%
|
112,092
|
23.9
|
%
|
90,444
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
54,238
|
19.8
|
%
|
45,278
|
37.4
|
%
|
32,951
|
|||||||||||
|
Non-cash
stock grant compensation
|
359
|
52.8
|
%
|
235
|
36.6
|
%
|
172
|
|||||||||||
|
Other
operating expenses
|
20,414
|
23.1
|
%
|
16,581
|
26.5
|
%
|
13,110
|
|||||||||||
|
Amortization
|
8,103
|
37.8
|
%
|
5,882
|
31.1
|
%
|
4,488
|
|||||||||||
|
Depreciation
|
1,998
|
26.2
|
%
|
1,583
|
31.0
|
%
|
1,208
|
|||||||||||
|
Interest
|
10,433
|
21.3
|
%
|
8,603
|
26.3
|
%
|
6,810
|
|||||||||||
|
Total
expenses
|
95,545
|
22.2
|
%
|
78,162
|
33.1
|
%
|
58,739
|
|||||||||||
|
Income
before income taxes
|
$
|
38,385
|
13.1
|
%
|
$
|
33,930
|
7.0
|
%
|
$
|
31,705
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
3.9%
|
|
4.5%
|
|
11.2%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
40.5%
|
|
40.4%
|
|
36.4%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.2%
|
|
14.8%
|
|
14.5%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
3,067
|
$
|
2,693
|
$
|
2,874
|
||||||||||||
|
Total
assets at December 31
|
$
|
445,146
|
$
|
359,551
|
$
|
273,363
|
||||||||||||
Total
revenues in 2005 increased $21.8 million to $133.9
million, a 19.5% increase over 2004. Of this increase, approximately
$17.9 million related to core commissions and fees revenue from acquisitions
for
which there were no comparable revenues in 2004. The National Program Division’s
net internal growth
rate for core commissions and fees revenue was 3.9%, excluding core commissions
and fees revenue recognized in 2005 from new acquisitions. The majority of
the
internally generated growth in the 2005 core commissions and fees revenue
was
primarily related to increasing insurance premium rates in our condominium
program at our Florida Intracoastal Underwriters (FIU) profit center that
occurred as a result of the 2005 and 2004 hurricane seasons.
Income
before income taxes and minority interest in 2005 increased $4.5 million
to
$38.4 million, a 13.1% increase over 2004, of which the majority related
to the
revenues derived from acquisitions completed in 2005 and the increased earnings
at FIU.
Total
revenues in 2004 increased $21.6 million to $112.1
million, a 23.9% increase over 2003. Of this increase, approximately
$21.6 million related to core commissions and fees revenue from acquisitions
for
which there were no comparable revenues in 2003. During 2004, we discontinued
several programs,
including our professional medical program, which
generated approximately $1.2 million in revenues in
2003
but for which there were no comparable revenues in 2004.
Therefore, the National Program Division’s net internal growth
rate for core commissions and fees revenue in 2004 was 4.5%, excluding core
commissions
and fees revenue recognized in 2004 from new acquisitions and the 2003 core
commissions and fees revenue from divested business. The net internal growth
rate for core commissions and fees revenue for the National Programs Division
in
2003 was 11.2%. The decline in the net internal growth rates from core
commissions and fees revenue from 2003 to 2004 was primarily related to
declining insurance premium rates in our condominium program with our FIU
profit
center.
Income
before income taxes and minority interest in 2004 increased $2.2 million
to
$33.9 million, a 7.0% increase over 2003, of which the majority related to
the
revenues derived from acquisitions completed in 2004, but offset primarily
by
lower earnings at FIU. The ratio of employee compensation and benefits to
total
revenues and the ratio of other operating expenses to total revenue were
higher
in 2004 than 2003, primarily due to two reasons: (1) 2004 total revenues
reflected $2.8 million less profit-sharing contingency commissions income
than
in 2003 due primarily to the impact of the 2004 hurricanes in Florida, and
(2)
the 2003 and 2004 acquisitions reporting in this Division
accounted for 27% of the Division’s total revenues, but
operated at a lower aggregate operating profit margin of approximately 38.0%,
thereby diluting the historical aggregate operating profit margin of this
Division.
Brokerage
Division
The
Brokerage Division markets and sells excess and surplus commercial and personal
lines insurance and reinsurance, primarily through independent agents and
brokers. Like the Retail and National Programs Divisions, the Brokerage
Division’s revenues are primarily commission-based.
Financial
information relating to our Brokerage Division is as follows (in thousands,
except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
120,889
|
218.7
|
%
|
$
|
37,929
|
39.5
|
%
|
$
|
27,183
|
||||||||
|
Contingent
commissions
|
4,648
|
27.1
|
%
|
3,656
|
(19.7)
|
%
|
4,555
|
|||||||||||
|
Investment
income
|
1,599
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Other
(loss) income, net
|
(23
|
)
|
(227.8)
|
%
|
18
|
800.0
|
%
|
2
|
||||||||||
|
Total
revenues
|
127,113
|
205.5
|
%
|
41,603
|
31.1
|
%
|
31,740
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
59,432
|
200.4
|
%
|
19,782
|
47.3
|
%
|
13,426
|
|||||||||||
|
Non-cash
stock grant compensation
|
164
|
64.0
|
%
|
100
|
(39.0)
|
%
|
164
|
|||||||||||
|
Other
operating expenses
|
19,808
|
153.9
|
%
|
7,800
|
38.9
|
%
|
5,614
|
|||||||||||
|
Amortization
|
5,672
|
649.3
|
%
|
757
|
142.6
|
%
|
312
|
|||||||||||
|
Depreciation
|
1,285
|
153.0
|
%
|
508
|
53.5
|
%
|
331
|
|||||||||||
|
Interest
|
12,446
|
843.6
|
%
|
1,319
|
72.4
|
%
|
765
|
|||||||||||
|
Total
expenses
|
98,807
|
226.5
|
%
|
30,266
|
46.8
|
%
|
20,612
|
|||||||||||
|
Income
before income taxes
|
$
|
28,306
|
149.7
|
%
|
$
|
11,337
|
1.9
|
%
|
$
|
11,128
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
24.9%
|
|
14.1%
|
|
19.7%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
46.8%
|
|
47.5%
|
|
42.3%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.6%
|
|
18.7%
|
|
17.7%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
1,969
|
$
|
694
|
$
|
824
|
||||||||||||
|
Total
assets at December 31
|
$
|
476,653
|
$
|
128,699
|
$
|
74,390
|
||||||||||||
Total
revenues in 2005 increased $85.5 million to $127.1 million, a 205.5% increase
over 2004. Of this increase, approximately $73.3 million related to core
commissions and fees revenue from acquisitions for which there were no
comparable revenues in 2004. The majority of this acquired revenue was from
the
March 1, 2005 acquisition of Hull & Company, which represented the largest
acquisition in our history. Commissions and fees revenue of Hull & Company
for the twelve months preceding March 1, 2005 was approximately $63.0 million.
The Brokerage Division’s net internal growth rate for core commissions and fees
revenue in 2005 was 24.9%, excluding core commissions and fees revenue
recognized in 2005 from new acquisitions. The strong net internal growth
rate
was generated primarily from two of our operations, one of which focuses
on
property accounts in the southeastern United States, and the other which
focuses
on construction accounts in the western part of the United States. In addition
to the increase in net new business, both of these markets experienced increases
in insurance premium rates during 2005.
As
a
result of the Brokerage Division’s significant acquisitions in 2005 and late
2004, as well as the net new business growth from existing operations, income
before income taxes in 2005 increased $17.0 million to $28.3 million, a 149.7%
increase over 2004. The ratio of employee compensation and benefits
to total revenues and the ratio of other operating expenses
to total revenue improved in 2005 over 2004, primarily due to two reasons:
(1)
the majority of the operations acquired in 2005 and 2004 operated at higher
operating profit margins than the Brokerage Division's 2004 combined margins,
and (2) during 2005, one of our largest brokerage profit center's branch
improved their operating profit margins by over 9%.
Total
revenues in 2004 increased $9.9 million to $41.6 million, a 31.1% increase
over
2003. Of this increase, approximately $7.0 million related to core commissions
and fees revenues from acquisitions for which there were no comparable revenues
in 2003. The Brokerage Division’s net internal growth rate for core commissions
and fees revenues in 2004 was 14.1%, excluding core commissions and fees
revenues recognized in 2004 from new acquisitions. The net internal growth
rate
for core commissions and fees revenues for the Brokerage Division in 2003
was
19.7%. The decline in the net internal growth rates from core commissions
and
fees revenues in 2004 from 2003 was primarily related to the decline in the
net
new business generated by our reinsurance brokerage unit and the gradual
softening of insurance premium
rates.
As
a
result of the Brokerage Division’s net new business growth, income before income
taxes in 2004 increased $0.2 million to $11.3 million, a 1.9% increase over
2003. The ratio of employee compensation and benefits
to total revenues and the ratio of other operating expenses
to total revenue were higher in 2004 than 2003, primarily due to two reasons:
(1) 2004 total revenues
reflected $0.9 million less profit-sharing contingency
commissions than in 2003, and (2) during 2004, we started several new profit
center branches and the start-up salaries and operational costs diluted the
Division’s normal operating profit margins.
Services
Division
The
Services Division provides insurance-related services, including third-party
administration, consulting for the workers’ compensation and employee benefit
self-insurance markets, and managed healthcare services. Unlike our other
segments, approximately 98.0% of the Services Division’s 2005 commissions and
fees revenue is generated from fees, which are not significantly affected by
fluctuations in general insurance premiums.
Financial
information relating to our Services Division is as follows (in thousands,
except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
26,565
|
2.9
|
%
|
$
|
25,807
|
(7.6)
|
%
|
$
|
27,920
|
||||||||
|
Contingent
commissions
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Investment
income
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Other
income, net
|
952
|
(5.0)
|
%
|
1,002
|
49.3
|
%
|
671
|
|||||||||||
|
Total
revenues
|
27,517
|
2.6
|
%
|
26,809
|
(6.2)
|
%
|
28,591
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
15,582
|
4.2
|
%
|
14,961
|
(5.8)
|
%
|
15,876
|
|||||||||||
|
Non-cash
stock grant compensation
|
122
|
13.0
|
%
|
108
|
(32.9)
|
%
|
161
|
|||||||||||
|
Other
operating expenses
|
4,339
|
(11.0)
|
%
|
4,873
|
(23.9)
|
%
|
6,407
|
|||||||||||
|
Amortization
|
43
|
19.4
|
%
|
36
|
(2.7)
|
%
|
37
|
|||||||||||
|
Depreciation
|
435
|
12.4
|
%
|
387
|
(8.5)
|
%
|
423
|
|||||||||||
|
Interest
|
4
|
(94.2)
|
%
|
69
|
(57.4)
|
%
|
162
|
|||||||||||
|
Total
expenses
|
20,525
|
0.4
|
%
|
20,434
|
(11.4)
|
%
|
23,066
|
|||||||||||
|
Income
before income taxes
|
$
|
6,992
|
9.7
|
%
|
$
|
6,375
|
15.4
|
%
|
$
|
5,525
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
9.2%
|
|
16.6%
|
|
7.9%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
56.6%
|
|
55.8%
|
|
55.5%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.8%
|
|
18.2%
|
|
22.4%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
350
|
$
|
788
|
$
|
234
|
||||||||||||
|
Total
assets at December 31
|
$
|
18,766
|
$
|
13,760
|
$
|
13,267
|
||||||||||||
Total
revenues in 2005 increased $0.7 million net to $27.5
million, a 2.6% increase over 2004. The
Services Division’s net internal growth rate for core commissions and fees
revenue was 9.2% in 2005, excluding the 2004 core commissions and fees
revenue
from divested business. The
positive net internal
growth rates from core commissions and fees revenue primarily
reflect the strong net new business growth from our workers’ compensation and
public entity third-party administration (TPA) businesses.
Income
before income taxes in 2005 increased $0.6 million to $7.0 million, a 9.7%
increase over 2004, primarily due to strong net new business
growth.
Total
revenues in 2004 decreased $1.8 million to $26.8
million, a 6.2% decrease from 2003. Of this decrease,
approximately $6.6 million related to core commissions and fees revenue
from
medical TPA business units sold in 2004 and 2003. These operations were
sold
because their respective operating profit margins were not expected to
exceed
the 10%-12% range, which were not acceptable returns to us in our culture.
The
Services Division’s net internal growth rate for core commissions and fees
revenue was 16.6% in 2004, excluding the 2003 core commissions and fees
revenue
from divested business. The net internal growth rate for core
commissions and fees revenue for the Services Division in 2003 was
7.9%.
The positive net internal
growth rates from core commissions and fees revenue for 2003 and
2004
primarily reflect the strong net new business growth from our workers’
compensation and public entity TPA businesses.
Income
before income taxes in 2004 increased $0.9 million to $6.4 million, a 15.4%
increase over 2003, primarily due to strong net new business growth and
the
elimination of the lower margin medical TPA businesses sold in 2003 and
2004.
Other
As
discussed in Note 16 of the Notes to Consolidated Financial Statements, the
“Other” column in the Segment Information table includes any income and expenses
not allocated to reportable segments, and corporate-related items, including
the
inter-company interest expense charge to the reporting segment.
Quarterly
Operating Results
The
following table sets forth our quarterly results for 2005 and 2004.
|
(in
thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
2005
|
|||||||||||||
|
Total
revenues
|
$
|
202,374
|
$
|
195,931
|
$
|
190,645
|
$
|
196,857
|
|||||
|
Income
before income taxes
|
$
|
70,513
|
$
|
60,468
|
$
|
55,689
|
$
|
57,460
|
|||||
|
Net
income
|
$
|
43,018
|
$
|
37,033
|
$
|
34,783
|
$
|
35,717
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.26
|
|||||
|
Diluted
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.25
|
|||||
|
2004
|
|||||||||||||
|
Total
revenues
|
$
|
165,565
|
$
|
157,942
|
$
|
160,381
|
$
|
163,046
|
|||||
|
Income
before income taxes
|
$
|
59,360
|
$
|
52,529
|
$
|
48,256
|
$
|
46,804
|
|||||
|
Net
income
|
$
|
36,348
|
$
|
32,153
|
$
|
30,086
|
$
|
30,256
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
|
Diluted
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash
and cash equivalents of $100.6 million at December 31, 2005 reflected a decrease
of $87.5 million from
the
$188.1 million balance at December 31, 2004. During
2005,
$215.1
million of cash was provided from operating activities.
Also
during this period, $262.2 million of cash was used for acquisitions, $13.4
million was used for additions
to fixed assets,
$16.1 million was used for payments on long-term debt and $23.6 million was
used
for payment of dividends.
Our
cash
and cash equivalents of $188.1 million at December
31, 2004 reflected an increase of $131.2 million over
the
$56.9 million balance at December 31, 2003. During
2004,
$170.2
million of cash was provided from operating activities,
and $200.0 million was provided from the issuance
of new privately-placed, unsecured senior notes. Also
during this period, $202.7 million of cash was used for acquisitions, $10.2
million was used for additions
to fixed assets,
$18.6 million was used for payments on long-term debt
and
$20.0
million was used for payment of dividends.
Our
cash
and cash equivalents of $56.9 million at December 31, 2003 reflected a decrease
of $11.1 million from our December 31, 2002 balance of $68.0 million. During
2003, $142.7 million of cash was provided from operating activities. Also during
the period, $100.3 million of cash was used for acquisitions, $15.9 million
was
used for additions to fixed assets, $28.0 million was used for payments on
long-term debt and $16.6 million was used for payments of dividends.
Our
ratio of current assets to current liabilities
(the “current ratio”) was 1.06 and 1.48 at December 31, 2005 and 2004,
respectively.
As
of
December 31, 2005, our contractual cash obligations were as
follows:
Contractual
Cash Obligations
|
(in
thousands)
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5 Years
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Long-term
debt
|
$
|
269,792
|
$
|
55,623
|
$
|
13,806
|
$
|
304
|
$
|
200,059
|
||||||
|
Capital
lease obligations
|
17
|
7
|
10
|
-
|
-
|
|||||||||||
|
Other
long-term liabilities
|
11,830
|
9,174
|
946
|
653
|
1,057
|
|||||||||||
|
Operating
leases
|
85,821
|
20,731
|
32,373
|
21,075
|
11,642
|
|||||||||||
|
Interest
obligations
|
85,709
|
13,129
|
23,775
|
23,326
|
25,479
|
|||||||||||
|
Maximum
future acquisition contingency payments
|
189,611
|
107,277
|
82,325
|
9
|
-
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
642,780
|
$
|
205,941
|
$
|
153,235
|
$
|
45,367
|
$
|
238,237
|
||||||
In
July
2004, we completed a private placement of $200.0 million
of unsecured senior notes (the “Notes”). The $200.0 million
is divided into two series: Series A, for $100.0 million due in 2011 and bearing
interest at 5.57% per year; and Series B, for $100.0 million due in 2014 and
bearing interest at 6.08% per year. The closing on the Series B Notes occurred
on July 15, 2004. The closing on the Series A Notes occurred on September 15,
2004. We have used the proceeds from the Notes for general corporate purposes,
including acquisitions and repayment of existing debt. As of December 31, 2005,
there was an outstanding balance of $200.0 million on the Notes.
In
September 2003, we established an unsecured revolving credit facility with
a
national banking institution that provided for available borrowings of up to
$75.0 million, with a maturity date of October 2008, bearing an interest rate
based upon the 30-, 60- or 90-day LIBOR plus 0.625% to 1.625%, depending upon
our quarterly ratio of funded debt to earnings before interest, taxes,
depreciation, amortization and non-cash stock grant compensation.
A commitment fee of 0.175% to 0.375% per annum
was
assessed on the unused balance. The 90-day LIBOR was 4.53% as of December 31,
2005. There were no borrowings against this facility at December 31,
2005.
In
January 2001, we entered into a $90.0 million, unsecured seven-year term loan
agreement with a national banking institution. Borrowings under this facility
bear interest based upon the 30-, 60- or 90-day LIBOR plus a credit risk spread
ranging from 0.50% to 1.00%, depending upon our quarterly ratio of funded debt
to earnings before interest, taxes, depreciation, amortization and non-cash
stock grant compensation. The 90-day LIBOR was 4.53% as of December 31, 2005.
The loan was fully funded on January 3, 2001, and a balance of $25.7 million
remained outstanding as of December 31, 2005. This loan is to be repaid
in
equal quarterly principal installments of $3.2 million
through
December 2007. Effective January 2, 2002, we entered into an interest rate
swap
agreement with a national banking institution to lock in an effective fixed
interest rate of 4.53% for the remaining six years of the term loan, excluding
our credit risk spread of between 0.50% and 1.00%.
In
1991,
we entered into a long-term unsecured credit agreement with a major insurance
company that provided for borrowings at an interest rate equal to the prime
rate
(9.25% at December 31, 2002) plus 1.00%. In accordance with an August 1, 1998
amendment to this credit agreement, the outstanding balance was repaid in August
2003, thus ending the credit agreement.
All
of
our credit agreements require us to maintain certain financial ratios and comply
with certain other covenants. We were in compliance with all such covenants
as
of December 31, 2005 and 2004.
Neither
we nor our subsidiaries has ever incurred off-balance sheet obligations through
the use of, or investment in, off-balance sheet derivative financial instruments
or structured finance or special purpose entities organized as corporations,
partnerships or limited liability companies or trusts.
We
believe that our existing cash, cash equivalents, short-term
investment portfolio and funds generated from operations,
together with our unsecured revolving credit facility described above, will
be
sufficient to satisfy our normal liquidity needs through at least the end of
2006. Additionally, we believe that funds generated from future operations
will be sufficient to satisfy our normal liquidity needs, including the required
annual principal payments on our
long-term debt.
Historically,
much of our cash has been used for acquisitions. If additional acquisition
opportunities should become
available that exceed our current cash flow, we believe
that given our relatively low debt-to-total capitalization ratio, we would
have
the ability to raise additional capital through either the private or public
debt markets.
In
December 2001, a universal “shelf” registration statement that we filed with the
Securities and Exchange Commission (SEC) covering the public offering and sale,
from time to time, of an aggregate of up to $250 million of debt and/or equity
securities, was declared effective. The net proceeds from the sale of such
securities could be used to fund acquisitions and for general corporate
purposes, including capital expenditures, and to meet working capital
needs.
A
common stock follow-on offering of 5,000,000
shares
in March 2002 was made pursuant to this “shelf” registration statement. As of
December 31, 2005, approximately $90.0 million of the universal “shelf”
registration remains available. If we needed to publicly raise additional funds,
we may need to register additional securities with the SEC.
Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and equity prices. We are exposed to market
risk
through our investments, revolving credit line and term loan
agreements.
Our
invested assets are held as cash and cash equivalents, restricted cash,
available-for-sale marketable equity securities, non-marketable equity
securities and certificates of deposit. These investments are subject to
interest rate risk and equity price risk. The fair values of our cash and cash
equivalents, restricted cash, and certificates of deposit at
December 31, 2005 and 2004 approximated their respective carrying values due
to
their short-term duration and therefore such market risk is not considered
to be
material.
We
do not
actively invest or trade in equity securities. In addition, we generally dispose
of any significant equity securities received in conjunction with an acquisition
shortly after the acquisition date. However, we have no current intentions
to
add to or dispose of any of the 559,970 common stock shares of Rock-Tenn
Company, a publicly-held New York Stock Exchange listed company, which we have
owned for more than 10 years. The investment in Rock-Tenn Company accounted
for 68%
of
the total value of available-for-sale marketable equity securities,
non-marketable equity securities and certificates of deposit as of December
31,
2005 and 2004, respectively. Rock-Tenn Company's closing stock price at December
31, 2005 and 2004 was $13.65 and $15.16 respectively. Our exposure to equity
price risk is primarily related to the Rock-Tenn Company investment. As of
December 31, 2005, the value of the Rock-Tenn Company investment was
$7,644,000.
To
hedge
the risk of increasing interest rates from January 2, 2002 through the remaining
six years of our seven-year $90 million term loan, on December 5, 2001 we
entered into an interest rate swap agreement that effectively converted the
floating rate interest payments based on a London Interbank Offering Rate
(LIBOR) to fixed interest rate payments at 4.53%. This agreement did not impact
or change the required 0.50% to 1.00% credit risk spread portion of the term
loan. We do not otherwise enter into derivatives, swaps or other similar
financial instruments for trading or speculative purposes.
At
December 31, 2005, the interest rate swap agreement was as follows:
|
(in
thousands, except percentages)
|
Contractual/
Notional
Amount
|
Fair
Value
|
Weighted
Average
Pay
Rates
|
Weighted
Average
Received
Rates
|
|
|
|
|
|
|
|
Interest
rate swap agreement
|
$25,714
|
$58
|
4.53%
|
3.78%
|
Index
to Consolidated Financial Statements
| Page No. | |
| Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 |
30
|
| Consolidated Balance Sheets as of December 31, 2005 and 2004 |
31
|
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 |
32
|
| Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 |
33
|
|
|
|
| Notes to Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003 |
34
|
| Note 1: Summary of Significant Accounting Policies |
34
|
| Note 2: Business Combinations |
38
|
| Note 3: Goodwill |
40
|
| Note 4: Amortizable Intangible Assets |
40
|
| Note 5: Investments |
41
|
| Note 6: Fixed Assets |
41
|
| Note 7: Accrued Expenses |
42
|
| Note 8: Long-Term Debt |
42
|
| Note 9: Income Taxes |
43
|
| Note 10: Employee Savings Plan |
44
|
| Note 11: Stock-Based Compensation and Incentive Plans |
44
|
| Note 12: Supplemental Disclosures of Cash Flow Information |
45
|
| Note 13: Commitments and Contingencies |
45
|
| Note 14: Business Concentrations |
47
|
| Note 15: Quarterly Operating Results (Unaudited) |
47
|
| Note 16: Segment Information |
47
|
| Note 17: Subsequent Events |
48
|
|
|
|
| Reports of Independent Registered Public Accounting Firm on Consolidated Financial Statements |
50
|
| Management’s Report on Internal Control Over Financial Reporting |
51
|
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
52
|
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF
INCOME
|
|
Year
Ended December 31,
|
|||||||||
|
(in
thousands, except per share data)
|
2005
|
2004
|
2003
|
|||||||
|
REVENUES
|
||||||||||
|
Commissions
and fees
|
$
|
775,543
|
$
|
638,267
|
$
|
545,287
|
||||
|
Investment
income
|
6,578
|
2,715
|
1,428
|
|||||||
|
Other
income, net
|
3,686
|
5,952
|
4,325
|
|||||||
|
Total
revenues
|
785,807
|
646,934
|
551,040
|
|||||||
|
|
||||||||||
|
EXPENSES
|
||||||||||
|
Employee
compensation and benefits
|
374,943
|
314,221
|
268,372
|
|||||||
|
Non-cash
stock grant compensation
|
3,337
|
2,625
|
2,272
|
|||||||
|
Other
operating expenses
|
105,622
|
84,927
|
74,617
|
|||||||
|
Amortization
|
33,245
|
22,146
|
17,470
|
|||||||
|
Depreciation
|
10,061
|
8,910
|
8,203
|
|||||||
|
Interest
|
14,469
|
7,156
|
3,624
|
|||||||
|
Total
expenses
|
541,677
|
439,985
|
374,558
|
|||||||
|
|
||||||||||
|
Income
before income taxes
|
244,130
|
206,949
|
176,482
|
|||||||
|
Income
taxes
|
93,579
|
78,106
|
66,160
|
|||||||
|
|
||||||||||
|
Net
income
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
||||
|
|
||||||||||
|
Net
income per share:
|
||||||||||
|
Basic
|
$
|
1.09
|
$
|
0.93
|
$
|
0.81
|
||||
|
Diluted
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
||||
|
|
||||||||||
|
Weighted
average number of shares outstanding:
|
||||||||||
|
Basic
|
138,563
|
137,818
|
136,654
|
|||||||
|
Diluted
|
139,776
|
138,888
|
137,794
|
|||||||
|
Dividends
declared per share
|
$
|
0.17
|
$
|
0.1450
|
$
|
0.1213
|
||||
See
accompanying notes to consolidated financial statements.
BROWN
& BROWN, INC.
CONSOLIDATED
BALANCE
SHEETS
|
At
December 31,
|
|||||||
|
(in
thousands, except per share data)
|
2005
|
2004
|
|||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
100,580
|
$
|
188,106
|
|||
|
Restricted
cash and investments
|
229,872
|
147,483
|
|||||
|
Short-term
investments
|
2,748
|
3,163
|
|||||
|
Premiums,
commissions and fees receivable
|
257,930
|
172,395
|
|||||
|
Other
current assets
|
28,637
|
28,819
|
|||||
|
Total current assets
|
619,767
|
539,966
|
|||||
|
Fixed
assets, net
|
39,398
|
33,438
|
|||||
|
Goodwill
|
549,040
|
360,843
|
|||||
|
Amortizable
intangible assets, net
|
377,907
|
293,009
|
|||||
|
Investments
|
8,421
|
9,328
|
|||||
|
Other
assets
|
14,127
|
12,933
|
|||||
|
Total assets
|
$
|
1,608,660
|
$
|
1,249,517
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Premiums
payable to insurance companies
|
$
|
397,466
|
$
|
242,414
|
|||
|
Premium
deposits and credits due customers
|
34,027
|
32,273
|
|||||
|
Accounts
payable
|
21,161
|
16,257
|
|||||
|
Accrued
expenses
|
74,534
|
58,031
|
|||||
|
Current
portion of long-term debt
|
55,630
|
16,135
|
|||||
|
Total
current liabilities
|
582,818
|
365,110
|
|||||
|
Long-term
debt
|
214,179
|
227,063
|
|||||
|
Deferred
income taxes, net
|
35,489
|
24,859
|
|||||
|
Other
liabilities
|
11,830
|
8,160
|
|||||
|
Commitments
and contingencies (Note 13)
|
|||||||
|
Shareholders’
Equity:
|
|||||||
|
Common
stock, par value $0.10 per share;
|
|||||||
|
authorized
280,000 shares; issued and
|
|||||||
|
outstanding
139,383 at 2005 and 138,318 at 2004
|
13,938
|
13,832
|
|||||
|
Additional
paid-in capital
|
193,313
|
180,364
|
|||||
|
Retained
earnings
|
552,647
|
425,662
|
|||||
|
Accumulated
other comprehensive income, net of related income tax
|
|||||||
|
effect
of $2,606 at 2005 and $2,617 at 2004
|
4,446
|
4,467
|
|||||
|
Total
shareholders’ equity
|
764,344
|
624,325
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,608,660
|
$
|
1,249,517
|
|||
See
accompanying notes to consolidated financial
statements.
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Common
Stock
|
|
Accumulated
|
|||||||||||||||||
|
(in
thousands, except per share data)
|
Shares
Outstanding
|
Par
Value
|
Additional Paid-InCapital
|
Retained
Earnings
|
Other Comprehensive
Income |
Total
|
|||||||||||||
|
Balance
at January 1, 2003
|
136,356
|
$13,636
|
$152,746
|
$223,102
|
$2,106
|
$391,590
|
|||||||||||||
|
Net
income
|
110,322
|
110,322
|
|||||||||||||||||
|
Net
unrealized holding gains on available-for-sale securities
|
1,395
|
1,395
|
|||||||||||||||||
|
Net
gain on cash-flow hedging derivative
|
726 |
726
|
|||||||||||||||||
|
Comprehensive
income
|
112,443
|
||||||||||||||||||
|
Common
stock purchased for employee stock benefit plans
|
(162)
|
(16)
|
(2,318)
|
|
(2,334)
|
||||||||||||||
|
Common
stock issued for employee stock benefit plans
|
920
|
92
|
9,203
|
9,295
|
|||||||||||||||
|
Income
tax benefit from exercise of stock options
|
3,530
|
3,530
|
|||||||||||||||||
|
Common
stock issued to directors
|
8
|
113
|
113
|
||||||||||||||||
|
Cash
dividends paid ($0.1213 per share)
|
(16,602
|
)
|
(16,602
|
)
|
|||||||||||||||
|
Balance
at December 31, 2003
|
137,122
|
13,712
|
163,274
|
316,822
|
4,227
|
498,035
|
|||||||||||||
|
Net
income
|
128,843
|
128,843
|
|||||||||||||||||
| Net unrealized holding loss on available-for-sale securities |
(649
|
)
|
(649
|
)
|
|||||||||||||||
|
Net
gain on cash-flow hedging derivative
|
889
|
889
|
|||||||||||||||||
|
Comprehensive
income
|
129,083
|
||||||||||||||||||
|
Common
stock issued for acquisitions
|
400
|
40
|
6,204
|
6,244
|
|||||||||||||||
|
Common
stock issued for employee stock benefit plans
|
790
|
80
|
10,525
|
10,605
|
|||||||||||||||
|
Income
tax benefit from exercise of stock options
|
234
|
234
|
|||||||||||||||||
|
Common
stock issued to directors
|
6
|
-
|
127
|
127
|
|||||||||||||||
|
Cash
dividends paid ($0.1450 per share)
|
(20,003
|
)
|
(20,003
|
)
|
|||||||||||||||
|
Balance
at December 31, 2004
|
138,318
|
13,832
|
180,364
|
425,662
|
4,467
|
624,325
|
|||||||||||||
|
Net
income
|
150,551
|
150,551
|
|||||||||||||||||
|
Net
unrealized holding loss on available-for-sale securities
|
(512
|
)
|
(512
|
)
|
|||||||||||||||
|
Net
gain on cash-flow hedging derivative
|
491
|
491
|
|||||||||||||||||
|
Comprehensive
income
|
150,530
|
||||||||||||||||||
|
Common
stock issued for employee stock benefit plans
|
1,057
|
105
|
12,769
|
12,874
|
|||||||||||||||
|
Common
stock issued to directors
|
8
|
1
|
180
|
181
|
|||||||||||||||
|
Cash
dividends paid ($0.17 per share)
|
(23,566
|
)
|
(23,566
|
)
|
|||||||||||||||
|
Balance
at December 31, 2005
|
139,383
|
$
|
13,938
|
$
|
193,313
|
$
|
552,647
|
$
|
4,446
|
$
|
764,344
|
||||||||
See
accompanying notes to consolidated financial statements.
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF
CASH
FLOWS
|
Year
Ended December 31,
|
||||||||||
|
(in
thousands)
|
2005
|
2004
|
2003
|
|||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Amortization
|
33,245
|
22,146
|
17,470
|
|||||||
|
Depreciation
|
10,061
|
8,910
|
8,203
|
|||||||
|
Non-cash
stock grant compensation
|
3,337
|
2,625
|
2,272
|
|||||||
|
Deferred
income taxes
|
10,642
|
8,840
|
8,370
|
|||||||
|
Income
tax benefit from exercise of stock options
|
-
|
234
|
3,530
|
|||||||
|
Net
gain on sales of investments, fixed
|
||||||||||
|
assets and customer accounts
|
(2,478
|
)
|
(5,999
|
)
|
(3,836
|
)
|
||||
|
Changes
in operating assets and liabilities, net of effect
|
||||||||||
|
from acquisitions and divestitures:
|
||||||||||
|
Restricted
cash and investments (increase)
|
(82,389
|
)
|
(30,940
|
)
|
(13,550
|
)
|
||||
|
Premiums,
commissions and fees receivable (increase)
|
(84,058
|
)
|
(22,907
|
)
|
(2,553
|
)
|
||||
|
Other
assets decrease (increase)
|
1,072
|
(3,953
|
)
|
(4,605
|
)
|
|||||
|
Premiums
payable to insurance companies increase
|
153,032
|
41,473
|
7,946
|
|||||||
|
Premium
deposits and credits due customers increase
|
1,754
|
9,997
|
5,500
|
|||||||
|
Accounts
payable increase (decrease)
|
4,377
|
3,608
|
(1,732
|
)
|
||||||
|
Accrued
expenses increase
|
14,854
|
7,140
|
5,551
|
|||||||
|
Other
liabilities increase (decrease)
|
1,088
|
186
|
(163
|
)
|
||||||
|
Net
cash provided by operating activities
|
215,088
|
170,203
|
142,725
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Additions
to fixed assets
|
(13,426
|
)
|
(10,152
|
)
|
(15,946
|
)
|
||||
|
Payments
for businesses acquired, net of cash acquired
|
(262,181
|
)
|
(202,664
|
)
|
(100,270
|
)
|
||||
|
Proceeds
from sales of fixed assets and customer accounts
|
2,362
|
6,330
|
4,975
|
|||||||
|
Purchases
of investments
|
(299
|
)
|
(3,142
|
)
|
-
|
|||||
|
Proceeds
from sales of investments
|
896
|
1,107
|
106
|
|||||||
|
Net
cash used in investing activities
|
(272,648
|
)
|
(208,521
|
)
|
(111,135
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from long-term debt
|
-
|
200,000
|
-
|
|||||||
|
Payments
on long-term debt
|
(16,117
|
)
|
(18,606
|
)
|
(28,024
|
)
|
||||
|
Borrowings
on revolving credit facility
|
50,000
|
50,000
|
-
|
|||||||
|
Payments
on revolving credit facility
|
(50,000
|
)
|
(50,000
|
)
|
-
|
|||||
|
Issuances
of common stock for employee stock benefit plans
|
9,717
|
8,107
|
7,136
|
|||||||
|
Purchase
of common stock for employee stock benefit plan
|
-
|
-
|
(2,334
|
)
|
||||||
|
Cash
dividends paid
|
(23,566
|
)
|
(20,003
|
)
|
(16,602
|
)
|
||||
|
Cash
distribution to minority interest shareholders
|
-
|
-
|
(2,890
|
)
|
||||||
|
Net
cash (used in) provided by financing activities
|
(29,966
|
)
|
169,498
|
(42,714
|
)
|
|||||
|
Net
(decrease) increase in cash and cash equivalents
|
(87,526
|
)
|
131,180
|
(11,124
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
188,106
|
56,926
|
68,050
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
100,580
|
$
|
188,106
|
$
|
56,926
|
||||
See
accompanying notes to consolidated financial
statements.
Notes
to Consolidated Financial Statements
NOTE
1 • Summary of Significant Accounting Policies
Nature
of Operations
Brown
& Brown, Inc., a Florida corporation, and its subsidiaries (collectively,
Brown & Brown or the “Company”) is a diversified insurance agency,
brokerage, and services organization that markets and sells to its customers
insurance products and services, primarily in the property and casualty area.
Brown & Brown’s business is divided into four reportable segments: the
Retail Division, which provides a broad range of insurance products and services
to commercial, public entity, professional and individual customers; the
National Programs Division, which is comprised of two units - Professional
Programs, which provides professional liability and related package products
for
certain professionals delivered through nationwide networks of independent
agents, and Special Programs, which markets targeted products and services
designated for specific industries, trade groups, governmental entities and
market niches; the Brokerage Division, which markets and sells excess and
surplus commercial insurance
and reinsurance, primarily through independent agents and brokers; and the
Services Division, which provides insurance-related
services, including third-party administration, consulting for the workers’
compensation and employee benefit self-insurance markets, and managed healthcare
services.
Principles
of Consolidation
The
accompanying Consolidated Financial Statements include the accounts of
Brown
&
Brown, Inc. and its subsidiaries. All
significant intercompany account balances and transactions have been eliminated
in the Consolidated Financial Statements. Any
outside or third-party interests in Brown & Brown’s net income and net
assets are reflected as minority interest in the accompanying Consolidated
Financial Statements.
Revenue
Recognition
Commission
revenue is recognized as of the effective date of the insurance policy or the
date the
policy
premium is billed to the customer, whichever is later. At that date, the
earnings process has been completed and Brown & Brown can reliably estimate
the impact of policy cancellations for refunds and establish reserves
accordingly. The reserve for policy cancellations is based upon historical
cancellation experience adjusted by known circumstances. The policy cancellation
reserve was $5,019,000 and
$3,771,000 at December 31, 2005 and 2004, respectively, and is periodically
evaluated and adjusted as necessary. Subsequent
commission adjustments are recognized upon notification from the insurance
companies. Commission revenues
are
reported net of commissions paid to sub-brokers or co-brokers. Profit-sharing
contingent commissions from insurance companies are recognized when
determinable, which is when such commissions are received. Fee income is
recognized as services are rendered.
Use
of Estimates
The
preparation of Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, as well as disclosures of contingent assets and
liabilities, at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Cash
and Cash Equivalents
Cash
and
cash equivalents principally consist of demand deposits with financial
institutions and highly liquid investments having maturities of three months
or
less when purchased.
Restricted
Cash and Investments, and Premiums, Commissions and Fees
Receivable
In
its
capacity as an insurance agent or broker, Brown & Brown typically collects
premiums from insureds and, after deducting its authorized commissions, remits
the net premiums to the appropriate insurance companies. Accordingly, as
reported in the Consolidated Balance Sheets, “premiums” are receivable from
insureds. Unremitted net insurance premiums are held in a fiduciary capacity
until disbursed by Brown & Brown. Brown & Brown invests these unremitted
funds only in cash, money market accounts, commercial paper and debt securities
held for a short term, and reports such amounts
as restricted cash on the Consolidated Balance Sheets. Debt securities held
for
a short term consisted of nil ($0)
and
$62,675,000 of “Auction Rate Securities” (“ARS”) as of December 31, 2005 and
2004, respectively. In certain states where Brown & Brown operates, the use
and investment alternatives for these funds are regulated by various state
agencies. The interest income earned on these unremitted funds is reported
as
investment income in the Consolidated Statements of Income.
34
In
other
circumstances, the insurance companies collect the premiums directly from
the
insureds and remit the applicable
commissions to Brown & Brown. Accordingly, as reported in the Consolidated
Balance Sheets, “commissions” are receivable from insurance companies. “Fees”
are primarily receivable from customers of Brown & Brown’s Services
Division.
Investments
Marketable
debt securities held by Brown & Brown consist of ARS.
These ARS are purchased for their investment yields for short periods of time,
generally 15 to 35 days, between specified “auction dates.” However, since these
securities have underlying stated maturity dates of 20 to 30 years, they are
classified as “trading” and are reported at their fair value. These ARS are
purchased for their short-term interest earnings, and there is generally no
gain
or loss on the sale or “maturity” of these trading securities.
Marketable
equity securities held by Brown & Brown have been classified as
“available-for-sale” and are reported at estimated fair value, with the
accumulated other comprehensive income (unrealized gains and losses), net of
related income tax effect, reported as a separate component of shareholders’
equity. Realized gains and losses and declines in value below cost that are
judged to be other-than-temporary on available-for-sale securities are reflected
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income in the Consolidated
Statements of Income.
As
of
December 31, 2005 and 2004, Brown & Brown’s marketable equity securities
principally represented a long-term investment of 559,970 shares of common
stock
in Rock-Tenn Company. Brown & Brown’s Chief Executive Officer serves on the
board of directors of Rock-Tenn Company. Brown & Brown has no current
intention of adding to or selling these shares.
Non-marketable
equity securities and certificates of deposit having maturities of more than
three months when purchased are reported at cost and are adjusted for
other-than-temporary market value declines.
Net
unrealized holding gains on available-for-sale securities included in
accumulated other comprehensive income reported in shareholders’ equity was
$4,410,000 at December 31, 2005 and $4,922,000 at December 31, 2004, net of
deferred income taxes of $2,584,000 and $2,884,000, respectively.
Fixed
Assets
Fixed
assets including leasehold improvements are carried at cost, less accumulated
depreciation and amortization. Expenditures for improvements are capitalized,
and expenditures for maintenance and repairs are expensed to operations as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
and amortization are removed from the accounts and the resulting gain or loss,
if any, is reflected in other income. Depreciation has been determined using
the
straight-line method over the estimated useful lives of the related assets,
which range from three to 10 years. Leasehold improvements are amortized on
the
straight-line method over the term of the related lease.
Goodwill
and Amortizable Intangible Assets
In
June
2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards
(SFAS)
No. 141, “Business Combinations” (SFAS No. 141), which requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. SFAS No. 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets arising from such
business combinations. The excess of the purchase price of an acquisition over
the fair value of the identifiable tangible and amortizable intangible assets
is
assigned to goodwill.
Effective
January 1, 2002, Brown & Brown adopted SFAS No. 142, “Goodwill and Other
Intangible Assets” (SFAS No. 142), which provides for the non-amortization of
goodwill. Goodwill is now subject to at least an annual assessment for
impairment
by applying a fair-value based test. Amortizable intangible assets are amortized
over their economic lives and are
subject to lower-of-cost-or-market impairment testing. SFAS No. 142 requires
Brown & Brown to compare the fair value
of
each reporting unit with its carrying amount to determine if there is potential
impairment of goodwill. If the fair value of the reporting unit is less than
its
carrying value, an impairment loss would be recorded to the extent that the
fair
value of the goodwill
within the reporting unit is less than its carrying value. Fair value is
estimated based on multiples of revenues, earnings before
interest, income taxes, depreciation and amortization (EBITDA) and pre-tax
income. Brown & Brown completed its most recent annual assessment as of
November 30, 2005 and identified no impairment as a result of the evaluation.
35
Amortizable
intangible assets are stated at cost, less accumulated amortization, and
consist
of purchased customer accounts and noncompete agreements. Purchased customer
accounts and noncompete agreements are being amortized on a straight-line
basis
over the related estimated lives and contract periods, which range from five
to
15 years. Purchased customer accounts primarily consist of records and files
that contain information about insurance policies and the related insured
parties that are essential to policy renewals.
As
part
of Brown & Brown’s annual impairment assessment completed as of November 30,
2004, management determined that the maximum amortization period for the
intangible asset, purchased customer accounts, should be reduced from 20
years
to 15 years. A change in accounting estimate was recognized to reflect this
decision resulting in an increase in the 2005 and 2004 amortization expense
of
$6.4 million and $0.5 million, a corresponding decrease in net income of
$3.9
million and $0.3 million, and $0.03 and nil ($0) impact on earnings per share,
respectively.
The
carrying value of intangibles attributable to each division comprising Brown
& Brown is periodically reviewed by management to determine if the facts and
circumstances suggest that they may be impaired. In the insurance agency
and
brokerage industry, it is common for agencies or customer accounts to be
acquired at a price determined as a multiple of either their corresponding
revenues or EBITDA. Accordingly, Brown & Brown assesses the carrying value
of its intangible assets by comparison of a reasonable multiple applied to
either corresponding revenues or EBITDA, as well as considering the estimated
future cash flows generated by the corresponding division. Any impairment
identified through this assessment may require that the carrying value of
related intangible assets be adjusted; however, no impairments have been
recorded for the years ended December 31, 2005, 2004 and 2003.
Derivatives
Brown
& Brown utilizes a derivative financial instrument to reduce interest rate
risk. Brown & Brown does not hold or issue derivative financial instruments
for trading purposes. In June 1998, the FASB issued SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (SFAS No. 133), which was
subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities. These standards require that an entity recognize all
derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair value. Changes in the fair value of those instruments
will be reported in earnings or other comprehensive income, depending on the
use
of the derivative and whether it qualifies for hedge accounting. The accounting
for gains and losses associated with changes in the fair value of the
derivative, and the resulting effect on the consolidated financial statements,
will depend on the derivative’s hedge designation and whether the hedge is
highly effective in achieving offsetting changes in the fair value of cash
flows
as compared to changes in the fair value of the liability being hedged.
Stock-Based
Compensation and Incentive Plans
Brown
& Brown has elected to account for its stock-based compensation and
incentive
plans
under the intrinsic value-based
method, with pro forma disclosures of net earnings and earnings per share as
if
the fair value-based method of accounting defined in SFAS No. 123, “Accounting
for Stock-Based Compensation” (SFAS No. 123), had been applied. Under the
intrinsic value-based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Under the fair
value-based method, compensation cost is measured at the grant date based on
the
fair value of the award and is recognized over the service period, which is
usually the vesting period. In December 2002, Brown & Brown adopted the
disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation
- Transition and Disclosure,” which requires presentation of pro forma net
income and earnings per share information under SFAS No. 123.
Pursuant
to the above disclosure requirements, the following table provides an expanded
reconciliation for all periods presented that adds back to reported net income
the recorded expense under Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” net of related income tax effects,
deducts the total fair value expense under SFAS No. 123, net of related income
tax effects, and shows the reported and pro forma earnings per share
amounts:
|
Year
Ended December 31,
|
||||||||||
|
(in
thousands, except per share data)
|
2005
|
2004
|
2003
|
|||||||
|
Net
income as reported
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
||||
|
Total
stock-based employee compensation cost included in the determination
of
net
income, net of related income tax effects
|
2,061
|
1,638
|
1,412
|
|||||||
|
Total
stock-based employee compensation cost determined under fair
value
method
for all awards, net of related income tax effects
|
(5,069
|
)
|
(3,436
|
)
|
(2,868
|
)
|
||||
|
Pro
forma net income
|
$
|
147,543
|
$
|
127,045
|
$
|
108,866
|
||||
|
Earnings
per share:
|
||||||||||
|
Basic,
as reported
|
$
|
1.09
|
$
|
0.93
|
$
|
0.81
|
||||
|
Basic,
pro forma
|
$
|
1.06
|
$
|
0.92
|
$
|
0.80
|
||||
|
Diluted,
as reported
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
||||
|
Diluted,
pro forma
|
$
|
1.06
|
$
|
0.91
|
$
|
0.79
|
||||
Income
Taxes
Brown
& Brown records income tax expense using the asset and liability method of
accounting for deferred income taxes. Under such method, deferred tax assets
and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial statement carrying values and the income
tax
bases of Brown & Brown’s assets and liabilities.
Brown
& Brown files a consolidated federal income tax return and has elected to
file consolidated returns in certain states. Deferred income taxes are provided
for in the Consolidated Financial Statements and relate principally to expenses
charged to income for financial reporting purposes in one period and deducted
for income tax purposes in other periods.
Net
Income Per Share
Basic
net
income per share is computed by dividing net income available to shareholders
by
the weighted average number of shares outstanding for the period. Basic net
income per share excludes dilution. Diluted net income per share reflects the
potential dilution that could occur if stock options or other contracts to
issue
common stock were exercised or converted to common stock.
The
following table sets forth the computation of basic net income per share and
diluted net income per share:
|
Year
Ended December 31,
|
||||||||||
|
(in
thousands, except per share data)
|
2005
|
2004
|
2003
|
|||||||
|
Net
income
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
||||
|
Weighted
average number of common shares outstanding
|
138,563
|
137,818
|
136,654
|
|||||||
|
Dilutive
effect of stock options using the treasury stock method
|
1,213
|
1,070
|
1,140
|
|||||||
|
Weighted
average number of shares outstanding
|
139,776
|
138,888
|
137,794
|
|||||||
|
Net
income per share:
|
||||||||||
|
Basic
|
$
|
1.09
|
$
|
0.93
|
$
|
0.81
|
||||
|
Diluted
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
||||
All
share
and per share amounts in the consolidated financial statements have been
restated to give effect to the two-for-one common stock split effected by Brown
& Brown on November 28, 2005. The stock split was effected as a stock
dividend.
Fair
Value of Financial Instruments
The
carrying amounts of Brown & Brown’s financial assets and liabilities,
including cash and cash equivalents, investments, premiums, commissions and
fees
receivable, premiums payable to insurance companies, premium deposits and
credits due customers
and accounts payable, at December 31, 2005 and 2004, approximate fair value
because of the short-term maturity
of these
instruments. The carrying amount of Brown & Brown’s long-term debt
approximates fair value at December 31, 2005 and 2004 since the debt is at
floating rates. Brown & Brown’s one interest rate swap agreement is reported
at its fair value as of December 31, 2005 and 2004.
New
Accounting Pronouncement
In
December 2004, the FASB issued revised SFAS No. 123, “Share-Based Payment,”
which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and
supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This
revised statement, which requires that the cost of all share-based payment
transactions be recognized in the financial statements, establishes fair value
as the measurement objective and requires entities to apply a fair value-based
measurement method in accounting for share-based payment transactions. The
revised statement applies to all awards granted, modified, repurchased or
cancelled after July 1, 2005.
Revised
SFAS No. 123 permits public companies to account for the adoption of this
revised standard using one of two methods: the modified-prospective method
or
the modified-retrospective method. The modified-prospective method requires
a
company to recognize compensation cost based upon fair value for only those
share-based awards granted or modified with an effective date subsequent
to the
company’s date of adoption and share-based awards issued in prior periods that
remain unvested at the date of adoption. The modified-retrospective method
allows a company to restate, based upon pro forma amounts previously disclosed
under the requirements of Revised SFAS No. 123, for either all prior periods
presented or prior interim periods included in the year of adoption.
Effective
January 1, 2006, the company adopted Revised SFAS No. 123 and accounted for
the
adoption using the modified-prospective method. For fair value purposes,
the
company will use a Black-Scholes option-pricing model to estimate the fair
value
of stock option awards.
Brown
&
Brown's
assessment of the estimated
future compensation expense is affected by the stock price as well as
assumptions regarding a number of complex variables and the related tax impact.
Although the adoption of Revised SFAS No. 123 is not expected to have a material
effect on Brown & Brown's results of operations, future changes to various
assumptions used to determine the fair-value of awards issued or the amount
and
type of equity awards granted create uncertainty as to whether future
compensation expense will be similar to the historical SFAS No. 123 pro forma
expense.
NOTE
2 • Business Combinations
Acquisitions
in 2005
During
2005, Brown & Brown acquired the assets and assumed certain liabilities of
32 insurance intermediary operations and several
books of business (customer accounts). The aggregate purchase
price was $288,623,000, including $244,006,000 of net cash payments, the
issuance of $38,072,000 in notes payable
and the assumption of $6,545,000 of other liabilities. All of these acquisitions
operate in the insurance intermediary business and were acquired primarily
to
expand Brown & Brown’s core businesses and to attract high-quality
individuals to the Company. Acquisition purchase prices are typically based
on a
multiple of average annual operating profit (core commissions and fees revenue
over expenses) earned over a one- to three-year period after the acquisition
effective date, within a minimum and maximum price range. The initial asset
allocation of an acquisition is based on the minimum purchase price and any
subsequent “earn-out” payment is allocated to Goodwill.
All
of
these acquisitions have been accounted for as business combinations and are
as
follows:
|
(in
thousands)
Name
of Acquisitions
|
Business
Segment
|
2005
Date
of
Acquisition
|
Net
Cash
Paid
|
Notes
Payable
|
Recorded
Purchase
Price
|
|||||||||||
|
American
Specialty Companies, Inc., et al.
|
National
Programs
|
January
1
|
$
|
23,782
|
$
|
-
|
$
|
23,782
|
||||||||
|
Braishfield
Associates, Inc.
|
Brokerage
|
January
1
|
10,215
|
-
|
10,215
|
|||||||||||
|
Hull
& Company, Inc., et al.
|
Brokerage
|
March
1
|
140,169
|
35,000
|
175,169
|
|||||||||||
|
Weible
& Cahill, LLC
|
Retail
|
October
1
|
17,971
|
-
|
17,971
|
|||||||||||
|
Timothy
R. Downey Insurance, Inc.
|
National
Programs
|
November
1
|
14,302
|
1,374
|
15,676
|
|||||||||||
|
Other
|
Various
|
Various
|
37,567
|
1,698
|
39,265
|
|||||||||||
|
Total
|
$
|
244,006
|
$
|
38,072
|
$
|
282,078
|
||||||||||
The
following table summarizes the estimated fair values of the aggregate assets
and
liabilities acquired as of the date of each acquisition:
(in
thousands)
|
American
Specialty
|
Braishfield
|
Hull
|
Weible
&
Cahill
|
Downey
|
Other
|
Total
|
||||||||||||||||
|
Other
current assets
|
$
|
112
|
$
|
50
|
$
|
173
|
$
|
266
|
$
|
-
|
$
|
1,117
|
$
|
1,718
|
||||||||
|
Fixed
assets
|
370
|
25
|
2,500
|
111
|
89
|
180
|
3,275
|
|||||||||||||||
|
Purchased
customer accounts
|
7,410
|
4,835
|
68,000
|
10,825
|
9,042
|
17,633
|
117,745
|
|||||||||||||||
|
Noncompete
agreements
|
38
|
50
|
95
|
11
|
55
|
887
|
1,136
|
|||||||||||||||
|
Goodwill
|
18,247
|
5,408
|
105,463
|
7,092
|
8,382
|
20,157
|
164,749
|
|||||||||||||||
|
Total
assets acquired
|
26,177
|
10,368
|
176,231
|
18,305
|
17,568
|
39,974
|
288,623
|
|||||||||||||||
|
Other
current liabilities
|
(59
|
)
|
(153
|
)
|
(1,062
|
)
|
(100
|
)
|
(1,892
|
)
|
(709
|
)
|
(3,975
|
)
|
||||||||
|
Other
liabilities
|
(2,336
|
)
|
-
|
-
|
(234
|
)
|
-
|
-
|
(2,570
|
)
|
||||||||||||
|
Total
liabilities assumed
|
(2,395
|
)
|
(153
|
)
|
(1,062
|
)
|
(334
|
)
|
(1,892
|
)
|
(709
|
)
|
(6,545
|
)
|
||||||||
|
Net
assets acquired
|
$
|
23,782
|
$
|
10,215
|
$
|
175,169
|
$
|
17,971
|
$
|
15,676
|
$
|
39,265
|
$
|
282,078
|
||||||||
38
The
weighted average useful lives for the above acquired amortizable intangible
assets are as follows: purchased customer accounts, 15.0 years; and noncompete
agreements, 4.1 years.
Goodwill
of $164,749,000, all of which is expected to be deductible for income tax
purposes, was assigned to the Retail, National Programs and Brokerage Divisions
in the amounts of $19,773,000, $27,144,000 and $117,832,000,
respectively.
The
results of operations for the acquisitions completed during 2005 have been
combined with those of Brown & Brown since their respective acquisition
dates. If the acquisitions had occurred as of January 1, 2004, Brown &
Brown’s results of operations would be as shown in the following table. These
unaudited pro forma results are not necessarily indicative of the actual
results
of operations that would have occurred had the acquisitions actually been
made
at the beginning of the respective periods.
|
Year
Ended December 31,
|
|||||||
|
(in
thousands, except per share data)
|
2005
|
2004
|
|||||
|
(UNAUDITED)
|
|||||||
|
Total
revenues
|
$
|
818,783
|
$
|
769,815
|
|||
|
Income
before income taxes
|
$
|
255,268
|
$
|
246,978
|
|||
|
Net
income
|
$
|
157,420
|
$
|
153,765
|
|||
|
Net
income per share:
|
|||||||
|
Basic
|
$
|
1.14
|
$
|
1.12
|
|||
|
Diluted
|
$
|
1.13
|
$
|
1.11
|
|||
|
Weighted
average number of shares outstanding:
|
|||||||
|
Basic
|
138,563
|
137,818
|
|||||
|
Diluted
|
139,776
|
138,888
|
|||||
Additional
consideration paid to sellers,
or
consideration returned to Brown & Brown by sellers, as a result of purchase
price “earn-out” provisions are recorded as adjustments to intangible assets
when the contingencies are settled. The net additional consideration paid by
Brown & Brown as a result of these adjustments totaled $22,832,000 in 2005
and $965,000 in 2004, of which $23,797,000 was allocated to goodwill. Of the
$22,832,000 net additional consideration paid in 2005, $18,175,000 was paid
in
cash and the issuance of $4,657,000 in notes payable. Of the $965,000 net
additional consideration paid in 2004, $814,000 was paid in cash and the
assumption of $151,000 of other liabilities. As of December 31, 2005, the
maximum future contingency payments related related to acquisitions totaled
$189,611,000.
Acquisitions
in 2004
During
2004, Brown & Brown acquired the assets and assumed certain liabilities of
29 insurance intermediary operations, several
books of business (customer accounts), and the outstanding stock of three
general insurance agencies. The aggregate purchase
price was $199,281,000 including $190,544,000 of net cash payments, the issuance
of $1,430,000 in notes payable
and the assumption of $7,307,000 of other liabilities. All of these acquisitions
operate in the insurance intermediary business and were acquired primarily
to
expand Brown & Brown’s core businesses and to attract high-quality
individuals to the Company. Acquisition purchase prices are typically based
on a
multiple of operating profit earned over a one- to three-year period after
the
acquisition effective date, within a minimum and maximum price range. The
initial asset allocation of an acquisition is based on the minimum purchase
price and any subsequent “earn-out” payment is allocated to
Goodwill.
All
of
these acquisitions have been accounted for as business combinations and are
as
follows:
(in
thousands)
|
Name
of Acquisition
|
Business
Segment
|
2004
Date
of
Acquisition
|
Net
Cash
Paid
|
Notes
Payable
|
Recorded
Purchase
Price
|
|||||||||||
|
Doyle
Consulting Group, Inc., et al.
|
Retail
|
February
1
|
$
|
10,707
|
$
|
-
|
$
|
10,707
|
||||||||
|
Statfeld
Vantage Insurance Group, LLC et al.
|
Retail
|
March
1
|
26,619
|
-
|
26,619
|
|||||||||||
|
Waldor
Agency, Inc.
|
Retail
|
March
1
|
30,412
|
-
|
30,412
|
|||||||||||
|
Proctor
Financial, Inc.
|
National
Programs
|
May
1
|
31,060
|
-
|
31,060
|
|||||||||||
|
The
McDuffee Insurance Agency, Inc.
|
Retail
|
July
1
|
19,020
|
-
|
19,020
|
|||||||||||
|
International
E&S Insurance Brokers, Inc., et al.
|
Brokerage
|
September
1
|
18,387
|
-
|
18,387
|
|||||||||||
|
Others
|
Various
|
Various
|
54,339
|
1,430
|
55,769
|
|||||||||||
|
Total
|
|
$
|
190,544
|
$
|
1,430
|
$
|
191,974
|
|||||||||
39
The
following table summarizes the estimated fair values of the aggregate assets
and
liabilities acquired as of the date of each acquisition:
|
(in
thousands)
|
Doyle
|
Statfeld
|
Waldor
|
Proctor
|
McDuffee
|
Int'l.
E&S
|
Others
|
Total
|
|||||||||||||||||
|
Other
current assets
|
$
|
568
|
$
|
876
|
$
|
-
|
$
|
786
|
$
|
424
|
$
|
-
|
$
|
1,589
|
$
|
4,243
|
|||||||||
|
Fixed
assets
|
100
|
50
|
50
|
200
|
100
|
23
|
451
|
974
|
|||||||||||||||||
|
Purchases
customer accounts
|
4,451
|
8,384
|
10,807
|
16,013
|
6,876
|
11,123
|
27,244
|
84,898
|
|||||||||||||||||
|
Noncompete
agreements
|
151
|
11
|
31
|
-
|
11
|
92
|
477
|
773
|
|||||||||||||||||
|
Goodwill
|
5,494
|
17,495
|
19,524
|
16,935
|
11,655
|
7,271
|
30,019
|
108,393
|
|||||||||||||||||
|
Total
assets acquired
|
10,764
|
26,816
|
30,412
|
33,934
|
19,066
|
18,509
|
59,780
|
199,281
|
|||||||||||||||||
|
Other
current liabilities
|
(57
|
)
|
(197
|
)
|
-
|
(2,874
|
)
|
(46
|
)
|
(122
|
)
|
(3,105
|
)
|
(6,401
|
)
|
||||||||||
|
Deferred
taxes
|
-
|
-
|
-
|
-
|
-
|
-
|
(906
|
)
|
(906
|
)
|
|||||||||||||||
|
Total
liabilities assumed
|
(57
|
)
|
(197
|
)
|
-
|
(2,874
|
)
|
(46
|
)
|
(122
|
)
|
(4,011
|
)
|
(7,307
|
)
|
||||||||||
|
Net
assets acquired
|
$
|
10,707
|
$
|
26,619
|
$
|
30,412
|
$
|
31,060
|
$
|
19,020
|
$
|
18,387
|
$
|
55,769
|
$
|
191,974
|
|||||||||
The
weighted average useful lives for the above acquired amortizable intangible
assets are as follows: purchased customer accounts, 14.8 years; and noncompete
agreements, five years.
Goodwill
of $108,393,000 was assigned to the Retail, National Programs and Brokerage
Divisions in the amounts of $80,793,000, $20,329,000 and $7,271,000,
respectively. Of that total amount, $105,024,000 is expected to be deductible
for income tax purposes.
Additional
consideration paid to sellers, or consideration returned to Brown & Brown by
sellers, as a result of purchase price “earn-out” provisions are recorded as
adjustments to intangible assets when the contingencies are settled. The net
additional consideration paid by Brown & Brown in 2004 as a result of these
adjustments totaled $17,349,000, of which $17,168,000 was allocated to goodwill.
Of the $17,349,000 net additional consideration paid, $12,120,000 was paid
in
cash, $6,244,000 was issued in common stock, and $1,015,000 was taken back
as a
forgiveness of a note payable obligation. As of December 31, 2004, the maximum
future contingency payments related to acquisitions totaled
$107,137,000.
NOTE
3 • Goodwill
Effective
January 1, 2002, Brown & Brown adopted SFAS No. 142, which provides for the
non-amortization of goodwill. Goodwill is now subject to at least an annual
assessment for impairment by applying a fair value-based test. Brown & Brown
completed its most recent annual assessment as of November 30, 2005 and
identified no impairment as a result of the evaluation.
The
changes in goodwill, net of accumulated amortization, for the years ended
December 31, are as follows:
|
(in
thousands)
|
Retail
|
National
Programs
|
Brokerage
|
Service
|
Total
|
|||||||||||
|
Balance
as of January 1, 2004
|
$
|
168,135
|
$
|
60,694
|
$
|
8,868
|
$
|
56
|
$
|
237,753
|
||||||
|
Goodwill
of acquired businesses
|
93,626
|
24,043
|
7,892
|
-
|
125,561
|
|||||||||||
|
Goodwill
disposed of relating to sales of businesses
|
(2,471
|
)
|
-
|
-
|
-
|
(2,471
|
)
|
|||||||||
|
Balance
as of December 31, 2004
|
259,290
|
84,737
|
16,760
|
56
|
360,843
|
|||||||||||
|
Goodwill
of acquired businesses
|
33,243
|
34,313
|
120,990
|
-
|
188,546
|
|||||||||||
|
Goodwill
disposed of relating to sales of businesses
|
(321
|
)
|
(28
|
)
|
-
|
-
|
(349
|
)
|
||||||||
|
Balance
as of December 31, 2005
|
$
|
292,212
|
$
|
119,022
|
$
|
137,750
|
$
|
56
|
$
|
549,040
|
||||||
NOTE
4 • Amortizable Intangible Assets
Amortizable
intangible assets at December 31 consisted of the following:
|
2005
|
2004
|
||||||||||||||||||||||||
|
(in
thousands)
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Net
Carrying
Value
|
Weighted
Average Life (years)
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Net
Carrying
Value
|
Weighted
Average
Life
(years)
|
|||||||||||||||||
|
Purchased
customer accounts
|
$
|
498,580
|
$
|
(126,161
|
)
|
$
|
372,419
|
14.9
|
$
|
381,744
|
$
|
(96,342
|
)
|
$
|
285,402
|
14.8
|
|||||||||
|
Noncompete
agreements
|
34,154
|
(28,666
|
)
|
5,488
|
7.0
|
32,996
|
(25,389
|
)
|
7,607
|
7.1
|
|||||||||||||||
|
Total
|
$
|
532,734
|
$
|
154,827
|
$
|
377,907
|
$
|
414,740
|
$
|
(121,731
|
)
|
$
|
293,009
|
||||||||||||
Amortization
expense recorded for other amortizable intangible assets for the years ended
December 31, 2005, 2004 and 2003 was $33,245,000, $22,146,000 and $17,470,000,
respectively.
Amortization
expense for other amortizable intangible
assets for the years ending December 31, 2006, 2007, 2008, 2009 and 2010 is
estimated to be $34,398,000, $33,783,000, $32,897,000, $32,431,000, and
$31,797,000 respectively.
NOTE
5 • Investments
Investments
at December 31 consisted of the following:
|
2005
|
2004
|
||||||||||||
|
Carrying
Value
|
Carrying
Value
|
||||||||||||
|
(in
thousands)
|
Current
|
Non-Current
|
Current
|
Non-Current
|
|||||||||
|
Available-for-sale
marketable equity securities
|
$
|
216
|
$
|
7,644
|
$
|
204
|
$
|
8,489
|
|||||
|
Non-marketable
equity securities and certificates
of deposit
|
2,532
|
777
|
2,959
|
839
|
|||||||||
|
Total
investments
|
$
|
2,748
|
$
|
8,421
|
$
|
3,163
|
$
|
9,328
|
|||||
The
following table summarizes available-for-sale securities at December 31:
|
(in
thousands)
|
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||||||||
|
Marketable
equity securities:
|
|||||||||||||
|
2005
|
$
|
550
|
$
|
7,312
|
$
|
(2
|
)
|
$
|
7,860
|
||||
|
2004
|
$
|
549
|
$
|
8,147
|
$
|
(3
|
)
|
$
|
8,693
|
||||
The
following table summarizes the proceeds and realized gains/(losses) on
non-marketable equity securities and certificates of deposit for the years
ended
December 31:
|
(in
thousands)
|
Proceeds
|
Gross
Realized
Gains
|
Gross
Realized
Losses
|
|||||||
|
2005
|
$
|
896
|
$
|
87
|
$
|
-
|
||||
|
2004
|
$
|
1,107
|
$
|
526
|
$
|
(118
|
)
|
|||
|
2003
|
$
|
106
|
$
|
-
|
$
|
-
|
||||
NOTE
6 • Fixed Assets
Fixed
assets at December 31 consisted of the following:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Furniture,
fixtures and equipment
|
$
|
83,275
|
$
|
74,358
|
|||
|
Leasehold
improvements
|
6,993
|
5,222
|
|||||
|
Land,
buildings and improvements
|
487
|
655
|
|||||
|
90,755
|
80,235
|
||||||
|
Less
accumulated depreciation and amortization
|
(51,357
|
)
|
(46,797
|
)
|
|||
|
Total
|
$
|
39,398
|
$
|
33,438
|
|||
Depreciation
and amortization expense amounted to $10,061,000 in 2005, $8,910,000 in 2004
and
$8,203,000 in 2003.
NOTE
7 • Accrued Expenses
Accrued
expenses at December 31 consisted of the following:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Accrued
bonuses
|
$
|
35,613
|
$
|
25,314
|
|||
|
Accrued
compensation and benefits
|
15,179
|
12,596
|
|||||
|
Accrued
rent and vendor expenses
|
6,504
|
4,195
|
|||||
|
Accrued
interest
|
5,302
|
4,560
|
|||||
|
Reserve
for policy cancellations
|
5,019
|
3,771
|
|||||
|
Other
|
6,917
|
7,595
|
|||||
|
Total
|
$
|
74,534
|
$
|
58,031
|
|||
NOTE
8 • Long-Term Debt
Long-term
debt at December 31 consisted of the following:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Unsecured
Senior Notes
|
$
|
200,000
|
$
|
200,000
|
|||
|
Acquisition
notes payable
|
43,889
|
4,385
|
|||||
|
Term
loan agreements
|
25,714
|
38,571
|
|||||
|
Revolving
credit facility
|
-
|
-
|
|||||
|
Other
notes payable
|
206
|
242
|
|||||
|
269,809
|
243,198
|
||||||
|
Less
current portion
|
(55,630
|
)
|
(16,135
|
)
|
|||
|
Long-term
debt
|
$
|
214,179
|
$
|
227,063
|
|||
In
July
2004, Brown & Brown completed a private placement of $200.0 million of
unsecured senior notes (the Notes). The $200.0 million is divided into two
series: Series A, for $100.0 million due in 2011 and bearing interest at 5.57%
per year; and Series B, for $100.0 million due in 2014 and bearing interest
at
6.08% per year. The closing on the Series B Notes occurred on July 15, 2004.
The
closing on the Series A Notes occurred on September 15, 2004. Brown & Brown
has used the proceeds from the Notes for general corporate purposes, including
acquisitions and repayment of existing debt. As of December 31, 2005 and 2004
there was an outstanding balance of $200.0 million on the Notes.
In
September 2003, Brown & Brown established an unsecured revolving credit
facility with a national banking institution that provided for available
borrowings of up to $75.0 million, with a maturity date of October 2008, bearing
an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.625% to 1.625%,
depending upon the Company’s quarterly ratio of funded debt to earnings before
interest, taxes, depreciation, amortization and non-cash stock grant
compensation. A commitment fee of 0.175% to 0.375% per annum is assessed on
the
unused balance. The 90-day LIBOR was 4.53% and 2.56% as of December 31, 2005
and
2004, respectively. There were no borrowings against this facility at December
31, 2005 or 2004.
In
January 2001, Brown & Brown entered into a $90.0 million unsecured
seven-year term loan agreement with a national banking institution, bearing
an
interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.50% to 1.00%,
depending upon Brown & Brown’s quarterly ratio of funded debt to earnings
before interest, taxes, depreciation, amortization and non-cash stock grant
compensation. The 90-day LIBOR was 4.53% and 2.56% as of December 31, 2005
and
2004, respectively. The loan was fully funded on January 3, 2001 and as of
December 31, 2005 had an outstanding balance of $25,714,000. This loan is to
be
repaid in equal quarterly installments of $3,200,000 through December
2007.
All
three
of these credit agreements require Brown & Brown to maintain certain
financial ratios and comply with certain other covenants. Brown & Brown was
in compliance with all such covenants as of December 31, 2005 and
2004.
To
hedge
the risk of increasing interest rates from January 2, 2002 through the remaining
six years of its seven-year $90 million term loan, Brown & Brown entered
into an interest rate swap agreement that effectively converted the floating
rate LIBOR-based interest payments to fixed interest rate payments at 4.53%.
This agreement did not affect the required 0.50% to 1.00% credit risk spread
portion of the term loan. In accordance with SFAS No. 133, as amended, the
fair
value of the interest rate swap of approximately $36,000, net of related income
taxes of approximately $22,000, was recorded in other assets as of December
31,
2005, and $455,000, net of related income taxes of approximately $267,000,
was
recorded in other liabilities as of December 31, 2004; with the
related change in fair value reflected as other comprehensive income. Brown
& Brown has designated and assessed the derivative as a highly effective
cash flow hedge.
Acquisition
notes payable represent debt incurred to former owners of certain insurance
operations acquired by Brown & Brown. These notes and future contingent
payments are payable in monthly, quarterly and annual installments through
February 2014, including interest in the range from 3.0% to 8.05%.
Interest
paid in 2005, 2004 and 2003 was $13,726,000, $2,773,000 and $3,646,000,
respectively.
At
December 31, 2005, maturities of long-term debt were $55,630,000 in 2006,
$13,677,000 in 2007, $139,000 in 2008, $147,000 in 2009, $157,000 in 2010 and
$200,059,000 in 2011 and beyond.
NOTE
9 • Income Taxes
Significant
components of the provision (benefit) for income taxes for the years ended
December 31 are as follows:
|
(in
thousands)
|
2005
|
2004
|
2003
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
72,550
|
$
|
59,478
|
$
|
51,954
|
||||
|
State
|
10,387
|
9,788
|
5,836
|
|||||||
|
Total
current provision
|
82,937
|
69,266
|
57,790
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
8,547
|
6,967
|
8,691
|
|||||||
|
State
|
2,095
|
1,873
|
(321
|
)
|
||||||
|
Total
deferred provision
|
10,642
|
8,840
|
8,370
|
|||||||
|
Total
tax provision
|
$
|
93,579
|
$
|
78,106
|
$
|
66,160
|
||||
A
reconciliation of the differences between the effective tax rate and the federal
statutory tax rate for the years ended December 31 is as follows:
|
2005
|
2004
|
2003
|
||||||||
|
Federal
statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
income taxes, net of federal income tax benefit
|
3.3
|
3.7
|
2.8
|
|||||||
|
State
income tax credits
|
-
|
(0.5
|
)
|
(0.6
|
)
|
|||||
|
Interest
exempt from taxation and dividend exclusion
|
(0.2
|
)
|
(0.2
|
)
|
(0.1
|
)
|
||||
|
Other,
net
|
0.2
|
(0.3
|
)
|
0.4
|
||||||
|
Effective
tax rate
|
38.3
|
%
|
37.7
|
%
|
37.5
|
%
|
||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the corresponding amounts used for income tax reporting purposes.
Significant
components of Brown & Brown’s deferred tax liabilities and assets as of
December 31 are as follows:
|
(in
thousands)
|
2005
|
2004
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Fixed
assets
|
$
|
3,454
|
$
|
4,416
|
|||
|
Net
unrealized holding gain of available-for-sale securities
|
2,584
|
2,884
|
|||||
|
Prepaid
insurance and pension
|
2,219
|
2,107
|
|||||
|
Net
gain on cash-flow hedging derivative
|
22
|
-
|
|||||
|
Intangible
assets
|
37,379
|
24,609
|
|||||
|
Total
deferred tax liabilities
|
45,658
|
34,016
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Deferred
compensation
|
4,984
|
4,257
|
|||||
|
Accruals
and reserves
|
4,973
|
4,470
|
|||||
|
Net
operating loss carryforwards
|
537
|
485
|
|||||
|
Net
loss on cash-flow hedging derivative
|
-
|
266
|
|||||
|
Other
|
-
|
(89
|
)
|
||||
|
Valuation
allowance for deferred tax assets
|
(325
|
)
|
(232
|
)
|
|||
|
Total
deferred tax assets
|
10,169
|
9,157
|
|||||
|
Net
deferred tax liability
|
$
|
35,489
|
$
|
24,859
|
|||
Income
taxes paid in 2005, 2004 and 2003 were $77,143,000, $72,904,000, and
$60,818,000, respectively.
At
December 31, 2005, Brown & Brown had a net operating loss carryforward of
$8,551,000 for income tax reporting purposes, portions of which expire in the
years 2012 through 2023. This carryforward was derived from insurance
operations acquired by Brown & Brown in 2001 and 1998, and the
operating results of certain profit centers for state income tax purposes.
NOTE
10 • Employee Savings Plan
Brown
& Brown has an Employee Savings Plan (401(k)) under which substantially all
employees with more than 30 days
of
service are eligible to participate. Under this plan, Brown & Brown makes
matching contributions, subject to a maximum of 2.5% of each participant’s
salary. Further, Brown & Brown provides for a discretionary profit-sharing
contribution for all eligible employees. Brown & Brown’s contributions to
the plan totaled $7,762,000 in 2005, $6,569,000 in 2004 and $6,398,000 in 2003.
NOTE
11 • Stock-Based Compensation and Incentive Plans
Stock
Performance Plan
Brown
& Brown has adopted and the shareholders have approved a stock performance
plan, under which up to 14,400,000 shares of Brown & Brown’s stock
(Performance Stock, also referred to as PSP) may be granted to key employees
contingent
on the employees’ future years of service with Brown & Brown and other
criteria established by the Compensation
Committee of Brown & Brown’s Board of Directors. Before participants take
full title to Performance Stock, two vesting conditions must be met. Of the
grants currently outstanding, specified portions will satisfy the first
condition for vesting based on increases in the 20-trading-day average stock
price of Brown & Brown’s common stock from the initial grant price
specified
by Brown & Brown. Performance Stock that has satisfied the first vesting
condition is considered to be “awarded shares.”
Awarded shares are included as issued and outstanding common stock shares and
are included in the calculation of basic
and
diluted earnings per share. Dividends are paid on awarded shares and
participants may exercise voting privileges on
such
shares. Awarded shares satisfy the second condition for vesting on the earlier
of: (i) 15 years of continuous employment with Brown & Brown from the date
shares are granted to the participants; (ii) attainment of age 64; or (iii)
death or disability of the participant. At December 31, 2005, 6,349,298 shares
had been granted under the plan at initial stock prices ranging from $1.90
to
$25.68. As of December 31, 2005, 5,125,304 shares had met the first condition
for vesting and had been awarded, and 497,616 shares had satisfied both
conditions for vesting and had been distributed to the
participants.
The
compensation expense for the Performance Stock is equal to the fair market
value
of the shares at the date the first vesting condition is satisfied and is
expensed over the remainder of the estimated vesting period. Compensation
expense related to this Plan totaled $3,337,000 in 2005, $2,625,000 in 2004
and
$2,272,000 in 2003.
Employee
Stock Purchase Plan
Brown
& Brown has adopted and the shareholders have approved an employee stock
purchase plan (ESPP), which allows for substantially all employees to subscribe
to purchase shares of Brown & Brown’s stock at 85% of the lesser of the
market value of such shares at the beginning or end of each annual subscription
period. Eligible employees may contribute up to 10% of their annual
compensation, up to a maximum of $25,000, towards the purchase of Brown &
Brown common stock. Brown & Brown issued 521,948 and 546,344 shares of
common stock under the ESPP in August 2005 and 2004, respectively. These shares
were issued at an aggregate purchase price of $9,208,000 or $17.64 per share
in
2005, and of $7,256,000 or $13.28 per share in 2004. Of the 12,000,000 shares
of
common stock authorized for issuance under the ESPP as of December 31, 2005,
5,598,784 shares remained available and reserved for future issuance. As
described in Note 1, under the APB No. 25, there has been no expense relating
to
the common stock issued under the ESPP.
Incentive
Stock Option Plan
On
April
21, 2000, Brown & Brown adopted and the shareholders have approved a
qualified incentive stock option plan that provides for the granting of stock
options to certain key employees for up to 4,800,000 shares of common stock.
The
objective of this plan is to provide additional performance incentives to grow
Brown & Brown’s pre-tax income in excess of 15% annually. The options
are granted at the most recent trading days’ closing market price, and vest over
a one-to-10-year period, with a potential acceleration of the vesting period
to
three to six years based on achievement of certain performance goals. All of
the
options expire 10 years after the grant date.
On
October 31, 2001, an additional 10,000 option shares were granted at the most
recent trading day’s closing market price of $14.20. These option shares vest in
2,000-share increments through 2006, if certain performance goals are met.
The
option shares are expensed at the price differential of the closing market
price
at the date of vesting and the option price, times the number of shares vesting.
As of December 31, 2005 and 2004, 2,000 of these option shares became vested
and
were exercisable, and thus a corresponding $5,000 was expensed in each
year.
Stock
option activity under the plan was as follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||
|
Outstanding
at January 1, 2003
|
2,146,536
|
$
|
4.88
|
||||
|
Granted
|
1,080,004
|
$
|
15.78
|
||||
|
Exercised
|
(959,264
|
)
|
$
|
4.85
|
|||
|
Forfeited
|
(40,000
|
)
|
$
|
4.84
|
|||
|
Outstanding
at December 31, 2003
|
2,227,276
|
$
|
10.18
|
||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(154,248
|
)
|
$
|
4.96
|
|||
|
Forfeited
|
-
|
-
|
|||||
|
Outstanding
at December 31, 2004
|
2,073,028
|
$
|
10.56
|
||||
|
Granted
|
12,000
|
$
|
22.06
|
||||
|
Exercised
|
(68,040
|
)
|
$
|
4.84
|
|||
|
Forfeited
|
-
|
-
|
|||||
|
Outstanding
at December 31, 2005
|
2,016,988
|
$
|
10.83
|
||||
|
Exercisable
at December 31, 2005
|
783,672
|
$
|
4.88
|
||||
|
Exercisable
at December 31, 2004
|
698,312
|
$
|
4.86
|
||||
|
Exercisable
at December 31, 2003
|
635,840
|
$
|
4.86
|
||||
The
following table summarizes information about stock options outstanding at
December 31, 2005:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
$4.84
|
918,984
|
4.3
|
$
|
4.84
|
779,672
|
$
|
4.84
|
|||||||||
|
$14.20
|
6,000
|
0.8
|
$
|
14.20
|
4,000
|
$
|
14.20
|
|||||||||
|
$15.78
|
1,080,004
|
7.2
|
$
|
15.78
|
-
|
-
|
||||||||||
|
$22.06
|
12,000
|
2.0
|
$
|
22.06
|
-
|
-
|
||||||||||
|
2,016,988
|
5.9
|
$
|
10.69
|
783,672
|
$
|
4.88
|
||||||||||
There
were 1,537,996 option shares available for future grant under this plan as
of
December 31, 2005 and 2004.
No
compensation expense related to these options is recognized in operations for
2005, 2004 or 2003, except for the 10,000 option shares granted on October
31,
2001 as described above. As disclosed in Note 1, Brown & Brown accounts for
its stock options using the intrinsic value method prescribed in APB No. 25.
Brown & Brown also disclosed in Note 1 the effect on net income and net
income per share if Brown & Brown had applied the fair value recognition
provisions of revised SFAS No. 123 to its granted stock options.
The
weighted average fair value of the incentive stock options granted during 2000
estimated on the date of grant, using the Black-Scholes option-pricing model,
was $2.37 per share. The fair value of these options granted was estimated
on
the
date of grant using the following assumptions: dividend yield of 0.86%; expected
volatility of 29.6%; risk-free interest
rate of
6.3%; and an expected life of 10 years. The weighted average fair value of
the
incentive stock options granted during 2003 estimated on the date of grant,
using the Black-Scholes option-pricing model, was $5.63 per share. The fair
value of these options granted was estimated on the date of grant using the
following assumptions: dividend yield of 0.63%; expected volatility of 37.0%;
risk-free interest rate of 1.5%; and an expected life of six years.
NOTE
12 • Supplemental Disclosures of Cash Flow Information
Brown
& Brown’s significant non-cash investing and financing activities for the
years ended December 31 are summarized as follows:
|
(in
thousands)
|
2005
|
2004
|
2003
|
|||||||
|
Unrealized
holding (loss) gain on available-for-sale securities, net of tax
benefit
of $300
for
2005; net of tax benefit of $530 for 2004; and net of tax effect
of $857
for 2003
|
$
|
(512
|
)
|
$
|
(649
|
)
|
$
|
1,395
|
||
|
Net
gain on cash-flow hedging derivative, net of tax effect of $289 for
2005,
net of tax
effect
of $557 for 2004; and net of tax effect of $445 for 2003
|
$
|
491
|
$
|
889
|
$
|
726
|
||||
|
Notes
payable issued or assumed for purchased customer accounts
|
$
|
42,843
|
$
|
1,976
|
$
|
3,323
|
||||
|
Notes
received on the sale of fixed assets and customer accounts
|
$
|
1,855
|
$
|
6,024
|
$
|
4,584
|
||||
|
Common
stock issued for acquisitions accounted for under the purchase method
of
accounting
|
$
|
-
|
$
|
6,244
|
$
|
-
|
||||
NOTE
13 • Commitments and Contingencies
Operating
Leases
Brown
& Brown leases facilities and certain items of office equipment under
noncancelable operating lease arrangements
expiring
on
various dates through 2017. The facility leases generally contain renewal
options and escalation clauses based on increases in the lessors’ operating
expenses and other charges. Brown & Brown anticipates that most of these
leases will be renewed or replaced upon expiration. At December 31, 2005, the
aggregate future minimum lease payments under all noncancelable lease agreements
were as follows:
| (in thousands) | ||||
|
2006
|
$
|
20,731
|
||
|
2007
|
17,217
|
|||
|
2008
|
15,156
|
|||
|
2009
|
12,156
|
|||
|
2010
|
8,919
|
|||
|
Thereafter
|
11,642
|
|||
|
Total
minimum future lease payments
|
$
|
85,821
|
||
Rental
expense in 2005, 2004 and 2003 for operating leases totaled $28,926,000,
$24,595,000 and $21,844,000, respectively.
45
Antitrust
Actions and Related Matters
As
previously disclosed, Brown & Brown, Inc. is one of more than ten insurance
intermediaries named together with a number of insurance companies as
defendants
in putative class action lawsuits purporting to be brought on behalf
of
policyholders.
Brown
& Brown, Inc. initially became a defendant in certain of those actions
in
October and December of 2004. In February 2005, the Judicial Panel on
Multi-District Litigation consolidated these cases, together with other
putative
class action lawsuits in which Brown & Brown, Inc. was not named as a party,
to a single jurisdiction, the United States District Court, District
of New
Jersey, for pre-trial purposes. One of the consolidated actions, In
Re: Employee-Benefits Insurance Antitrust Litigation,
concerns
employee benefits insurance and the other, styled In
Re: Insurance Brokerage Antitrust Litigation,
involves other lines of insurance. These two consolidated actions are
collectively referred to in this report as the "Antitrust Actions." The
complaints
refer to
an action, since settled, that was filed against Marsh & McLennan Companies,
Inc. (“Marsh & McLennan”), the largest insurance broker in the world, by the
New York State Attorney General in October 2004, and allege various
improprieties and unlawful acts by the various defendants in the pricing
and
placement of insurance, including alleged manipulation of the insurance
market
by, among other things: “bid rigging” and “steering” clients to particular
insurers based on considerations other than the clients’ interests; alleged
entry into unlawful tying arrangements pursuant to which the placement
of
primary insurance contracts was conditioned upon commitments to place
reinsurance through a particular broker; and alleged failure to disclose
contingent commission and other allegedly improper compensation and fee
arrangements. The plaintiffs in the Antitrust Actions
assert a
number of causes of action, including violations of the federal antitrust
laws,
multiple state antitrust and unfair and deceptive practices statutes,
and the
federal anti-racketeering (RICO) statute, as well as breach of fiduciary
duty,
misrepresentation, conspiracy, aiding and abetting, and unjust enrichment,
and
seek injunctive and declaratory relief as well as unspecified damages,
including
treble and punitive damages, and attorneys’ fees and costs.
Brown
& Brown, Inc. disputes the allegations and is vigorously defending itself
in
the Antitrust Actions.
Related
Regulatory Proceedings
Since
the
New York State Attorney General filed the lawsuit referenced above against
Marsh
& McLennan in October
2004, governmental agencies in a number of states have looked or are
looking
into issues related to compensation practices in the insurance industry,
and the
Company continues to actively receive and respond to written and oral
requests
for information and/or subpoenas seeking information related to this
topic. To
date, requests for information and/or subpoenas have been received from
governmental agencies such as attorneys general or departments of insurance
in
the following states: Arkansas (Department of Insurance), Arizona (Department
of
Insurance), California (Department of Insurance), Connecticut (Office
of
Attorney General), Florida (Office of Attorney General, Department of
Financial
Services, and Office of Insurance Regulation), Nevada (Department of
Business
& Industry, Division of Insurance), New Hampshire (Department of Insurance),
New Jersey (Department of Banking and Insurance), New York (Office of
Attorney
General), North Carolina (Department of Insurance and Department of Justice),
Oklahoma (Department of Insurance), Pennsylvania (Department of Insurance),
South Carolina (Department of Insurance), Texas (Department of Insurance),
Vermont (Department of Banking, Insurance, Securities & Healthcare
Administration), Virginia (State Corporation Commission, Bureau of Insurance,
Agent Regulation & Administration Division), Washington (Office of Insurance
Commissioner) and West Virginia (Office of Attorney General). None of
these
governmental agencies has charged or alleged any wrongdoing or violation
of law
by the Company. Agencies in Arizona and Washington have concluded their
respective investigations of subsidiaries of Brown & Brown, Inc. based in
those states with no further action as to these entities.
As
previously disclosed in our public filings, offices of the Company are
party to
contingent commission agreements with certain insurance companies, including
agreements providing for potential payment of revenue-sharing commissions
by
insurance companies based primarily on the overall profitability of the
aggregate business written with that insurance company, and/or additional
factors such as retention ratios and overall volume of business that
an office
or offices place with the insurance company. Additionally, to a lesser
extent,
some offices of the Company are party to override commission agreements
with
certain insurance companies, and these agreements provide for commission
rates
in excess of standard commission rates to be applied to specific lines
of
business, such as group health business, based primarily on the overall
volume
of such business that the office or offices in question place with the
insurance
company. The Company has not chosen to discontinue receiving contingent
commissions or override commissions.
As
previously disclosed, a committee comprised of independent members of
the Board
of Directors of Brown & Brown, Inc. (the “Special Review Committee”)
determined that maintenance of a derivative suit was not in the best
interests
of the Company, following an investigation in response to a December
2004 demand
letter from counsel purporting to represent a current shareholder of
Brown &
Brown, Inc. (the “Demand Letter”). The Demand Letter sought the commencement of
a derivative suit by Brown & Brown, Inc. against the Board of Directors and
current and former officers and directors of Brown & Brown, Inc. for alleged
breaches of fiduciary duty related to the Company’s participation in contingent
commission agreements. The Special Review Committee's conclusions were
communicated to the purported shareholder's counsel and there has been
limited
communication since then. There can be no assurance that the purported
shareholder will not further pursue his allegations or that any pursuit
of any
such allegations would not have a material adverse effect on the
Company.
In
response to the foregoing events, the Company also, on its own volition,
engaged
outside counsel to conduct a limited internal inquiry into certain
sales and marketing practices of the Company, with special emphasis on
the
effects of contingent commission agreements on the placement of insurance
products by the Company for its clients. The internal inquiry resulted
in
several recommendations being made in January 2006 regarding disclosure
of
compensation, premium finance charges, the retail-wholesale interface,
fee-based
compensation and direct incentives from insurance companies, and the
Company has
been evaluating such recommendations and has adopted or is in the process
of
adopting these recommendations. As a result of that inquiry, and in the
process
of preparing responses to some of the governmental agency inquiries referenced
above, management of the Company became aware of a limited number of
specific, unrelated instances of questionable conduct. These matters have
been addressed and resolved, or are in the process of being addressed
and
resolved, on a case-by-case basis, and thus far the amounts involved
in
resolving such matters have not been, either individually or in the aggregate,
material. However, there can be no assurance that the ultimate cost and
ramifications of resolving these matters will not have a material adverse
effect
on the Company.
Some
of
the other insurance intermediaries and insurance companies that have
been
subject to governmental investigations and/or lawsuits arising out of
these
matters have chosen to settle some such matters. Such settlements have
involved
the payment of substantial sums, as well as agreements to change business
practices, including agreeing to no longer pay or accept contingent commissions.
Marsh & McLennan, Aon Corporation, Arthur J. Gallagher & Co., Hilb,
Rogal & Hobbs Company (“HRH”), and Willis Group Holdings Ltd. have each
entered into agreements with governmental agencies, which collectively
involve
payments by these intermediaries to agencies and to certain of their
clients
totaling nearly $1 billion. With the exception of the settlement entered
into by
HRH, which included an agreement that HRH would discontinue acceptance
of
certain types of contingency compensation, these agreements provided
that these
insurance intermediaries would discontinue acceptance of any contingency
compensation.
On
March
14, 2006, the Florida Attorney General and the Florida Department of
Financial
Services, which, as mentioned, have also been seeking information from
the
Company, filed a complaint against Marsh & McLennan on behalf of various
Florida governmental entities, businesses and residents alleging that
Marsh
& McLennan violated Florida’s RICO and antitrust laws. The complaint alleges
that Marsh & McLennan conspired with various insurance companies to rig
quotes for commercial insurance, manipulate the commercial insurance
markets,
inflate insurance premiums, and receive undisclosed, additional compensation,
all of which are alleged to have caused damage to the State of Florida,
governmental entities and Florida businesses and residents. While the
above
Florida governmental agencies have not made demands upon the Company,
which is
headquartered in Florida, or filed suit against it, there can be no assurance
that their inquiries, or any of those of the other various governmental
authorities referenced above, will not result in demands upon the Company
or
suits filed against it, or that any such demands or suits or any resolution
thereof would not have a material adverse effect on the Company.
The
Company cannot currently predict the impact or resolution of the Antitrust
Actions, the shareholder demand or the various governmental inquiries
or
lawsuits and thus cannot reasonably estimate a range of possible loss,
which
could be material, or whether the resolution of these matters may harm
the
Company’s business and/or lead to a decrease in or elimination of contingent
commissions and override commissions, which could have a material adverse
impact
on the Company’s consolidated financial condition.
Other
The
Company
is
involved in numerous pending or threatened proceedings by or against
Brown
& Brown, Inc.
or one
or more of its subsidiaries that arise in the ordinary course of business.
The
damages that may be claimed against the Company in these various proceedings
are
substantial, including in many instances claims for punitive or extraordinary
damages. Some of these claims and lawsuits have been resolved, others are
in the
process of being resolved, and others are still in the investigation or
discovery phase. The Company will continue to respond appropriately to
these
claims and lawsuits, and to vigorously protect its interests.
Among
the
above-referenced claims, and as previously described in the Company’s public
filings, there are several threatened and pending legal claims and lawsuits
against Brown & Brown, Inc. and Brown & Brown Insurance Services of
Texas, Inc. (BBTX), a subsidiary
of
Brown & Brown, Inc., arising out of BBTX’s involvement with the procurement
and placement of workers’ compensation
insurance coverage for entities including several professional employer
organizations. One such action, styled Great
American Insurance Company, et al. v. The Contractor’s Advantage, Inc., et
al.,
Cause
No. 2002-33960, pending in the 189th Judicial District Court in Harris
County,
Texas, asserts numerous causes of action, including fraud, civil conspiracy,
federal Lanham Act and RICO violations, breach of fiduciary duty, breach
of
contract, negligence and violations of the Texas Insurance Code against
BBTX,
Brown & Brown, Inc. and other defendants, and seeks recovery of punitive or
extraordinary damages (such as treble damages) and attorneys’ fees. Although the
ultimate outcome of the matters referenced in this section titled “Other” cannot
be ascertained and liabilities in indeterminate amounts may be imposed
on Brown
& Brown, Inc. or its subsidiaries, on the basis of present information,
availability of insurance and legal advice received, it is the opinion
of
management that the disposition or ultimate determination of such claims
will
not have a material adverse effect on the Company’s consolidated financial
position. However, as (i) one or more of the Company’s insurance carriers could
take the position that portions of these claims are not covered by the
Company’s
insurance, (ii) to the extent that payments are made to resolve claims
and
lawsuits, applicable insurance policy limits are eroded, and (iii) the
claims
and lawsuits relating to these matters are continuing to develop, it is
possible
that future results of operations or cash flows for any particular quarterly
or
annual period could be materially affected by unfavorable resolutions of
these
matters.
NOTE
14•
Business Concentrations
A
significant portion of business written by Brown & Brown is for customers
located in California, Florida, Georgia, New Jersey, New York, Pennsylvania
and
Washington. Accordingly, the occurrence of adverse economic conditions, an
adverse regulatory climate, or a disaster in any of these states could have
a
material adverse effect on Brown & Brown’s business, although no such
conditions have been encountered in the past.
For
the
year ended December 31, 2005, approximately 8.0% and 5.4% of Brown & Brown’s
total revenues were derived from insurance policies underwritten by two separate
insurance companies, respectively. Should these insurance companies seek to
terminate its arrangement with Brown & Brown, Brown & Brown believes
that other insurance companies are available to underwrite the business,
although some additional expense and loss of market share could possibly result.
No other insurance company accounts for 5% or more of Brown & Brown’s total
revenues.
NOTE
15 • Quarterly Operating Results (Unaudited)
Quarterly
operating results for 2005 and 2004 were as follows:
|
(in
thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
2005
|
|||||||||||||
|
Total
revenues
|
$
|
202,374
|
$
|
195,931
|
$
|
190,645
|
$
|
196,857
|
|||||
|
Total
expenses
|
$
|
131,861
|
$
|
135,463
|
$
|
134,956
|
$
|
139,397
|
|||||
|
Income
before income taxes
|
$
|
70,513
|
$
|
60,468
|
$
|
55,689
|
$
|
57,460
|
|||||
|
Net
income
|
$
|
43,018
|
$
|
37,033
|
$
|
34,783
|
$
|
35,717
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.26
|
|||||
|
Diluted
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.25
|
|||||
|
2004
|
|||||||||||||
|
Total
revenues
|
$
|
165,565
|
$
|
157,942
|
$
|
160,381
|
$
|
163,046
|
|||||
|
Total
expenses
|
$
|
106,205
|
$
|
105,413
|
$
|
112,125
|
$
|
116,242
|
|||||
|
Income
before income taxes
|
$
|
59,360
|
$
|
52,529
|
$
|
48,256
|
$
|
46,804
|
|||||
|
Net
income
|
$
|
36,348
|
$
|
32,153
|
$
|
30,086
|
$
|
30,256
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
|
Diluted
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
Quarterly
financial information is affected by seasonal variations. The timing of
contingent commissions, policy renewals and acquisitions may cause revenues,
expenses and net income to vary significantly between quarters.
NOTE
16•
Segment Information
Brown
& Brown’s business is divided into four reportable segments: the Retail
Division, which provides a broad range of insurance products and services to
commercial, governmental, professional and individual customers; the National
Programs Division, which is comprised of two units - Professional Programs,
which provides professional liability and related package products for certain
professionals delivered through nationwide networks of independent agents,
and
Special Programs, which markets targeted products and services designated for
specific industries, trade groups, governmental entities, and market niches;
the
Services Division, which provides insurance-related services, including
third-party administration, consulting for the workers’ compensation and
employee benefit self-insurance markets, and managed healthcare services; and
the Brokerage Division, which markets and sells excess and surplus commercial
and personal lines insurance, and reinsurance, primarily through independent
agents and brokers. Brown & Brown conducts all of its operations within the
United States of America.
The
accounting policies of the reportable segments are the same as those described
in Note 1. Brown & Brown evaluates the performance of its segments based
upon revenues and income before income taxes and minority interest.
Inter-segment revenues are eliminated.
Summarized
financial information concerning Brown & Brown’s reportable segments is
shown in the following table. The “Other” column includes any income and
expenses not allocated to reportable segments and corporate-related items,
including the inter-company interest expense charge to the reporting segment.
|
Year
Ended December 31,
2005
|
|||||||||||||||||||
|
(in
thousands)
|
Retail
|
National
Programs
|
Brokerage
|
Services
|
Other
|
Total
|
|||||||||||||
|
Total
revenues
|
$
|
491,202
|
$
|
133,930
|
$
|
127,113
|
$
|
27,517
|
$
|
6,045
|
$
|
785,807
|
|||||||
|
Investment
income
|
159
|
367
|
1,599
|
-
|
4,453
|
6,578
|
|||||||||||||
|
Amortization
|
19,368
|
8,103
|
5,672
|
43
|
59
|
33,245
|
|||||||||||||
|
Depreciation
|
5,641
|
1,998
|
1,285
|
435
|
702
|
10,061
|
|||||||||||||
|
Interest
expense
|
20,927
|
10,433
|
12,446
|
4
|
(29,341
|
)
|
14,469
|
||||||||||||
|
Income
before income taxes
|
128,881
|
38,385
|
28,306
|
6,992
|
41,566
|
244,130
|
|||||||||||||
|
Total
assets
|
1,002,781
|
445,146
|
476,653
|
18,766
|
(334,686
|
)
|
1,608,660
|
||||||||||||
|
Capital
expenditures
|
6,186
|
3,067
|
1,969
|
350
|
1,854
|
13,426
|
|||||||||||||
|
Year
Ended December 31,
2004
|
|||||||||||||||||||
|
(in
thousands)
|
Retail
|
National
Programs
|
Brokerage
|
Services
|
Other
|
Total
|
|||||||||||||
|
Total
revenues
|
$
|
461,348
|
$
|
112,092
|
$
|
41,603
|
$
|
26,809
|
$
|
5,082
|
$
|
646,934
|
|||||||
|
Investment
income
|
567
|
139
|
-
|
-
|
2,009
|
2,715
|
|||||||||||||
|
Amortization
|
15,314
|
5,882
|
757
|
36
|
157
|
22,146
|
|||||||||||||
|
Depreciation
|
5,734
|
1,583
|
508
|
387
|
698
|
8,910
|
|||||||||||||
|
Interest
expense
|
21,846
|
8,603
|
1,319
|
69
|
(24,681
|
)
|
7,156
|
||||||||||||
|
Income
before income taxes
|
113,637
|
33,930
|
11,337
|
6,375
|
41,670
|
206,949
|
|||||||||||||
|
Total
assets
|
843,823
|
359,551
|
128,699
|
13,760
|
(96,316
|
)
|
1,249,517
|
||||||||||||
|
Capital
expenditures
|
5,568
|
2,693
|
694
|
788
|
409
|
10,152
|
|||||||||||||
|
Year
Ended December 31,
2003
|
|||||||||||||||||||
|
(in
thousands)
|
Retail
|
National
Programs
|
Brokerage
|
Services
|
Other
|
Total
|
|||||||||||||
|
Total
revenues
|
$
|
399,010
|
$
|
90,444
|
$
|
31,740
|
$
|
28,591
|
$
|
1,255
|
$
|
551,040
|
|||||||
|
Investment
income
|
55
|
143
|
-
|
-
|
1,230
|
1,428
|
|||||||||||||
|
Amortization
|
12,476
|
4,488
|
312
|
37
|
157
|
17,470
|
|||||||||||||
|
Depreciation
|
5,771
|
1,208
|
331
|
423
|
470
|
8,203
|
|||||||||||||
|
Interest
expense
|
17,732
|
6,810
|
765
|
162
|
(21,845
|
)
|
3,624
|
||||||||||||
|
Income
before income taxes
|
98,386
|
31,705
|
11,128
|
5,525
|
29,738
|
176,482
|
|||||||||||||
|
Total
assets
|
623,648
|
273,363
|
74,390
|
13,267
|
(118,814
|
)
|
865,854
|
||||||||||||
|
Capital
expenditures
|
5,904
|
2,874
|
824
|
234
|
6,110
|
15,946
|
|||||||||||||
NOTE
17•
Subsequent Events
From
January 1, 2006 through March 14, 2006, Brown & Brown acquired the assets
and assumed certain liabilities of
three
insurance intermediaries. The aggregate purchase price of these acquisitions
was
$71,852,000, including $61,972,000 of net cash payments, the issuance of $82,000
in notes payable and the assumption of $9,798,000 of liabilities. All
of
these acquisitions were acquired primarily to expand Brown & Brown’s
core businesses and to attract and obtain high-quality individuals. Acquisition
purchase prices are based primarily on a multiple of average annual operating
profits earned over a one- to three-year period within
a
minimum and maximum price range. The initial asset allocation of an acquisition
is based on the minimum purchase price, and any subsequent earn-out payment
is
allocated to goodwill.
All
of
these acquisitions have been accounted for as business combinations and are
as
follows:
|
(in
thousands)
Name
and Effective Date of Acquisitions
|
Business
Segment
|
2006
Date
of
Acquisition
|
Net
Cash
Paid
|
Notes
Payable
|
Recorded
Purchase
Price
|
|||||||||||
|
Axiom
Intermediaries, LLC
|
Brokerage
|
January
1
|
$
|
60,293
|
$
|
-
|
$
|
60,293
|
||||||||
|
Other
|
Various
|
Various
|
1,679
|
82
|
1,761
|
|||||||||||
|
Total
|
$
|
61,972
|
$
|
82
|
$
|
62,054
|
||||||||||
The
following table summarizes the estimated fair values of the aggregate assets
and
liabilities acquired as of the date of each acquisition:
| (in thousands) |
Axiom
|
Other
|
Total
|
|||||||
|
Fiduciary
Cash
|
$
|
9,598
|
$
|
-
|
$
|
9,598
|
||||
|
Other
current assets
|
372
|
-
|
372
|
|||||||
|
Fixed
assets
|
435
|
25
|
460
|
|||||||
|
Purchased
customer accounts
|
17,405
|
835
|
18,240
|
|||||||
|
Noncompete
agreements
|
31
|
43
|
74
|
|||||||
|
Goodwill
|
42,177
|
858
|
43,035
|
|||||||
|
Other
assets
|
73
|
-
|
73
|
|||||||
|
Total
assets acquired
|
70,091
|
1,761
|
71,852
|
|||||||
|
Other
current liabilities
|
(9,798
|
)
|
-
|
(9,798
|
)
|
|||||
|
Total
liabilities assumed
|
(9,798
|
)
|
-
|
(9,798
|
)
|
|||||
|
Net
assets acquired
|
$
|
60,293
|
$
|
1,761
|
$
|
62,054
|
||||
Brown
& Brown’s 2005 Consolidated Statement of Income does not include any results
of these operations since the acquisitions were not effective until January
1,
2006 or later. The following unaudited pro forma results of operations of Brown
& Brown give effect to these acquisitions for the years ended December 31,
as though the transactions had occurred on January 1, 2005.
|
Year
Ended December 31,
|
|||||||
|
(in
thousands, except per share data)
|
|
2005
|
|||||
|
(Unaudited)
|
|||||||
|
Total
revenues
|
|
|
$
|
800,444
|
|||
|
Income
before income taxes
|
|
$
|
248,070
|
||||
|
Net
income
|
|
$
|
152,981
|
||||
|
Net
income per share:
|
|||||||
|
Basic
|
|
|
$
|
1.10
|
|||
|
Diluted
|
|
|
$
|
1.09
|
|||
|
Weighted
average number of shares outstanding:
|
|||||||
|
Basic
|
|
138,563
|
|||||
|
Diluted
|
|
139,776
|
|||||
Additional
consideration was also paid to sellers as a result of purchase price “earn-out”
adjustments. The net additional consideration paid by Brown & Brown as a
result of these adjustments for acquisitions consumated prior to December 31,
2005 totaled $6,861,000, all of which was paid in cash.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of
Brown
& Brown, Inc.
Daytona
Beach, Florida
We
have
audited the accompanying consolidated balance sheets of Brown & Brown, Inc.
and subsidiaries (the “Company”)
as of
December 31, 2005 and 2004, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2005 and
2004, and the results of its operations and its cash flows for each of the
three
years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated March 14, 2006 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/
Deloitte & Touche LLP
Certified
Public Accountants
Jacksonville,
Florida
March
14,
2006
Management’s
Report on Internal Control Over Financial
Reporting
The
Management of Brown & Brown, Inc. and its subsidiaries (“Brown & Brown”)
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Securities Exchange Act Rule
13a-15(f). Under
the
supervision and with the participation of management, including Brown &
Brown’s principal executive officer and
principal financial officer, Brown & Brown conducted an evaluation of the
effectiveness of internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee
of
Sponsoring
Organizations of the Treadway Commission.
In
conducting Brown & Brown’s evaluation of this effectiveness of its internal
control over financial reporting, Brown & Brown has excluded the following
acquisitions completed by Brown & Brown during 2005: American Specialty
Companies, Inc. et al., Dana R. Hando (sole proprietor), ECC Insurance Brokers,
LLC, Emerald Benefits, Inc., et al., Braishfield Associates, Inc., Hull &
Company, Inc., et al., Nichols & Associates, Alliance Insurance Services,
Weible & Cahill, LLC, Timothy R. Downey Insurance Inc, and de Arrieta
Insurance Agency, Inc. et al. Collectively,
these acquisitions represented 26.1% of total assets as of December 31, 2005,
11.2% of total revenue and 4.1% of net income for the year ended. Refer to
Note
2 to the Consolidated Financial Statements for further discussion of these
acquisitions and their impact
on
Brown & Brown’s Consolidated Financial Statements.
Based
on
Brown & Brown’s evaluation under the framework in Internal Control -
Integrated Framework, management concluded that internal control over financial
reporting was effective as of December 31, 2005. Management’s assessment of the
effectiveness of internal control over financial reporting as of December 31,
2005 has been audited by Deloitte & Touche, LLP, an independent registered
public accounting firm, as stated in their report which is included
herein.
Brown
& Brown, Inc.
Daytona
Beach, Florida
March
14,
2006
| /s/ J. Hyatt Brown | /s/ Cory T. Walker |
| J. Hyatt Brown | Cory T. Walker |
| Chief Executive Officer | Chief Financial Officer |
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of
Brown
& Brown, Inc.
Daytona
Beach, Florida
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting that Brown & Brown, Inc.
and its subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established
in
Internal
Control - Integrated Framework
issued
by
the
Committee of Sponsoring Organizations of the Treadway Commission. As described
in Management’s Report on Internal
Control over Financial Reporting, management excluded from their assessment
the
internal control over financial reporting
at American
Specialty Companies, Inc., et al., Dana R. Hando (sole proprietor), ECC
Insurance Brokers, LLC, Emerald Benefits, Inc., et al., Braishfield Associates,
Inc., Hull & Company, Inc., et al., Nichols & Associates, Alliance
Insurance Services, Weible & Cahill, LLC, Timothy R. Downey Insurance Inc.,
and de Arrieta Insurance Agency, Inc. et al. (collectively the
“2005
Excluded Acquisitions”), which were acquired during 2005 and whose financial
statements constitute 26.1% of total assets, 11.2% of revenues and 4.1% of
net
income of the related consolidated financial statement amounts as of and for
the
year ended December 31, 2005. Accordingly, our audit did not include the
internal control over financial reporting at the 2005 Excluded Acquisitions.
The
Company’s management is responsible for maintaining effective internal control
over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the Company’s
principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability
of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on the criteria established in
Internal Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Also,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
the
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and
for the year ended December 31, 2005 of the Company and our report dated March
14, 2006, expressed an unqualified opinion on those financial statements.
/s/
Deloitte & Touche LLP
Certified
Public Accountants
Jacksonville,
Florida
March
14,
2006
ITEM
9. Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
There
were no changes in or disagreements with accountants on accounting and financial
disclosure in 2005.
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation required by Rules 13a-15 and 15d-15 under the
Exchange Act (the “Evaluation”), under the supervision and with the
participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), of the effectiveness of our disclosure controls and procedures as
defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure
Controls”). Based on the Evaluation, our CEO and CFO concluded that the design
and operation of our Disclosure Controls provide reasonable assurance that
the
Disclosure Controls, as described in this Item 9A, are effective in
alerting them timely to material information required to be included in our
periodic SEC reports.
Changes
in Internal Controls
There
has
not been any change in our internal control over financial reporting identified
in connection with the Evaluation that occurred during the quarter ended
December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, those controls.
Inherent
Limitations of Internal Control Over Financial Reporting
Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, a control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures
may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CEO
and CFO Certifications
Exhibits
31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively.
The
Certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item of this
report, which you are currently reading, is the information concerning the
Evaluation referred to in the Section 302 Certifications and this
information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Our internal control system was designed to provide
reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial statements. All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on
our evaluation under the framework in Internal
Control — Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of December 31, 2005. Management's Annual Report on Internal
Control over Financial Reporting and the Report of Independent Registered Public
Accounting Firm on Internal Controls over Financial Reporting are set forth
in
Part II, Item 8 of this Annual Report on Form 10-K and are included herein
by
reference.
The
information required by this item regarding directors and executive officers
is
incorporated herein by reference to our definitive Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Annual
Meeting of Shareholders to be held in 2006 (the 2006 Proxy Statement) under
the
headings “Management” and "Section 16(a) Beneficial Ownership Reporting.” We
have adopted a code of ethics that applies to our principal executive officer,
principal financial officer, and controller. A copy of our Code of Ethics for
Chief Executive Officer and Senior Financial Officers and a copy of our
code of Business Conduct and Ethics applicable to all employees
are posted on our Internet website, at www.bbinsurance.com,
and is
also available upon written request. Requests for copies of our Code of Ethics
should be directed in writing to Investor Relations, Brown & Brown, Inc.,
220 South Ridgewood Avenue, Daytona Beach, Florida 32114, or by telephone to
(352) 732-6522.
The
information required by this item is incorporated herein by reference to the
2006 Proxy Statement under the heading “Executive Compensation.”
The
information required by this item is incorporated herein by reference to the
2006 Proxy Statement under the heading “Security Ownership of Management and
Certain Beneficial Owners.”
The
information required by this item is incorporated herein by reference to the
2006 Proxy Statement under the heading “Management-Certain Relationships and
Related Transactions."
The
information required by this item is incorporated herein by reference to the
2006 Proxy Statement under the heading “Fees Paid to Deloitte & Touche LLP.”
The
following documents are filed as part of this Report:
| (a) | 1. | Financial statements |
| Reference is made to the information set forth in Part II, Item 8 of this report, which information is incorporated by reference. | ||
| 2. | Consolidated Financial Statement Schedules. | |
| All required Financial Statement Schedules are included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements. |
| 3. | EXHIBITS | ||
| The following exhibits are filed as a part of this Report: | |||
|
3.1
|
Articles
of Amendment to Articles of Incorporation (adopted April 24, 2003)
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 2003), and Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 1999).
|
||
| 3.2 |
Bylaws
(incorporated by reference to Exhibit 3b
to Form 10-K for the year ended December 31, 2002).
|
||
| 4.1 |
Note
Purchase Agreement, dated as of July 15,
2004, among the Company and the listed Purchasers of the 5.57% Series
A
Senior Notes due September 15, 2011 and 6.08% Series B Senior Notes
due
July 15, 2014. (incorporated by reference to Exhibit 4.1 to Form
10-Q for
the quarter ended June 30, 2004).
|
||
| 4.2 |
First
Amendment to Amended and Restated
Revolving and Term Loan Agreement dated and effective July 15, 2004,
by
and between Brown & Brown, Inc. and SunTrust Bank (incorporated by
reference to Exhibit 4.2 to Form 10-Q for the quarter ended June
30,
2004).
|
||
| 4.3 |
Second
Amendment to Revolving Loan Agreement
dated and effective July 15, 2004, by and between Brown & Brown, Inc.
and SunTrust Bank (incorporated by reference to Exhibit 4.3 to Form
10-Q
for the quarter ended June 30, 2004).
|
||
| 10.1(a) |
Amended
and Restated Revolving and Term Loan
Agreement dated January 3, 2001 by and between the Registrant and
SunTrust
Bank (incorporated by reference to Exhibit 4a to Form 10-K for the
year
ended December 31, 2000).
|
||
| 10.1(b) |
Extension
of the Term Loan Agreement between
the Registrant and SunTrust Bank (incorporated by reference to Exhibit
10b
to Form 10-Q for the quarter ended September 30, 2000).
|
||
| 10.2(a) |
Lease
of the Registrant for office space at 220
South Ridgewood Avenue, Daytona Beach, Florida dated August 15, 1987
(incorporated by reference to Exhibit 10a(3) to Form 10-K for the
year
ended December 31, 1993), as amended by Letter Agreement dated June
26,
1995; First Amendment to Lease dated August 2, 1999; Second Amendment
to
Lease dated December 11, 2001; Third Amendment to Lease dated August
8,
2002; and Fourth Amendment to Lease dated October 26,
2004.
|
||
| 10.2(b) |
Lease
Agreement for office space at 3101 W.
Martin Luther King, Jr. Blvd., Tampa, Florida, dated July 1, 2004 and
effective May 9, 2005, between Highwoods/Florida Holdings, L.P.,
as
landlord and the Registrant, as tenant.
|
||
| 10.2(c) |
Lease
Agreement for office space at Riedman
Tower, Rochester, New York, dated January 3, 2001, between Riedman
Corporation, as landlord, and the Registrant, as tenant (incorporated
by
reference to Exhibit 10b(3) to Form 10-K for the year ended December
31,
2001), and Lease for same office space at Riedman Tower, Rochester,
New
York, dated December 31, 2005, between Riedman Corporation, as landlord,
and a subsidiary of the Registrant, as tenant.
|
||
| 10.3 |
Indemnity
Agreement dated January 1, 1979,
among the Registrant, Whiting National Management, Inc., and Pennsylvania
Manufacturers’ Association Insurance Company (incorporated by reference to
Exhibit 10g to Registration Statement No. 33-58090 on Form
S-4).
|
||
| 10.4 |
Agency
Agreement dated January 1, 1979 among
the Registrant, Whiting National Management, Inc., and Pennsylvania
Manufacturers’ Association Insurance Company (incorporated by reference to
Exhibit 10h to Registration Statement No. 33-58090 on Form
S-4).
|
||
| 10.5 |
Employment
Agreement, dated as of July 29,
1999, between the Registrant and J. Hyatt Brown (incorporated by
reference
to Exhibit 10f to Form 10-K for the year ended December 31,
1999).
|
||
| 10.6 |
Portions
of Employment Agreement, dated April
28, 1993 between the Registrant and Jim W. Henderson (incorporated
by
reference to Exhibit 10m to Form 10-K for the year ended December
31,
1993).
|
||
| 10.7 |
Noncompetition,
Nonsolicitation and
Confidentiality Agreement, effective as of January 1, 2001 between
the
Registrant and John R. Riedman (incorporated by reference to Exhibit
10l
to Form 10-K for the year ended December 31, 2000).
|
||
| 10.8(a) |
Registrant’s
2000 Incentive Stock Option Plan
(incorporated by reference to Exhibit 4 to Registration Statement
No.
333-43018 on Form S-8 filed on August 3, 2000).
|
||
| 10.8(b) |
Registrant’s
Stock Performance Plan
(incorporated by reference to Exhibit 4 to Registration Statement
No.
333-14925 on Form S-8 filed on October 28,
1996).
|
||
| 10.9 |
International
Swap Dealers Association, Inc.
Master Agreement dated as of December 5, 2001 between SunTrust Bank
and
the Registrant and letter agreement dated December 6, 2001, regarding
confirmation of interest rate transaction (incorporated by reference
to
Exhibit 10p to Form 10-K for the year ended December 31,
2001).
|
||
| 10.10 |
Revolving
Loan Agreement Dated as of September
29, 2003, By and Among Brown & Brown, Inc. and SunTrust Bank
(incorporated by reference to Exhibit 10a on Form 10-Q for the quarter
ended September 30, 2003).
|
||
| 21 |
Subsidiaries
of the
Registrant.
|
||
| 23 |
Consent
of Deloitte & Touche
LLP.
|
||
| 24 |
Powers
of Attorney pursuant to which this Form
10-K has been signed on behalf of certain directors and officers
of the
Registrant.
|
||
| 31.1 |
Rule 13a-14(a)/15d-14(a)
Certification by
the Chief Executive Officer of the Registrant.
|
||
| 31.2 |
Rule 13a-14(a)/15d-14(a)
Certification by
the Chief Financial Officer of the Registrant.
|
||
| 32.1 |
Section 1350
Certification by the Chief
Executive Officer of the Registrant.
|
||
| 32.2 |
Section 1350
Certification by the Chief
Financial Officer of the
Registrant.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
BROWN
& BROWN, INC.
|
||
|
Registrant
|
||
| |
|
|
| Date: March 14, 2006 | By: | ___________*_____________ |
|
J.
Hyatt Brown
|
||
|
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in
the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
||
|
|
||||
|
*
|
Chairman
of the Board and
|
March
14, 2006
|
||
|
J.
Hyatt Brown
|
Chief
Executive Officer
|
|||
|
(Principal
Executive Officer)
|
||||
|
*
|
President
and Chief Operating
|
March
14, 2006
|
||
|
Jim
W. Henderson
|
Officer,
Director
|
|||
|
*
|
Sr.
Vice President, Treasurer and
|
March
14, 2006
|
||
|
Cory
T. Walker
|
Chief
Financial Officer (Principal
|
|||
|
Financial
and Accounting Officer)
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Samuel
P. Bell, III
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Hugh
M. Brown
|
||||
|
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Bradley
Currey, Jr.
|
||||
|
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Theodore
J. Hoepner
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
David
H. Hughes
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
John
R. Riedman
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Jan
E. Smith
|
||||
|
*
|
Director
|
March
14, 2006
|
||
|
Chilton
D. Varner
|
||||
|
|
||
|
*By:
|
/S/
LAUREL L. GRAMMIG
|
|
|
Laurel
L. Grammig
|
||
|
Attorney-in-Fact
|
57
|
3.1
|
Articles
of Amendment to Articles of Incorporation (adopted April 24, 2003)
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 2003), and Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3a to Form 10-Q for the quarter
ended March 31, 1999).
|
| 3.2 |
Bylaws
(incorporated by reference to Exhibit 3b
to Form 10-K for the year ended December 31, 2002).
|
| 4.1 |
Note
Purchase Agreement, dated as of July 15,
2004, among the Company and the listed Purchasers of the 5.57%
Series A
Senior Notes due September 15, 2011 and 6.08% Series B Senior Notes
due
July 15, 2014. (incorporated by reference to Exhibit 4.1 to Form
10-Q for
the quarter ended June 30, 2004).
|
| 4.2 |
First
Amendment to Amended and Restated
Revolving and Term Loan Agreement dated and effective July 15,
2004, by
and between Brown & Brown, Inc. and SunTrust Bank (incorporated by
reference to Exhibit 4.2 to Form 10-Q for the quarter ended June
30,
2004).
|
| 4.3 |
Second
Amendment to Revolving Loan Agreement
dated and effective July 15, 2004, by and between Brown & Brown, Inc.
and SunTrust Bank (incorporated by reference to Exhibit 4.3 to
Form 10-Q
for the quarter ended June 30, 2004).
|
| 10.1(a) |
Amended
and Restated Revolving and Term Loan
Agreement dated January 3, 2001 by and between the Registrant and
SunTrust
Bank (incorporated by reference to Exhibit 4a to Form 10-K for
the year
ended December 31, 2000).
|
| 10.1(b) |
Extension
of the Term Loan Agreement between
the Registrant and SunTrust Bank (incorporated by reference to
Exhibit 10b
to Form 10-Q for the quarter ended September 30, 2000).
|
| 10.2(a) |
Lease
of the Registrant for office space at 220
South Ridgewood Avenue, Daytona Beach, Florida dated August 15,
1987
(incorporated by reference to Exhibit 10a(3) to Form 10-K for the
year
ended December 31, 1993), as amended by Letter Agreement dated
June 26,
1995; First Amendment to Lease dated August 2, 1999; Second Amendment
to
Lease dated December 11, 2001; Third Amendment to Lease dated August
8,
2002; and Fourth Amendment to Lease dated October 26,
2004.
|
| 10.2(b) |
Lease
Agreement for office space at 3101 W.
Martin Luther King, Jr. Blvd., Tampa, Florida, dated July 1, 2004 and
effective May 9, 2005, between Highwoods/Florida Holdings, L.P.,
as
landlord and the Registrant, as tenant.
|
| 10.2(c) |
Lease
Agreement for office space at Riedman
Tower, Rochester, New York, dated January 3, 2001, between Riedman
Corporation, as landlord, and the Registrant, as tenant (incorporated
by
reference to Exhibit 10b(3) to Form 10-K for the year ended December
31,
2001), and Lease for same office space at Riedman Tower, Rochester,
New
York, dated December 31, 2005, between Riedman Corporation, as
landlord,
and a subsidiary of the Registrant, as tenant.
|
| 10.3 |
Indemnity
Agreement dated January 1, 1979,
among the Registrant, Whiting National Management, Inc., and Pennsylvania
Manufacturers’ Association Insurance Company (incorporated by reference to
Exhibit 10g to Registration Statement No. 33-58090 on Form
S-4).
|
| 10.4 |
Agency
Agreement dated January 1, 1979 among
the Registrant, Whiting National Management, Inc., and Pennsylvania
Manufacturers’ Association Insurance Company (incorporated by reference to
Exhibit 10h to Registration Statement No. 33-58090 on Form
S-4).
|
| 10.5 |
Employment
Agreement, dated as of July 29,
1999, between the Registrant and J. Hyatt Brown (incorporated by
reference
to Exhibit 10f to Form 10-K for the year ended December 31,
1999).
|
| 10.6 |
Portions
of Employment Agreement, dated April
28, 1993 between the Registrant and Jim W. Henderson (incorporated
by
reference to Exhibit 10m to Form 10-K for the year ended December
31,
1993).
|
| 10.7 |
Noncompetition,
Nonsolicitation and
Confidentiality Agreement, effective as of January 1, 2001 between
the
Registrant and John R. Riedman (incorporated by reference to Exhibit
10l
to Form 10-K for the year ended December 31, 2000).
|
| 10.8(a) |
Registrant’s
2000 Incentive Stock Option Plan
(incorporated by reference to Exhibit 4 to Registration Statement
No.
333-43018 on Form S-8 filed on August 3, 2000).
|
| 10.8(b) |
Registrant’s
Stock Performance Plan
(incorporated by reference to Exhibit 4 to Registration Statement
No.
333-14925 on Form S-8 filed on October 28,
1996).
|
| 10.9 |
International
Swap Dealers Association, Inc.
Master Agreement dated as of December 5, 2001 between SunTrust
Bank and
the Registrant and letter agreement dated December 6, 2001, regarding
confirmation of interest rate transaction (incorporated by reference
to
Exhibit 10p to Form 10-K for the year ended December 31,
2001).
|
| 10.10 |
Revolving
Loan Agreement Dated as of September
29, 2003, By and Among Brown & Brown, Inc. and SunTrust Bank
(incorporated by reference to Exhibit 10a on Form 10-Q for the
quarter
ended September 30, 2003).
|
| 21 |
Subsidiaries
of the
Registrant.
|
| 23 |
Consent
of Deloitte & Touche
LLP.
|
| 24 |
Powers
of Attorney pursuant to which this Form
10-K has been signed on behalf of certain directors and officers
of the
Registrant.
|
| 31.1 |
Rule 13a-14(a)/15d-14(a)
Certification by
the Chief Executive Officer of the Registrant.
|
| 31.2 |
Rule 13a-14(a)/15d-14(a)
Certification by
the Chief Financial Officer of the Registrant.
|
| 32.1 |
Section 1350
Certification by the Chief
Executive Officer of the Registrant.
|
| 32.2 |
Section 1350
Certification by the Chief
Financial Officer of the
Registrant.
|
58