BROWN & BROWN, INC. - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
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For
the fiscal year ended December 31, 2006
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
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For
the transition period from
__________to___________
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Commission
file number 001-13619
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)
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59-0864469
(I.R.S.
Employer Identification Number)
32114
(Zip
Code)
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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
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Name
of each exchange on which registered
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COMMON
STOCK, $0.10 PAR VALUE
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NEW
YORK STOCK EXCHANGE
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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
NOTE:
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those Sections.
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 (or for such shorter period that the registrant was required
to file such reports), 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 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, 2006 (the last business day of the registrant’s most
recently
completed second fiscal quarter) was
$3,249,721,264.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the
Exchange Act). Check one:
Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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The
number of outstanding shares of the registrant’s Common Stock, $.10 par value,
outstanding as of February
26, 2007 was 140,483,559.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of Brown & Brown, Inc.’s Proxy Statement for the 2007 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, 2006
INDEX
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Page
No.
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3
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9
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14
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14
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14
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14
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15
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17
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18
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33
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34
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62
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62
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62
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63
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63
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63
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63
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63
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64
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66
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67
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2
PART
I
ITEM
1.
Business.
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 the following items, in additions to those
matters described in Item 1A “Risk Factors”:
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material
adverse changes in economic conditions in the markets we
serve;
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future
regulatory actions and conditions in the states in which we conduct
our
business;
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competition
from others in the insurance agency, wholesale brokerage and service
business;
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a
significant portion of business written by Brown & Brown is for
customers located in California, Florida, Georgia, Michigan, 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;
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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
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other
risks and uncertainties as may be detailed from time to time in our
public
announcements and Securities and Exchange Commission (“SEC”) filings.
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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, wholesale 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.
3
We
are compensated for our services primarily by commissions paid by insurance
companies and by 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. As
a
result of the significant losses incurred by the insurance carriers from these
hurricanes, the insurance premium rates in 2006 increased on coastal property,
primarily in the southeastern region of the United States. In the other regions
of the United States, the insurance premium rates, in general, declined during
2006.
As
of December 31, 2006, our activities were conducted in 179 locations in 35
states as follows:
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Florida
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40
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Arkansas
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3
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Texas
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12
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North
Carolina
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3
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California
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11
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South
Carolina
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3
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Georgia
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9
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Wisconsin
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3
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New
York
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9
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Connecticut
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2
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New
Jersey
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7
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Massachusetts
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2
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Colorado
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7
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Minnesota
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2
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Illinois
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7
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Montana
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2
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Pennsylvania
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6
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New
Hampshire
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2
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Washington
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6
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Hawaii
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1
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Virginia
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6
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Kansas
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1
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Arizona
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5
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Kentucky
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1
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Indiana
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4
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Missouri
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1
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Louisiana
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4
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Nebraska
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1
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Michigan
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4
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Ohio
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1
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New
Mexico
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4
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Utah
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1
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Nevada
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4
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West
Virginia
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1
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Oklahoma
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4
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Business
Combinations
Beginning
in 1993 through 2006, we acquired 237 insurance intermediary operations,
excluding acquired books of business (customer accounts), that had aggregate
estimated annual revenues of $627.0 million for the 12 calendar months
immediately preceding the dates of acquisition. Of these, 32 operations
were acquired during 2006, with aggregate estimated annual revenues of $56.4
million for the 12 calendar months immediately preceding the dates of
acquisition and 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.
4
See
Note 2 to the Consolidated Financial Statements for a summary of our 2006 and
2005 acquisitions.
From
January 1, 2007 through March 1, 2007, Brown & Brown acquired the assets and
assumed certain liabilities of five insurance intermediaries, a book of
business and the outstanding stock of two general insurance agency. The
aggregate purchase price of these acquisitions was $47,569,000, including
$40,818,000 of net cash payments, the issuance of $3,869,000 in notes payable
and the assumption of $2,882,000 of liabilities. See Note 17 to the Consolidated
Financial Statements for a summary of our 2007 acquisitions.
DIVISIONS
Our
business is divided into four reportable operating segments: (1) the Retail
Division; (2) the National Programs Division; (3) the Wholesale 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
Wholesale 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,
comprehensive medical utilization management services in both workers’
compensation and all-lines liability arenas, and Medicare Secondary Payer
statute compliance-related services.
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 2006, 2005 and 2004, and (2) the percentage of our total
commissions and fees revenue represented by each segment for each such period:
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(in
thousands, except percentages)
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2006
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%
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2005
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%
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2004
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%
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Retail
Division
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$
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516,489
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59.7
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%
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$
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489,566
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63.1
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%
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$
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457,936
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71.8
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%
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National
Programs Division
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156,996
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18.2
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133,147
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17.2
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111,907
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17.5
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Wholesale
Brokerage Division
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159,268
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18.4
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125,537
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16.2
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41,585
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6.5
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Services
Division
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32,561
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3.8
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26,565
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3.4
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25,807
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4.0
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Other
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(651
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(0.1
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728
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0.1
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1,032
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0.2
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Total
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$
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864,663
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100.0
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%
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$
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775,543
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100.0
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%
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$
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638,267
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100.0
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%
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See
Note 16 to the Consolidated Financial Statements for additional segment
financial data relating to our business.
Retail
Division
As
of December 31, 2006, our Retail Division employed 2,613 persons. Our retail
insurance agency business provides a broad range of insurance products and
services to commercial, public and quasi-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 2006, 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.
5
National
Programs Division
As
of December 31, 2006, our National Programs Division employed 666 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. 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.
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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.
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•
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Lawyers:
The Lawyer’s Protector Plan® (LPP®) was introduced in 1983, 10 years
after we began marketing lawyers’ professional liability insurance. This
program is presently offered in 43 states, the District of Columbia
and
Puerto Rico.
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•
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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.
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•
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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.
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•
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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.
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6
Special
Programs.
Special Programs markets targeted products and services to specific industries,
trade groups, public and quasi-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:
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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.
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•
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Public
Risk Underwriters®,
along with our similar offices in Florida and other states, are program
administrators offering tailored property and casualty insurance
products,
risk management consulting, third-party administration and related
services designed for municipalities, schools, fire districts, and
other
public entities.
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•
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Proctor
Financial, Inc.
(“Proctor”) provides insurance programs and compliance solutions for
financial institutions that 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.
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•
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American
Specialty Insurance & Risk Services, Inc.
provides insurance and risk management services for clients in
professional sports, motor sports, amateur sports, and the entertainment
industry.
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•
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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.
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•
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Professional
Risk Specialty Group
is a specialty insurance agency providing liability insurance products
to
various professional groups.
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•
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AFC
Insurance, Inc.
(“AFC”) is a managing general underwriter, specializing in tailored
insurance products for the health and human services 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.
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•
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Acumen
Re Management Corporation
is a reinsurance underwriting management organization, primarily
acting as
an outsourced specific excess workers’ compensation facultative
reinsurance underwriting facility.
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•
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Commercial
Programs serves the insurance needs of certain specialty trade/industry
groups. Programs offered include:
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•
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Wholesalers
& Distributors Preferred Program®.
Introduced in 1997, this program provides property and casualty protection
for businesses principally engaged in the wholesale-distribution
industry.
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•
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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.
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•
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Environmental
Protector Plan®.
Introduced in 1998, this program provides a variety of specialized
coverages, primarily to municipal mosquito control districts.
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•
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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.
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7
Wholesale
Brokerage Division
At
December 31, 2006, the Wholesale Brokerage Division employed 1,026 persons.
The
Wholesale Brokerage Division markets excess and surplus commercial insurance
products and services to retail insurance agencies (including our retail
offices), and reinsurance products and services to insurance companies
throughout the United States. Wholesale 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 Wholesale 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 insurance agency
business is solicited through mailings and direct contact with retail agency
representatives.
In
March 2005, we acquired the assets of Hull & Company, Inc. and certain
affiliated companies (“Hull”) with estimated annualized revenues of $63.0
million which along with acquisitions of several other larger wholesale
brokerage operations, which essentially tripled the Wholesale Brokerage
Division’s 2006 and 2005 revenues over its 2004 revenues.
On
January 1, 2006, we acquired the assets of Axiom Intermediaries, LLC. (“Axiom”),
which specializes in treaty and facultative reinsurance brokerage services.
Axiom’s total revenues in 2006 were $11.5 million.
In
September 2006, we acquired the assets of Delaware Valley Underwriting Agency,
Inc. and certain affiliated companies with estimated annualized revenues of
$15.0 million.
Services
Division
At
December 31, 2006, our Services Division employed 330 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; (2) comprehensive medical utilization management services for both
workers’ compensation and all-lines liability insurance plans: and (3) Medicare
Secondary Payer statute compliance-related services.
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
2006, our three largest workers’ compensation contracts represented
approximately 57.0% of our Services Division’s fees revenue, or
approximately 1.5% 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. 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, 2006, we had 4,733 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 extend 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, rather
than individually, oriented.
8
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.
ITEM
1A.
Risk
Factors
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 wholesale brokerage activities
and
derive revenues principally from commissions paid by insurance companies.
Commissions are based upon a percentage of premiums paid by customers for
insurance products. The amount of such commissions is therefore 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 on a moderated basis through 2006, with the
exception of premium rates on coastal property, which increased.
9
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 the results of 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 our practices and arrangements, 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.
Various state departments of insurance may also 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 profit-sharing 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 appropriately apply funds that we hold for our clients on a fiduciary
basis. We have established provisions against these potential matters 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, 2006, approximately 5.3% and 4.9%, respectively, of
our
total revenues were derived from insurance policies underwritten by two separate
insurance companies, respectively. 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.
10
BECAUSE
OUR BUSINESS IS HIGHLY CONCENTRATED IN CALIFORNIA, FLORIDA, GEORGIA, MICHIGAN,
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, Michigan, New Jersey, New York, Pennsylvania and Washington. For the
years ended December 31, 2006 and December 31, 2005, we derived $617.5 million,
or 71.4%, and $570.3 million, or 73.5%, 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 OTHER INSURANCE
INTERMEDARIES, 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, brokers and
other intermediaries. 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 businesses may not achieve levels of revenue,
profitability, or productivity comparable to our existing operations, 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 intermediaries 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 intermediaries 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 legislatures. 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 our stockholders. The
laws
of the various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to, among other things, licensing of entities
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
11
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 reductions, in a state in which we have substantial
operations, such as Florida, California 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. 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. The
aggregate of these commissions generally accounts for 5.2% to 5.6% of the
previous year’s total annual revenues over the last three years.
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 the inherent uncertainty of loss in our industry and changes in
underwriting criteria due in part to the high loss ratios experienced by
insurance companies, we cannot predict the payment of these profit-sharing
contingent commissions. 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.
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 profit-sharing 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 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
may have an adverse effect on our financial condition.
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 stock analysts' earnings and other 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 listed 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.
12
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 partly depends on our ability to attract and
retain experienced personnel, including 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 15.3% of our outstanding
common stock as of February 23, 2007,
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 OF THE
COMPANY.
At
February 23, 2007, 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 15.3%. 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 & Brown.
RECENTLY
ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS MAY TO INCREASE OUR
COSTS.
The
Sarbanes-Oxley Act of 2002 which 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 (“SEC”) 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 A TIMELY
MANNER.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
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 a 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.
13
IF
WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2007 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 SEC 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 our internal control over financial
reporting. In addition, the public accounting firm auditing the our 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 than we do 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 to issue a report other than an
unqualified opinion. A report other than an unqualified 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 of America (“US GAAP”). The preparation of financial statements in
accordance with US GAAP 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, and could have a material adverse
effect on our financial position and results of operations.
ITEM
1B.
Unresolved
Staff Comments.
None.
ITEM
2.
Properties.
We
lease our executive offices, which are located at 220 South Ridgewood Avenue,
Daytona Beach, Florida 32114, and 3101 West Martin Luther King Jr. Boulevard.,
Suite 400, Tampa, Florida 33607. We lease offices at each of our 179 locations
with the exception of Dansville and Jamestown, New York where we own the
buildings in which our offices are located. 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.
ITEM
3. Legal
Proceedings.
See
Note 13 to the Consolidated Financial Statements for information regarding
our
legal proceedings.
ITEM
4. Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during our fourth quarter
ended December 31, 2006.
14
PART
II
ITEM
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
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
|
||||||||
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
|
||||
2006
|
|
|
||||||||
First
Quarter
|
$
|
33.23
|
$
|
27.86
|
$
|
0.050
|
||||
Second
Quarter
|
$
|
35.25
|
$
|
28.15
|
$
|
0.050
|
||||
Third
Quarter
|
$
|
32.50
|
$
|
27.06
|
$
|
0.050
|
||||
Fourth
Quarter
|
$
|
30.77
|
$
|
28.00
|
$
|
0.060
|
On
February 26, 2007, there were 140,483,559 shares of our common stock
outstanding, held by approximately 1,208 shareholders of record.
We
intend to continue to pay quarterly dividends, subject to continued capital
availability and determination by our Board of Directors 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, 2006, 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
|
|
Weighted-average
exercise
price
of
outstanding
options,
warrants
and rights
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
|
|
|
|
|
|
|
|
Equity
compensation
plans approved
by shareholders
|
|
1,885,775
|
|
$11.11
|
|
14,755,349
|
|
|
|
|
|
|
|
Equity
compensation plans not
approved
by shareholders
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
1,885,775
|
|
$11.11
|
|
14,755,349
|
Sales
of Unregistered Securities
We made
no sales of unregistered securities during the fourth quarter of 2006.
Issuer
Purchases of Equity Securities
We
did not purchase any shares of Brown & Brown, Inc. common stock during the
fourth quarter of 2006.
15
PERFORMANCE
GRAPH
The
following graph is a comparison of five-year cumulative total stockholder
returns for our common stock as compared with the cumulative total stockholder
return for the Standard & Poor’s 500 Index,
and a
group of peer insurance broker and agency companies (Aon Corporation, Arthur
J.
Gallagher & Co, Hilb, Rogal and Hobbs Company, and Marsh &
McLennan Companies, Inc.). The returns of each company have been weighted
according to such companies’ respective
stock
market capitalizations as of December 31, 2001 for the purposes of arriving
at a
peer group average. The total return calculations are based upon an
assumed $100 investment on December 31, 2001, with all dividends
reinvested.
![](https://www.sec.gov/Archives/edgar/data/0000079282/000118811207000553/performancegraph.jpg)
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
Brown
& Brown, Inc.
|
100.00
|
119.12
|
121.08
|
162.23
|
227.71
|
212.22
|
S&P
500 Index
|
100.00
|
76.63
|
96.85
|
105.56
|
108.73
|
123.54
|
Peer
Group of Insurance Agents and Brokers
|
100.00
|
81.85
|
89.31
|
72.58
|
80.09
|
79.95
|
We
caution that the stock price performance shown in the graph should not
be considered indicative of potential future stock price
performance.
16
ITEM
6.
Selected
Financial Data.
The
following selected Consolidated Financial Data for each of the five fiscal
years
in the period ended December 31, 2006 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,
|
|||||||||||||||
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
REVENUES
|
||||||||||||||||
Commissions
& fees (2)
|
$
|
864,663
|
$
|
775,543
|
$
|
638,267
|
$
|
545,287
|
$
|
452,289
|
||||||
Investment
income
|
11,479
|
6,578
|
2,715
|
1,428
|
2,945
|
|||||||||||
Other
income, net
|
1,862
|
3,686
|
5,952
|
4,325
|
508
|
|||||||||||
Total
revenues
|
878,004
|
785,807
|
646,934
|
551,040
|
455,742
|
|||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
404,891
|
374,943
|
314,221
|
268,372
|
224,755
|
|||||||||||
Non-cash
stock-based compensation
|
5,416
|
3,337
|
2,625
|
2,272
|
3,823
|
|||||||||||
Other
operating expenses
|
126,492
|
105,622
|
84,927
|
74,617
|
66,554
|
|||||||||||
Amortization
|
36,498
|
33,245
|
22,146
|
17,470
|
14,042
|
|||||||||||
Depreciation
|
11,309
|
10,061
|
8,910
|
8,203
|
7,245
|
|||||||||||
Interest
|
13,357
|
14,469
|
7,156
|
3,624
|
4,659
|
|||||||||||
Total
expenses
|
597,963
|
541,677
|
439,985
|
374,558
|
321,078
|
|||||||||||
Income
before income taxes and minority interest
|
280,041
|
244,130
|
206,949
|
176,482
|
134,664
|
|||||||||||
Income
taxes
|
107,691
|
93,579
|
78,106
|
66,160
|
49,271
|
|||||||||||
Minority
interest, net of tax
|
-
|
-
|
-
|
-
|
2,271
|
|||||||||||
Net
income
|
$
|
172,350
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
$
|
83,122
|
||||||
EARNINGS
PER SHARE INFORMATION
|
||||||||||||||||
Net
income per share - diluted
|
$
|
1.22
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
$
|
0.61
|
||||||
Weighted
average number of shares outstanding - diluted
|
141,020
|
139,776
|
138,888
|
137,794
|
136,086
|
|||||||||||
Dividends
declared per share
|
$
|
0.2100
|
$
|
0.1700
|
$
|
0.1450
|
$
|
0.1213
|
$
|
0.1000
|
||||||
YEAR-END
FINANCIAL POSITION
|
||||||||||||||||
Total
assets
|
$
|
1,807,952
|
$
|
1,608,660
|
$
|
1,249,517
|
$
|
865,854
|
$
|
754,349
|
||||||
Long-term
debt
|
$
|
226,252
|
$
|
214,179
|
$
|
227,063
|
$
|
41,107
|
$
|
57,585
|
||||||
Shareholders'
equity
(3)
|
$
|
929,345
|
$
|
764,344
|
$
|
624,325
|
$
|
498,035
|
$
|
391,590
|
||||||
Total
shares outstanding
|
140,016
|
139,383
|
138,318
|
137,122
|
136,356
|
|||||||||||
OTHER
INFORMATION
|
||||||||||||||||
Number
of full-time equivalent employees
|
4,733
|
4,540
|
3,960
|
3,517
|
3,384
|
|||||||||||
Revenue
per average number of employees
|
$
|
189,368
|
$
|
184,896
|
$
|
173,046
|
$
|
159,699
|
$
|
144,565
|
||||||
Book
value per share at year-end
|
$
|
6.64
|
$
|
5.48
|
$
|
4.51
|
$
|
3.63
|
$
|
2.87
|
||||||
Stock
price at year-end
|
$
|
28.21
|
$
|
30.54
|
$
|
21.78
|
$
|
16.31
|
$
|
16.16
|
||||||
Stock
price earnings multiple at year-end
|
23.12
|
28.35
|
23.41
|
20.38
|
26.49
|
|||||||||||
Return
on beginning shareholders' equity
|
23
|
%
|
24
|
%
|
26
|
%
|
28
|
%
|
47
|
%
|
(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, 2006, 2005, 2004, 2003 and 2002 included
net
increases of $9,144,000, $4,446,000, $4,467,000, $4,227,000 and
$2,106,000, 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.”
|
17
ITEM
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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 became effective November 28, 2005.
We
are a diversified insurance agency, wholesale 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 $878.0
million in 2006, a compound annual growth rate of 18.6%. 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 $172.4 million in 2006, a compound
annual growth rate of 26.6%. 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 2006 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 $56.4 million.
Our
commissions and fees revenue is 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 paid by insurance
carriers, 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. 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. As a result of the significant losses incurred by the
insurance carriers as the result of these hurricanes, the insurance premium
rates in 2006 increased on coastal property, primarily in the southeastern
region of the United States. In the other regions of the United States, the
insurance premium rates, in general, declined during 2006.
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 or general
declines in economic activity could limit increases in the values of insurable
exposure units. Our revenues have continued 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 2007.
We
also earn “profit-sharing 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). Over the last three years profit-sharing contingent commissions have
averaged approximately
5.4% of
the previous year’s total commissions and fees revenue. Profit-sharing
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 profit-sharing contingent commissions and
therefore represents the revenues earned directly from specific insurance
policies sold, and specific fee-based services rendered. Recently,
two national insurance carriers announced the replacement of the current
loss-ratio based profit-sharing contingent commission calculation with a more
guaranteed fixed-based methodology. The impact of such changes on our operations
or financial position is not currently known.
18
Fee
revenues are generated primarily by our Services Division, which provides
insurance-related services, including third-party claims administration and
comprehensive medical utilization management services in both the workers’
compensation and all-lines liability arenas, as well as Medicare set-aside
services. 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 4.0% in 2004 to 3.8% in 2006. 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
2006, we acquired the assets and assumed certain liabilities of
32 insurance intermediary operations and several books of business
(customer accounts). The aggregate purchase price was $155.9 million, including
$138.7 million of net cash payments, the issuance of $3.7 million in notes
payable and the assumption of $13.5 million of liabilities. These acquisitions
had estimated aggregate annualized revenues of $56.4 million.
During
2005, we acquired the assets and assumed certain liabilities of
32 insurance intermediary operations and several books of business
(customer accounts). The aggregate purchase price was $288.6 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 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 $199.3 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.
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 on which 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. Profit-sharing 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.
19
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 partially include the physical records and files
obtained from acquired businesses that contain information about insurance
policies, customers and other matters essential to policy renewals. However,
they primarily represent the present value of the underlying cash flows expected
to be received over the estimated future renewal periods of the 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, and earnings before interest, income taxes, depreciation
and amortization (“EBITDA”).
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, 2006 and identified no impairment as a result of the
evaluation.
Stock-Based
Compensation
The
Company grants stock options and non-vested stock awards (previously referred
to
as “restricted stock”) to its employees, officers and directors. Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment” (“SFAS 123R”), for its stock-based compensation plans.
Among other things, SFAS 123R requires that compensation expense for all
share-based awards be recognized in the financial statements based upon the
grant-date fair value of those awards.
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 inside and 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.
20
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, 2006,
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, 2006, 2005 AND
2004
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):
2006
|
Percent
Change
|
2005
|
Percent
Change
|
2004
|
||||||||||||
REVENUES
|
||||||||||||||||
Commissions
and fees
|
$
|
823,615
|
11.2
|
%
|
$
|
740,567
|
21.9
|
%
|
$
|
607,615
|
||||||
Profit-sharing
contingent commissions
|
41,048
|
17.4
|
%
|
34,976
|
14.1
|
%
|
30,652
|
|||||||||
Investment
income
|
11,479
|
74.5
|
%
|
6,578
|
142.3
|
%
|
2,715
|
|||||||||
Other
income, net
|
1,862
|
(49.5
|
)%
|
3,686
|
(38.1
|
)%
|
5,952
|
|||||||||
Total
revenues
|
878,004
|
11.7
|
%
|
785,807
|
21.5
|
%
|
646,934
|
|||||||||
|
||||||||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
404,891
|
8.0
|
%
|
374,943
|
19.3
|
%
|
314,221
|
|||||||||
Non-cash
stock-based compensation
|
5,416
|
62.3
|
%
|
3,337
|
27.1
|
%
|
2,625
|
|||||||||
Other
operating expenses
|
126,492
|
19.8
|
%
|
105,622
|
24.4
|
%
|
84,927
|
|||||||||
Amortization
|
36,498
|
9.8
|
%
|
33,245
|
50.1
|
%
|
22,146
|
|||||||||
Depreciation
|
11,309
|
12.4
|
%
|
10,061
|
12.9
|
%
|
8,910
|
|||||||||
Interest
|
13,357
|
(7.7
|
)%
|
14,469
|
102.2
|
%
|
7,156
|
|||||||||
Total
expenses
|
597,963
|
10.4
|
%
|
541,677
|
23.1
|
%
|
439,985
|
|||||||||
|
||||||||||||||||
Income
before income taxes
|
$
|
280,041
|
14.7
|
%
|
$
|
244,130
|
18.0
|
%
|
$
|
206,949
|
||||||
|
||||||||||||||||
Net
internal growth rate - core commissions and fees
|
4.0
|
%
|
3.1
|
%
|
4.3
|
%
|
||||||||||
Employee
compensation and benefits ratio
|
46.1
|
%
|
47.7
|
%
|
48.6
|
%
|
||||||||||
Other
operating expenses ratio
|
14.4
|
%
|
13.4
|
%
|
13.1
|
%
|
||||||||||
|
||||||||||||||||
Capital
expenditures
|
$
|
14,979
|
$
|
13,426
|
$
|
10,152
|
||||||||||
Total
assets at December 31
|
$
|
1,807,952
|
$
|
1,608,660
|
$
|
1,249,517
|
Commissions
and Fees
Commissions
and fees revenue, including profit-sharing contingent commissions, increased
11.5% in 2006, 21.5% in 2005 and 17.1% in 2004. Profit-sharing contingent
commissions increased $6.1 million to $41.0 million in 2006, primarily as a
result of a better than average year for insurance companies’ loss ratios. Core
commissions and fees revenue increased 4.0% in 2006, 3.1% in 2005 and 4.3%
in
2004, when excluding commissions and fees revenue generated from acquired
operations and also from divested operations. The 2006 results reflect the
continued moderation of the insurance premium rate growth that began in 2004
in
most regions of the United States, but offset by increases in the insurance
premium rates for coastal property in the southeastern United
States.
21
Investment
Income
Investment
income increased to $11.5 million in 2006, compared with $6.6 million in 2005
and $2.7 million in 2004. The increases in 2006 over 2005, and 2005 over 2004
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 2006, gains of $1.1 million were recognized from the sale of customer
accounts as compared with $2.7 million and $4.8 million in 2005 and 2004,
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 8.0% in 2006, 19.3% in 2005
and 17.1% in 2004, 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 46.1% in 2006, 47.7% in 2005 and 48.6% in
2004, reflecting a gradual improvement in personnel efficiencies as revenues
grow. We had 4,733 full-time equivalent employees at December 31, 2006, compared
with 4,540 at December 31, 2005 and 3,960 at December 31, 2004.
Non-Cash
Stock-Based Compensation
The
Company grants stock options and non-vested stock awards to its employees,
officers and directors. Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123R, Share-Based Payment (“SFAS 123R”), for its
stock-based compensation plans. Among other things, SFAS 123R requires that
compensation expense for all share-based awards be recognized in the financial
statements based upon the grant-date fair value of those awards.
Prior
to
January 1, 2006, the Company accounted for stock-based compensation using the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related
interpretations, and disclosure requirements established by SFAS No. 123,
Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No.
148, Accounting for Stock-Based Compensation-Transitions and Disclosures (“SFAS
148”).
Under
APB
No. 25, no compensation expense was recognized for either stock options issued
under the Company’s stock compensation plans or for stock purchased under the
Company’s 1990 Employee Stock Purchase Plan (“ESPP”). The pro forma effects on
net income and earnings per share for stock options and ESPP awards were instead
disclosed in a footnote to the financial statements. Compensation expense was
previously recognized for awards of non-vested stock, based upon the market
value of the common stock on the date of award, on a straight-line basis over
the requisite service period with the effect of forfeitures recognized as they
occurred. As such the 2005 and 2004 non-cash stock-based compensation expense
of
$3.3 million and $2.6 million, respectively, were solely related to the
Performance Stock Plan (“PSP”) grants under APB 25.
For
2006,
the non-cash stock-based compensation under SFAS 123R incorporates costs related
to each of our three stock-based plans as explained in Note 11 to the
consolidated financial statements. The $5.4 million expense in 2006 consisted
of
$1.9 million related to the PSP plan, $0.5 million related to the limited amount
of incentive stock options issued and the remaining $3.0 million relates to
the
ESPP.
Other
Operating Expenses
As
a
percentage of total revenues, other operating expenses increased to 14.4% in
2006 from 13.4% in 2005 and 13.1% in 2004. Legal and professional fee expenses
increased $1.7 million in 2006 over the amount expended in 2005, which in turn
was $4.4 million greater than what was expended in 2004. 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 profit-sharing contingent commissions, by state regulators and, to
a
lesser extent, by the requirements of compliance with the Sarbanes-Oxley Act
of
2002. Additionally, in 2006 a total of $5.8 million was paid to State of Florida
regulatory authorities and other parties, which concluded the State of Florida’s
investigation of compensation paid to us (See Note 13). Excluding the impact
of
these increased legal and professional fee expenses and settlement
payments, other operating expenses declined as a percentage of total revenues
each year from 2004 to 2006, 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 during the same
period.
22
Amortization
Amortization
expense increased $3.3 million, or 9.8% in 2006, $11.1 million, or 50.1% in
2005, and $4.7 million, or 26.8% in 2004. The increases in 2006 and 2005 were
due to the amortization of additional intangible assets as a result of
acquisitions completed in those years.
Depreciation
Depreciation
increased 12.4% in 2006, 12.9% in 2005 and 8.6% in 2004. These increases were
primarily due to the purchase of new computers, related equipment and software,
and the depreciation of fixed assets associated with acquisitions
completed in those years.
Interest
Expense
Interest
expense decreased $1.1 million, or 7.7%, in 2006 over 2005 as a result of lower
average debt balances due to the normal quarterly principal payments. 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 38.5%
in 2006, 38.3% in 2005 and 37.7% in 2004. The higher effective tax rate in
2006
and 2005, compared with 2004, was primarily the result of increased amounts
of
business conducted in states having higher state tax rates.
23
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, Wholesale
Brokerage and Services Divisions. On a divisional basis, increases in
amortization, depreciation and interest expenses are the result of acquisitions
within a given division in a particular year. Likewise, other income in each
division primarily reflects net gains on sales of customer accounts and fixed
assets. As such, in evaluating the operational efficiency of a division,
management places emphasis on the net internal growth rate of core commissions
and fees revenue, the gradual improvement of the ratio of total employee
compensation and benefits to total revenues, and the gradual improvement of
the
ratio of other operating expenses to total revenues.
The
internal growth rates for our core commissions and fees for the three years
ended December 31, 2006, 2005 and 2004, by divisional units are as follows
(in
thousands, except percentages):
2006
|
For
the years
ended December 31, |
||||||||||||||||||
2006
|
2005
|
Total
Net
Change |
Total
Net
Growth % |
Less
Acquisition Revenues |
Internal
Net Growth% |
||||||||||||||
Florida
Retail
|
$
|
175,885
|
$
|
155,741
|
$
|
20,144
|
12.9
|
%
|
$
|
493
|
12.6
|
%
|
|||||||
National
Retail
|
206,661
|
198,033
|
8,628
|
4.4
|
%
|
11,417
|
(1.4
|
)%
|
|||||||||||
Western
Retail
|
103,222
|
103,951
|
(729
|
)
|
(0.7
|
)%
|
4,760
|
(5.3
|
)%
|
||||||||||
Total
Retail(1)
|
485,768
|
457,725
|
28,043
|
6.1
|
%
|
16,670
|
2.5
|
%
|
|||||||||||
Professional
Programs
|
40,867
|
41,930
|
(1,063
|
)
|
(2.5
|
)%
|
43
|
(2.6
|
)%
|
||||||||||
Special
Programs
|
113,141
|
90,933
|
22,208
|
24.4
|
%
|
9,255
|
14.2
|
%
|
|||||||||||
Total
National Programs
|
154,008
|
132,863
|
21,145
|
15.9
|
%
|
9,298
|
8.9
|
%
|
|||||||||||
Wholesale
Brokerage
|
151,278
|
120,889
|
30,389
|
25.1
|
%
|
25,616
|
3.9
|
%
|
|||||||||||
Services
|
32,561
|
26,565
|
5,996
|
22.6
|
%
|
4,496
|
5.6
|
%
|
|||||||||||
Total
Core Commissions and Fees
|
$
|
823,615
|
$
|
738,042
|
$
|
85,573
|
11.6
|
%
|
$
|
56,080
|
4.0
|
%
|
The
reconciliation of the above internal growth schedule to the total Commissions
and Fees included in the Consolidated Statements of Income for the years ended
December, 2006 and 2005 is as follows (in thousands, except
percentages):
For
the years
ended
December 31,
|
|||||||
2006
|
2005
|
||||||
Total
core commissions and fees
|
$
|
823,615
|
$
|
738,042
|
|||
Contingent
commissions
|
41,048
|
34,976
|
|||||
Divested
business
|
—
|
2,525
|
|||||
Total
commission & fees
|
$
|
864,663
|
$
|
775,543
|
24
2005
|
For
the years
ended December 31, |
||||||||||||||||||
2005
|
2004
|
Total
Net
Change |
Total
Net
Growth % |
Less
Acquisition Revenues |
Internal
Net Growth% |
||||||||||||||
Florida
Retail
|
$
|
155,973
|
$
|
140,895
|
$
|
15,078
|
10.7
|
%
|
$
|
5,694
|
6.7
|
%
|
|||||||
National
Retail
|
201,112
|
182,098
|
19,014
|
10.4
|
%
|
20,540
|
(0.8
|
)%
|
|||||||||||
Western
Retail
|
104,879
|
107,529
|
(2,650
|
)
|
(2.5
|
)%
|
2,699
|
(5.0
|
)%
|
||||||||||
Total
Retail(1)
|
461,964
|
430,522
|
31,442
|
7.3
|
%
|
28,933
|
0.6
|
%
|
|||||||||||
Professional
Programs
|
41,861
|
42,463
|
(602
|
)
|
(1.4
|
)%
|
715
|
(3.1
|
)%
|
||||||||||
Special
Programs
|
89,288
|
66,601
|
22,687
|
34.1
|
%
|
17,155
|
8.3
|
%
|
|||||||||||
Total
National Programs
|
131,149
|
109,064
|
22,085
|
20.2
|
%
|
17,870
|
3.9
|
%
|
|||||||||||
Wholesale
Brokerage
|
120,889
|
38,080
|
82,809
|
217.5
|
%
|
73,317
|
24.9
|
%
|
|||||||||||
Services
|
26,565
|
24,334
|
2,231
|
9.2
|
%
|
—
|
9.2
|
%
|
|||||||||||
Total
Core Commissions and Fees
|
$
|
740,567
|
$
|
602,000
|
$
|
138,567
|
23.0
|
%
|
$
|
120,120
|
3.1
|
%
|
The
reconciliation of the above internal growth schedule to the total Commissions
and Fees included in the Consolidated Statements of Income for the years ended
December, 2005 and 2004 is as follows (in thousands, except
percentages):
For
the years
ended
December 31,
|
|
||||||
|
|
2005
|
|
2004
|
|||
Total
core commissions and fees
|
$
|
740,567
|
$
|
602,000
|
|||
Contingent
commissions
|
34,976
|
30,652
|
|||||
Divested
business
|
—
|
5,615
|
|||||
Total
commission & fees
|
$
|
775,543
|
$
|
638,267
|
2004
|
For
the years
ended December 31, |
||||||||||||||||||
2004
|
2003
|
Total
Net
Change |
Total
Net
Growth % |
Less
Acquisition Revenues |
Internal
Net Growth% |
||||||||||||||
Florida
Retail
|
$
|
139,517
|
$
|
131,845
|
$
|
7,672
|
5.8
|
%
|
$
|
724
|
5.3
|
%
|
|||||||
National
Retail
|
183,666
|
134,492
|
49,174
|
36.6
|
%
|
50,039
|
(0.6
|
)%
|
|||||||||||
Western
Retail
|
108,922
|
95,814
|
13,108
|
13.7
|
%
|
9,124
|
4.2
|
%
|
|||||||||||
Total
Retail(1)
|
432,105
|
362,151
|
69,954
|
19.3
|
%
|
59,887
|
2.8
|
%
|
|||||||||||
Professional
Programs
|
42,462
|
37,714
|
4,748
|
12.6
|
%
|
2,400
|
6.2
|
%
|
|||||||||||
Special
Programs
|
68,618
|
47,881
|
20,737
|
43.3
|
%
|
19,191
|
3.2
|
%
|
|||||||||||
Total
National Programs
|
111,080
|
85,595
|
25,485
|
29.8
|
%
|
21,591
|
4.5
|
%
|
|||||||||||
Wholesale
Brokerage
|
37,929
|
27,092
|
10,837
|
40.0
|
%
|
7,006
|
14.1
|
%
|
|||||||||||
Services
|
25,062
|
21,321
|
3,741
|
17.5
|
%
|
—
|
17.5
|
%
|
|||||||||||
Total
Core Commissions and Fees
|
$
|
606,176
|
$
|
496,159
|
$
|
110,017
|
22.2
|
%
|
$
|
88,484
|
4.3
|
%
|
The
reconciliation of the above internal growth schedule to the total Commissions
and Fees included in the Consolidated Statements of Income for the years ended
December, 2004 and 2003 is as follows (in thousands, except
percentages):
For
the years
ended
December 31,
|
|||||||
2004
|
2003
|
||||||
Total
core commissions and fees
|
$
|
606,176
|
$
|
496,159
|
|||
Contingent
commissions
|
30,652
|
32,534
|
|||||
Divested
business
|
1,439
|
16,594
|
|||||
Total
commission & fees
|
$
|
638,267
|
$
|
545,287
|
(1) |
The
Retail segment includes commissions and fees reported in the “Other”
column of the Segment Information in Note 16 which includes corporate
and
consolidation items.
|
25
Retail
Division
The
Retail Division provides a broad range of insurance products and services to
commercial, public and quasi-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 other 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 71.8% of our total consolidated
commissions and fees revenue in 2004 but declined to 59.7% in 2006, mainly
due
to continued acquisitions in the National Programs and Wholesale Brokerage
Divisions.
Financial
information relating to Brown & Brown’s Retail Division is as follows (in
thousands, except percentages):
2006
|
Percent
Change
|
2005
|
Percent
Change
|
2004
|
||||||||||||
REVENUES
|
|
|
|
|
|
|||||||||||
Commissions
and fees
|
$
|
486,419
|
5.5
|
%
|
$
|
461,236
|
6.8
|
%
|
$
|
431,767
|
||||||
Profit-sharing
contingent commissions
|
30,070
|
6.1
|
%
|
28,330
|
8.3
|
%
|
26,169
|
|||||||||
Investment
income
|
139
|
(12.6
|
)%
|
159
|
(72.0
|
)%
|
567
|
|||||||||
Other
income, net
|
1,361
|
(7.9
|
)%
|
1,477
|
(48.1
|
)%
|
2,845
|
|||||||||
Total
revenues
|
517,989
|
5.5
|
%
|
491,202
|
6.5
|
%
|
461,348
|
|||||||||
|
||||||||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
242,469
|
4.0
|
%
|
233,124
|
3.4
|
%
|
225,438
|
|||||||||
Non-cash
stock-based compensation
|
2,976
|
35.4
|
%
|
2,198
|
37.5
|
%
|
1,599
|
|||||||||
Other
operating expenses
|
82,966
|
2.3
|
%
|
81,063
|
4.2
|
%
|
77,780
|
|||||||||
Amortization
|
19,305
|
(0.3
|
)%
|
19,368
|
26.5
|
%
|
15,314
|
|||||||||
Depreciation
|
5,621
|
(0.4
|
)%
|
5,641
|
(1.6
|
)%
|
5,734
|
|||||||||
Interest
|
18,903
|
(9.7
|
)%
|
20,927
|
(4.2
|
)%
|
21,846
|
|||||||||
Total
expenses
|
372,240
|
2.7
|
%
|
362,321
|
4.2
|
%
|
347,711
|
|||||||||
|
||||||||||||||||
Income
before income taxes
|
$
|
145,749
|
13.1
|
%
|
$
|
128,881
|
13.4
|
%
|
$
|
113,637
|
||||||
|
||||||||||||||||
Net
internal growth rate - core commissions and fees
|
2.5
|
%
|
0.6
|
%
|
2.8
|
%
|
||||||||||
Employee
compensation and benefits ratio
|
46.8
|
%
|
47.5
|
%
|
48.9
|
%
|
||||||||||
Other
operating expenses ratio
|
16.0
|
%
|
16.5
|
%
|
16.9
|
%
|
||||||||||
|
||||||||||||||||
Capital
expenditures
|
$
|
5,952
|
$
|
6,186
|
$
|
5,568
|
||||||||||
Total
assets at December 31
|
$
|
1,103,107
|
$
|
1,002,781
|
$
|
843,823
|
The
Retail Division’s total revenues in 2006 increased $26.8 million to $518.0
million, a 5.5% increase over 2005. Of this increase, approximately $16.7
million related to core commissions and fees revenue from acquisitions for
which
there were no comparable revenues in 2005. 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 2.5% in 2006, excluding revenues
recognized in 2006 from new acquisitions and the 2005 commissions and fees
revenue from divested business. The net internal growth rate of core commissions
and fees revenue for the Retail Division in 2005 was 0.6%. The increase in
the
net internal growth rate from core commission and fees from 2005 to 2006
primarily reflects increased premium rates for coastal property in the
southeastern part of the United States, but offset by lower insurance premium
rates in most other parts of the country.
Income
before income taxes in 2006 increased $16.9 million to $145.7 million, a 13.1%
increase over 2005. 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.
26
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 was 2.8%. The decline in the
net internal growth rate from core commissions and fees revenue from 2004 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.
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 and quasi-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):
2006
|
Percent
Change
|
2005
|
Percent
Change
|
2004
|
||||||||||||
REVENUES
|
||||||||||||||||
Commissions
and fees
|
$
|
154,008
|
17.4
|
%
|
$
|
131,149
|
18.1
|
%
|
$
|
111,080
|
||||||
Profit-sharing
contingent commissions
|
2,988
|
49.5
|
%
|
1,998
|
141.6
|
%
|
827
|
|||||||||
Investment
income
|
432
|
17.7
|
%
|
367
|
164.0
|
%
|
139
|
|||||||||
Other
income, net
|
20
|
(95.2
|
)%
|
416
|
804.3
|
%
|
46
|
|||||||||
Total
revenues
|
157,448
|
17.6
|
%
|
133,930
|
19.5
|
%
|
112,092
|
|||||||||
|
||||||||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
60,692
|
11.9
|
%
|
54,238
|
19.8
|
%
|
45,278
|
|||||||||
Non-cash
stock-based compensation
|
523
|
45.7
|
%
|
359
|
52.8
|
%
|
235
|
|||||||||
Other
operating expenses
|
26,014
|
27.4
|
%
|
20,414
|
23.1
|
%
|
16,581
|
|||||||||
Amortization
|
8,718
|
7.6
|
%
|
8,103
|
37.8
|
%
|
5,882
|
|||||||||
Depreciation
|
2,387
|
19.5
|
%
|
1,998
|
26.2
|
%
|
1,583
|
|||||||||
Interest
|
10,554
|
1.2
|
%
|
10,433
|
21.3
|
%
|
8,603
|
|||||||||
Total
expenses
|
108,888
|
14.0
|
%
|
95,545
|
22.2
|
%
|
78,162
|
|||||||||
|
||||||||||||||||
Income
before income taxes
|
$
|
48,560
|
26.5
|
%
|
$
|
38,385
|
13.1
|
%
|
$
|
33,930
|
||||||
|
||||||||||||||||
Net
internal growth rate - core commissions and fees
|
8.9
|
%
|
3.9
|
%
|
4.5
|
%
|
||||||||||
Employee
compensation and benefits ratio
|
38.5
|
%
|
40.5
|
%
|
40.4
|
%
|
||||||||||
Other
operating expenses ratio
|
16.5
|
%
|
15.2
|
%
|
14.8
|
%
|
||||||||||
|
||||||||||||||||
Capital
expenditures
|
$
|
3,750
|
$
|
3,067
|
$
|
2,693
|
||||||||||
Total
assets at December 31
|
$
|
544,272
|
$
|
445,146
|
$
|
359,551
|
27
Total
revenues in 2006 increased $23.5 million to $157.5 million, a 17.6% increase
over 2005. Of this increase, approximately $9.3 million related to core
commissions and fees revenue from acquisitions for which there were no
comparable revenues in 2005. The National Program Division’s net internal growth
rate for core commissions and fees revenue was 8.9%, excluding core commissions
and fees revenue recognized in 2006 from new acquisitions. The majority of
the
internally generated growth in the 2006 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 as well as strong
growth in the public entity business and the Proctor Financial operation. The
growth at FIU has been strong over the last two years, however, with changes
made by the State of Florida in early 2007, it appears that FIU’s 2007 revenues
may be substantially less than 2006.
Income
before income taxes in 2006 increased $10.2 million to $48.6 million, a 26.5%
increase over 2005, of which the majority related to the revenues derived from
acquisitions completed in 2006 and the increased earnings at FIU. Additionally,
in 2006 a total of $5.8 million was paid to State of Florida regulatory
authorities and other parties, which concluded the State of Florida’s
investigation of compensation paid to us (See Note 13).
Of the $5.8 million, $3.0 million was allocated to other operating expenses
in
National Programs.
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 FIU profit center that occurred as a result of the 2005 and
2004
hurricane seasons.
Income
before income taxes 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.
Wholesale
Brokerage Division
The
Wholesale 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 Wholesale
Brokerage Division’s revenues are primarily commission-based.
Financial
information relating to our Wholesale Brokerage Division is as follows (in
thousands, except percentages):
2006
|
Percent
Change
|
2005
|
Percent
Change
|
2004
|
||||||||||||
REVENUES
|
||||||||||||||||
Commissions
and fees
|
$
|
151,278
|
25.1
|
%
|
$
|
120,889
|
218.7
|
%
|
$
|
37,929
|
||||||
Profit-sharing
contingent commissions
|
7,990
|
71.9
|
%
|
4,648
|
27.1
|
%
|
3,656
|
|||||||||
Investment
income
|
4,017
|
151.2
|
%
|
1,599
|
-
|
-
|
||||||||||
Other
(loss) income, net
|
61
|
(365.2
|
)%
|
(23
|
)
|
(227.8
|
)%
|
18
|
||||||||
Total
revenues
|
163,346
|
28.5
|
%
|
127,113
|
205.5
|
%
|
41,603
|
|||||||||
|
||||||||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
78,459
|
32.0
|
%
|
59,432
|
200.4
|
%
|
19,782
|
|||||||||
Non-cash
stock-based compensation
|
519
|
216.5
|
%
|
164
|
64.0
|
%
|
100
|
|||||||||
Other
operating expenses
|
28,582
|
44.3
|
%
|
19,808
|
153.9
|
%
|
7,800
|
|||||||||
Amortization
|
8,087
|
42.6
|
%
|
5,672
|
649.3
|
%
|
757
|
|||||||||
Depreciation
|
2,075
|
61.5
|
%
|
1,285
|
153.0
|
%
|
508
|
|||||||||
Interest
|
18,759
|
50.7
|
%
|
12,446
|
843.6
|
%
|
1,319
|
|||||||||
Total
expenses
|
136,481
|
38.1
|
%
|
98,807
|
226.5
|
%
|
30,266
|
|||||||||
|
||||||||||||||||
Income
before income taxes
|
$
|
26,865
|
(5.1
|
)%
|
$
|
28,306
|
149.7
|
%
|
$
|
11,337
|
||||||
|
||||||||||||||||
Net
internal growth rate - core commissions and fees
|
3.9
|
%
|
24.9
|
%
|
14.1
|
%
|
||||||||||
Employee
compensation and benefits ratio
|
48.0
|
%
|
46.8
|
%
|
47.5
|
%
|
||||||||||
Other
operating expenses ratio
|
17.5
|
%
|
15.6
|
%
|
18.7
|
%
|
||||||||||
|
||||||||||||||||
Capital
expenditures
|
$
|
2,085
|
$
|
1,969
|
$
|
694
|
||||||||||
Total
assets at December 31
|
$
|
618,374
|
$
|
476,653
|
$
|
128,699
|
28
Total
revenues in 2006 increased $36.2 million to $163.3 million, a 28.5% increase
over 2005. Of this increase, approximately $25.6 million related to core
commissions and fees revenue from acquisitions for which there were no
comparable revenues in 2005. The Wholesale Brokerage Division’s net internal
growth rate for core commissions and fees revenue in 2006 was 3.9%, excluding
core commissions and fees revenue recognized in 2006 from new acquisitions.
The
weaker internal growth rate than in recent years for the Wholesale brokerage
division was primarily the result of lower revenues from two of our operations.
One of those operations, which focuses on home building construction accounts
in
the western region of the United States, experienced a slow-down in economic
activity during the year as well as lower insurance premium rates. The second
operation was the personal lines wholesale brokerage arm of Hull & Company
which had significant premium capacity restrictions on placing coastal property
coverage with their insurance carriers, which was not the case in
2005.
Income
before income taxes in 2006 decreased $1.4 million to $26.9 million, a 5.1%
decrease over 2005. This decrease is attributable in part to Axiom Re and
Delaware Valley Underwriting Agency operations acquired in 2006, which had
an
aggregate loss before income taxes of $4.0 million as a result of initial
transitional issues and net lost business. Additionally, our operation that
focuses on home building construction accounts in the western region of the
United States had income before income taxes of $3.0 million less than it earned
in 2005, due to the reduction of revenues mentioned above. Offsetting these
losses were net increases in income before income taxes from our other wholesale
brokerage operations.
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 Wholesale 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 Wholesale 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 total 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 Wholesale Brokerage Division's 2004 combined margins; and
(2)
during 2005, one branch of our largest wholesale brokerage profit center
improved its operating profit margin by over 9%.
Services
Division
The
Services Division provides insurance-related services, including third-party
claims administration and comprehensive medical utilization management services
in both the workers’ compensation and all-lines liability arenas, as well as
Medicare set-aside services. Unlike our other segments, approximately
96.9%
of the Services Division’s 2006 commissions and fees revenue is generated from
fees, which are not significantly affected by fluctuations in general insurance
premiums.
29
Financial
information relating to our Services Division is as follows (in thousands,
except percentages):
2006
|
Percent
Change
|
2005
|
Percent
Change
|
2004
|
||||||||||||
REVENUES
|
||||||||||||||||
Commissions
and fees
|
$
|
32,561
|
22.6
|
%
|
$
|
26,565
|
2.9
|
%
|
$
|
25,807
|
||||||
Profit-sharing
contingent commissions
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
Investment
income
|
45
|
-
|
-
|
-
|
-
|
|||||||||||
Other
income, net
|
-
|
-
|
952
|
(5.0
|
)%
|
1,002
|
||||||||||
Total
revenues
|
32,606
|
18.5
|
%
|
27,517
|
2.6
|
%
|
26,809
|
|||||||||
|
||||||||||||||||
EXPENSES
|
||||||||||||||||
Employee
compensation and benefits
|
18,147
|
16.5
|
%
|
15,582
|
4.2
|
%
|
14,961
|
|||||||||
Non-cash
stock-based compensation
|
118
|
(3.3
|
)%
|
122
|
13.0
|
%
|
108
|
|||||||||
Other
operating expenses
|
5,062
|
16.7
|
%
|
4,339
|
(11.0
|
)%
|
4,873
|
|||||||||
Amortization
|
343
|
697.7
|
%
|
43
|
19.4
|
%
|
36
|
|||||||||
Depreciation
|
533
|
22.5
|
%
|
435
|
12.4
|
%
|
387
|
|||||||||
Interest
|
440
|
NMF
|
%
|
4
|
(94.2
|
)%
|
69
|
|||||||||
Total
expenses
|
24,643
|
20.1
|
%
|
20,525
|
0.4
|
%
|
20,434
|
|||||||||
|
||||||||||||||||
Income
before income taxes
|
$
|
7,963
|
13.9
|
%
|
$
|
6,992
|
9.7
|
%
|
$
|
6,375
|
||||||
|
||||||||||||||||
Net
internal growth rate - core commissions and fees
|
5.6
|
%
|
9.2
|
%
|
17.5
|
%
|
||||||||||
Employee
compensation and benefits ratio
|
55.7
|
%
|
56.6
|
%
|
55.8
|
%
|
||||||||||
Other
operating expenses ratio
|
15.5
|
%
|
15.8
|
%
|
18.2
|
%
|
||||||||||
|
||||||||||||||||
Capital
expenditures
|
$
|
588
|
$
|
350
|
$
|
788
|
||||||||||
Total
assets at December 31
|
$
|
32,554
|
$
|
18,766
|
$
|
13,760
|
Total
revenues in 2006 increased $5.1 million to $32.6 million, a 18.5% increase
over
2005. Of this increase, approximately $4.5 million related to core commissions
and fees revenue from acquisitions for which there were no comparable revenues
in 2005. In 2006, other income was $0 compared with the 2005 other income of
$1.0 million which was due to the sale of a medical third-party administration
(“TPA”) operation in 2004. The Services Division’s net internal growth rate for
core commissions and fees revenue was 5.6% in 2006, excluding the 2005 core
commissions and fees revenue from acquisitions and 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 and quasi-public entity TPA businesses.
Income
before income taxes in 2006 increased $1.0 million to $8.0 million, a 13.9%
increase over 2005, primarily due to strong net new business growth and the
acquisitions of an operation in the Medicare secondary payer statute
compliance-related services.
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 and quasi-public entity
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.
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.
30
Quarterly
Operating Results
The
following table sets forth our quarterly results for 2006 and 2005:
(in
thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
2006
|
|
|
|
|
|
|
|
|
|
||||
Total
revenues
|
|
$
|
230,582
|
|
$
|
220,807
|
|
$
|
211,965
|
|
$
|
214,650
|
|
Income
before income taxes
|
|
$
|
81,436
|
|
$
|
70,967
|
|
$
|
65,565
|
|
$
|
62,073
|
|
Net
income
|
|
$
|
50,026
|
|
$
|
44,431
|
|
$
|
40,270
|
|
$
|
37,623
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.29
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.29
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash and cash equivalents of $88.5 million at December 31, 2006 reflected a
decrease of $12.1 million from the $100.6 million balance at December 31, 2005.
During 2006, $225.2 million of cash was provided from operating activities.
Also
during this period, $143.7 million of cash was used for acquisitions, $15.0
million was used for additions to fixed assets, $87.4 million was used for
payments on long-term debt and $29.3 million was used for payment of
dividends.
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
ratio of current assets to current liabilities (the “current ratio”) was 1.10
and 1.06 at December 31, 2006 and 2005, respectively.
As
of December 31, 2006, 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
|
$
|
244,324
|
$
|
18,074
|
$
|
1,034
|
$
|
100,216
|
$
|
125,000
|
||||||
Capital
lease obligations
|
10
|
8
|
2
|
-
|
-
|
|||||||||||
Other
long-term liabilities
|
11,967
|
9,409
|
309
|
362
|
1,887
|
|||||||||||
Operating
leases
|
82,293
|
20,955
|
33,601
|
18,339
|
9,398
|
|||||||||||
Interest
obligations
|
75,771
|
12,326
|
23,392
|
23,080
|
16,973
|
|||||||||||
Maximum
future acquisition contingency payments
|
169,947
|
37,728
|
132,219
|
-
|
-
|
|||||||||||
|
||||||||||||||||
Total
contractual cash obligations
|
$
|
584,312
|
$
|
98,500
|
$
|
190,557
|
$
|
141,997
|
$
|
153,258
|
31
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, 2006 and 2005 there was an
outstanding balance of $200.0 million on the Notes.
On
December 22, 2006, we entered into a Master Shelf and Note Purchase Agreement
(the "Master Agreement") with a national insurance company (the
"Purchaser"). The Purchaser purchased Notes issued by the company in
2004. The Master Agreement provides for a $200.0 million private
uncommitted shelf facility for the issuance of senior unsecured notes over
a
three-year period, with interest rates that may be fixed or floating and with
such maturity dates, not to exceed ten (10) years, as the parties may
determine. The Master Agreement includes various covenants, limitations
and events of default currently customary for similar facilities for similar
borrowers. The initial issuance of notes under the Master Facility
occurred on December 22, 2006, through the issuance of $25.0 million in Series
C
Senior Notes due December 22, 2016, with a fixed interest rate of 5.66% per
annum.
Also
on December 22, 2006, we entered into a Second Amendment to Amended and Restated
Revolving and Term Loan Agreement (the "Second Term Amendment") and a Third
Amendment to Revolving Loan Agreement (the "Third Revolving Amendment") with
a
national banking institution, amending the existing Amended and Restated
Revolving and Term Loan Agreement dated January 3, 2001 (the "Term Agreement")
and the existing Revolving Loan Agreement dated September 29, 2003, as amended
(the "Revolving Agreement"), respectively. The amendments provide covenant
exceptions for the Notes issued or to be issued under the Master Agreement,
and
relaxed or deleted certain other covenants. In the case of the Third Amendment
to Revolving Loan Agreement, the lending commitment was reduced from $75.0
million to $20.0 million, the maturity date was extended from September 30,
2008
to December 20, 2011, and the applicable margins for advances and the
availability fee were reduced. Based on the Company's funded debt to
EBITDA ratio, the applicable margin for Eurodollar advances changed from a
range
of 0.625% to 1.625% to a range of 0.450% to 0.875%. The applicable margin
for base rate advances changed from a range of 0.00% to 0.125% to the Prime
Rate
less 1.000%. The availability fee changed from a range of 0.175% to 0.250%
to a range of 0.100% to 0.200%. The
90-day LIBOR was 5.36% and 4.53% as of December 31, 2006 and 2005, respectively.
There were no borrowings against this facility at December 31, 2006 or
2005.
In
January 2001, we 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 5.36% and 4.53% as of December 31, 2006 and 2005, respectively. The
loan was fully funded on January 3, 2001 and as of December 31, 2006 had an
outstanding balance of $12,857,000. This loan is to be repaid in equal quarterly
installments of $3,200,000 through December 2007.
All
four of these credit agreements require that we maintain certain financial
ratios and comply with certain other covenants. We were in compliance with
all
such covenants as of December 31, 2006 and 2005.
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 Master
Agreement and the Revolving Agreement described above, will be sufficient to
satisfy our normal liquidity needs through at least the end of 2007.
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, 2006,
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.
32
ITEM
7A.
Quantitative
and Qualitative Disclosures About Market Risk.
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 and
investments, 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 investments, and certificates of
deposit at December 31, 2006 and 2005 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. Our largest security investment
is 559,970 common stock shares of Rock-Tenn Company, a New York Stock Exchange
listed company, which we have owned for more than 25 years. Our investment
in
Rock-Tenn Company accounted for 81% and 68% of the total value of
available-for-sale marketable equity securities, non-marketable equity
securities and certificates of deposit as of December 31, 2006 and 2005,
respectively. Rock-Tenn Company's closing stock price at December 31, 2006
and
2005 was $27.11 and $13.65 respectively. Our exposure to equity price risk
is
primarily related to the Rock-Tenn Company investment. As of December 31, 2006,
the value of the Rock-Tenn Company investment was $15,181,000. In late January
2007, the stock of Rock-Tenn began trading in excess of $32.00 per share and
the
Board of Directors authorized the sale of 275,000 shares. We realized a gain
of
$8,840,000 in excess of our original cost basis. As of February 23, 2007, we
have remaining 284,970 share of Rock-Tenn at a value of $9,891,000. We may
sell
these remaining shares in 2007.
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 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, 2006, 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
|
$12,857
|
$60
|
4.53%
|
5.30%
|
33
ITEM
8. Financial
Statements and Supplementary Data.
Index
to Consolidated Financial Statements
|
Page
No.
|
Consolidated
Statements of Income for the years ended December 31, 2006, 2005 and
2004
|
35
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
36
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2006,
2005 and 2004
|
37
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
38
|
|
|
Notes
to Consolidated Financial Statements for the years ended December
31,
2006, 2005 and 2004
|
39
|
Note
1: Summary of Significant Accounting Policies
|
39
|
Note
2: Business Combinations
|
43
|
Note
3: Goodwill
|
46
|
Note
4: Amortizable Intangible Assets
|
47
|
Note
5: Investments
|
47
|
Note
6: Fixed Assets
|
48
|
Note
7: Accrued Expenses
|
48
|
Note
8: Long-Term Debt
|
48
|
Note
9: Income Taxes
|
50
|
Note
10: Employee Savings Plan
|
51
|
Note
11: Stock-Based Compensation
|
51
|
Note
12: Supplemental Disclosures of Cash Flow Information
|
54
|
Note
13: Commitments and Contingencies
|
54
|
Note
14: Business Concentrations
|
57
|
Note
15: Quarterly Operating Results (Unaudited)
|
57
|
Note
16: Segment Information
|
57
|
Note
17: Subsequent Events
|
58
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
59
|
Management’s
Report on Internal Control Over Financial Reporting
|
60
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial Reporting
|
61
|
34
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF
INCOME
|
Year
Ended December 31,
|
|||||||||
(in
thousands, except per share data)
|
2006
|
2005
|
2004
|
|||||||
REVENUES
|
|
|
|
|||||||
Commissions
and fees
|
$
|
864,663
|
$
|
775,543
|
$
|
638,267
|
||||
Investment
income
|
11,479
|
6,578
|
2,715
|
|||||||
Other
income, net
|
1,862
|
3,686
|
5,952
|
|||||||
Total
revenues
|
878,004
|
785,807
|
646,934
|
|||||||
|
||||||||||
EXPENSES
|
||||||||||
Employee
compensation and benefits
|
404,891
|
374,943
|
314,221
|
|||||||
Non-cash
stock-based compensation
|
5,416
|
3,337
|
2,625
|
|||||||
Other
operating expenses
|
126,492
|
105,622
|
84,927
|
|||||||
Amortization
|
36,498
|
33,245
|
22,146
|
|||||||
Depreciation
|
11,309
|
10,061
|
8,910
|
|||||||
Interest
|
13,357
|
14,469
|
7,156
|
|||||||
Total
expenses
|
597,963
|
541,677
|
439,985
|
|||||||
|
||||||||||
Income
before income taxes
|
280,041
|
244,130
|
206,949
|
|||||||
|
||||||||||
Income
taxes
|
107,691
|
93,579
|
78,106
|
|||||||
|
||||||||||
Net
income
|
$
|
172,350
|
$
|
150,551
|
$
|
128,843
|
||||
|
||||||||||
Net
income per share:
|
||||||||||
Basic
|
$
|
1.23
|
$
|
1.09
|
$
|
0.93
|
||||
Diluted
|
$
|
1.22
|
$
|
1.08
|
$
|
0.93
|
||||
|
||||||||||
Weighted
average number of shares outstanding:
|
||||||||||
Basic
|
139,634
|
138,563
|
137,818
|
|||||||
Diluted
|
141,020
|
139,776
|
138,888
|
|||||||
|
||||||||||
Dividends
declared per share
|
$
|
0.21
|
$
|
0.17
|
$
|
0.1450
|
See
accompanying notes to consolidated financial statements.
35
BROWN
& BROWN, INC.
CONSOLIDATED
BALANCE
SHEETS
|
At
December 31,
|
||||||
(in
thousands, except per share data)
|
2006
|
2005
|
|||||
|
|
|
|||||
ASSETS
|
|
|
|||||
Current
Assets:
|
|
|
|||||
Cash
and cash equivalents
|
$
|
88,490
|
$
|
100,580
|
|||
Restricted
cash and investments
|
242,187
|
229,872
|
|||||
Short-term
investments
|
2,909
|
2,748
|
|||||
Premiums,
commissions and fees receivable
|
282,440
|
257,930
|
|||||
Other
current assets
|
32,180
|
28,637
|
|||||
Total
current assets
|
648,206
|
619,767
|
|||||
|
|||||||
Fixed
assets, net
|
44,170
|
39,398
|
|||||
Goodwill
|
684,521
|
549,040
|
|||||
Amortizable
intangible assets, net
|
396,069
|
377,907
|
|||||
Investments
|
15,826
|
8,421
|
|||||
Other
assets
|
19,160
|
14,127
|
|||||
Total
assets
|
$
|
1,807,952
|
$
|
1,608,660
|
|||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
Current
Liabilities:
|
|||||||
Premiums
payable to insurance companies
|
$
|
435,449
|
$
|
397,466
|
|||
Premium
deposits and credits due customers
|
33,273
|
34,027
|
|||||
Accounts
payable
|
17,854
|
21,161
|
|||||
Accrued
expenses
|
86,009
|
74,534
|
|||||
Current
portion of long-term debt
|
18,082
|
55,630
|
|||||
Total
current liabilities
|
590,667
|
582,818
|
|||||
|
|||||||
Long-term
debt
|
226,252
|
214,179
|
|||||
|
|||||||
Deferred
income taxes, net
|
49,721
|
35,489
|
|||||
|
|||||||
Other
liabilities
|
11,967
|
11,830
|
|||||
Commitments
and contingencies (Note 13)
|
|||||||
|
|||||||
Shareholders’
Equity:
|
|||||||
Common
stock, par value $0.10 per share; authorized 280,000 shares; issued
and outstanding
140,016 at 2006 and 139,383 at 2005
|
14,002
|
13,938
|
|||||
Additional
paid-in capital
|
210,543
|
193,313
|
|||||
Retained
earnings
|
695,656
|
552,647
|
|||||
Accumulated
other comprehensive income, net of related income tax effect
of $5,359 at 2006 and $2,606 at 2005
|
9,144
|
4,446
|
|||||
|
|||||||
Total
shareholders’ equity
|
929,345
|
764,344
|
|||||
|
|||||||
Total
liabilities and shareholders’ equity
|
$
|
1,807,952
|
$
|
1,608,660
|
See
accompanying notes to consolidated financial statements.
36
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Common
Stock
|
Accumulated
Other
Comprehensive
Income
|
||||||||||||||||||
(in
thousands, except per share data)
|
Shares
Outstanding
|
Par
Value
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Total
|
||||||||||||||
Balance
at January 1, 2004
|
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
|
|||||||||||||
Net
income
|
172,350
|
172,350
|
|||||||||||||||||
Net
unrealized holding gain on available-for-sale securities
|
4,697
|
4,697
|
|||||||||||||||||
Net
gain on cash-flow hedging derivative
|
1
|
1
|
|||||||||||||||||
Comprehensive
income
|
177,048
|
||||||||||||||||||
Common
stock issued for employee stock benefit plans
|
624
|
62
|
16,372
|
16,434
|
|||||||||||||||
Income
tax benefit from exercise of stock options
|
604
|
604
|
|||||||||||||||||
Common
stock issued to directors
|
9
|
2
|
254
|
256
|
|||||||||||||||
Cash
dividends paid ($0.21 per share)
|
(29,341
|
)
|
(29,341
|
)
|
|||||||||||||||
Balance
at December 31, 2006
|
140,016
|
$
|
14,002
|
$
|
210,543
|
$
|
695,656
|
$
|
9,144
|
$
|
929,345
|
See
accompanying notes to consolidated financial statements.
37
BROWN
& BROWN, INC.
CONSOLIDATED
STATEMENTS OF
CASH
FLOWS
Year
Ended December 31,
|
||||||||||
(in
thousands)
|
2006
|
2005
|
2004
|
|||||||
|
||||||||||
Cash
flows from operating activities:
|
||||||||||
Net
income
|
$
|
172,350
|
$
|
150,551
|
$
|
128,843
|
||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
Amortization
|
36,498
|
33,245
|
22,146
|
|||||||
Depreciation
|
11,309
|
10,061
|
8,910
|
|||||||
Non-cash
stock-based compensation
|
5,416
|
3,337
|
2,625
|
|||||||
Deferred
income taxes
|
11,480
|
10,642
|
8,840
|
|||||||
Income
tax benefit from exercise of stock options
|
-
|
-
|
234
|
|||||||
Net
gain on sales of investments, fixed assets
and customer accounts
|
(781
|
)
|
(2,478
|
)
|
(5,999
|
)
|
||||
Changes
in operating assets and liabilities, net of effect from
acquisitions and divestitures:
|
||||||||||
Restricted
cash and investments (increase)
|
(12,315
|
)
|
(82,389
|
)
|
(30,940
|
)
|
||||
Premiums,
commissions and fees receivable (increase)
|
(23,564
|
)
|
(84,058
|
)
|
(22,907
|
)
|
||||
Other
assets (increase) decrease
|
(6,301
|
)
|
1,072
|
(3,953
|
)
|
|||||
Premiums
payable to insurance companies increase
|
27,314
|
153,032
|
41,473
|
|||||||
Premium
deposits and credits due customers (decrease) increase
|
(754
|
)
|
1,754
|
9,997
|
||||||
Accounts
payable (decrease) increase
|
(3,561
|
)
|
4,377
|
3,608
|
||||||
Accrued
expenses increase
|
8,441
|
14,854
|
7,140
|
|||||||
Other
liabilities (decrease) increase
|
(318
|
)
|
1,088
|
186
|
||||||
Net
cash provided by operating activities
|
225,214
|
215,088
|
170,203
|
|||||||
|
||||||||||
Cash
flows from investing activities:
|
||||||||||
Additions
to fixed assets
|
(14,979
|
)
|
(13,426
|
)
|
(10,152
|
)
|
||||
Payments
for businesses acquired, net of cash acquired
|
(143,737
|
)
|
(262,181
|
)
|
(202,664
|
)
|
||||
Proceeds
from sales of fixed assets and customer accounts
|
1,399
|
2,362
|
6,330
|
|||||||
Purchases
of investments
|
(211
|
)
|
(299
|
)
|
(3,142
|
)
|
||||
Proceeds
from sales of investments
|
119
|
896
|
1,107
|
|||||||
Net
cash used in investing activities
|
(157,409
|
)
|
(272,648
|
)
|
(208,521
|
)
|
||||
|
||||||||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from long-term debt
|
25,000
|
-
|
200,000
|
|||||||
Payments
on long-term debt
|
(87,432
|
)
|
(16,117
|
)
|
(18,606
|
)
|
||||
Borrowings
on revolving credit facility
|
40,000
|
50,000
|
50,000
|
|||||||
Payments
on revolving credit facility
|
(40,000
|
)
|
(50,000
|
)
|
(50,000
|
)
|
||||
Income
tax benefit from exercise of stock options
|
604
|
-
|
-
|
|||||||
Issuances
of common stock for employee stock benefit plans
|
11,274
|
9,717
|
8,107
|
|||||||
Cash
dividends paid
|
(29,341
|
)
|
(23,566
|
)
|
(20,003
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(79,895
|
)
|
(29,966
|
)
|
169,498
|
|||||
|
||||||||||
Net
(decrease) increase in cash and cash equivalents
|
(12,090
|
)
|
(87,526
|
)
|
131,180
|
|||||
Cash
and cash equivalents at beginning of year
|
100,580
|
188,106
|
56,926
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
88,490
|
$
|
100,580
|
$
|
188,106
|
See
accompanying notes to consolidated financial statements.
38
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,
wholesale 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 Wholesale 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 claims administration and
comprehensive medical utilization management services in both the workers’
compensation and all-lines liability arenas, as well as Medicare set-aside
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.
Revenue
Recognition
Commission
revenue is recognized as of the effective date of the insurance policy or the
date on which 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 $7,432,000 and $5,019,000 at December 31, 2006 and
2005, 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.
39
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, tax-free variable-rate demand bonds
and commercial paper held for a short term, and reports such amounts as
restricted cash on the Consolidated Balance Sheets. 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.
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
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, 2006 and 2005, 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.
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
$9,106,000 at December 31, 2006 and $4,410,000 at December 31, 2005, net of
deferred income taxes of $5,337,000 and $2,584,000, 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
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.
While goodwill is not amortizable, it 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. The Company compares 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 and
earnings before interest, income taxes, depreciation and amortization
(“EBITDA”). Brown & Brown completed its most recent annual assessment as of
November 30, 2006 and identified no impairment as a result of the evaluation.
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.
40
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
wholesale 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, 2006, 2005 and 2004.
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
Financial Accounting Standards Board (“FASB”) issued
Statement
of Financial Accounting Standards (“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.
Income
Taxes
Brown
& Brown records income tax expense using the asset and liability method of
accounting for deferred income taxes. Under this 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 for a given period 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)
|
|
2006
|
|
2005
|
|
2004
|
|
|||
|
|
|
|
|
|
|
|
|||
Net
income
|
|
$
|
172,350
|
|
$
|
150,551
|
|
$
|
128,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
139,634
|
|
|
138,563
|
|
|
137,818
|
|
Dilutive
effect of stock options using the treasury stock method
|
|
|
1,386
|
|
|
1,213
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
141,020
|
|
|
139,776
|
|
|
138,888
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.23
|
|
$
|
1.09
|
|
$
|
0.93
|
|
Diluted
|
|
$
|
1.22
|
|
$
|
1.08
|
|
$
|
0.93
|
|
41
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, restricted cash and investments,
investments, premiums, commissions and fees receivable, premiums payable to
insurance companies, premium deposits and credits due customers and accounts
payable, at December 31, 2006 and 2005, 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, 2006 and 2005
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, 2006 and 2005.
New
Accounting Pronouncement
Accounting
for Uncertainty in Income Taxes
- In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN
48”), which clarifies the accounting for uncertainty in tax positions. FIN 48
requires companies to determine whether it is “more likely than not” that a tax
position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit of that position can be recorded
in
the financial statements. It also provides guidance on the recognition,
measurement and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also requires significant additional
disclosures. FIN 48 was effective for the Company on January 1, 2007, and the
cumulative effect, if any, of the change in accounting principle will be
recorded as an adjustment to beginning retained earnings. The Company is
currently evaluating the impact that the adoption of FIN 48 will have, if any,
on its consolidated financial statements and notes thereto.
Fair
Value Measurements
- In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”). SFAS 157 establishes a framework for the measurement of assets and
liabilities that uses fair value and expands disclosures about fair value
measurements. SFAS 157 will apply whenever another GAAP standard requires (or
permits) assets or liabilities to be measured at fair value but does not expand
the use of fair value to any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and for all interim periods within those fiscal years. Accordingly, the Company
will be required to adopt SFAS 157 in the first quarter of 2008. The Company
is
currently evaluating the impact that the adoption of SFAS 157 will have, if
any,
on its consolidated financial statements and notes thereto.
Stock-Based
Compensation
- The
Company grants stock options and non-vested stock awards (previously referred
to
as “restricted stock”) to its employees, officers and directors. Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123R,
Share-Based Payment (“SFAS 123R”), for its stock-based compensation plans. Among
other things, SFAS 123R requires that compensation expense for all share-based
awards be recognized in the financial statements based upon the grant-date
fair
value of those awards over the vesting period.
Prior
to
January 1, 2006, the Company accounted for stock-based compensation using the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related
interpretations, and disclosure requirements established by SFAS No. 123,
Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No.
148, Accounting for Stock-Based Compensation-Transitions and Disclosures (“SFAS
148”).
Under
APB
No. 25, no compensation expense was recognized for either stock options issued
under the Company’s stock compensation plans or for stock purchased under the
Company’s 1990 Employee Stock Purchase Plan (“ESPP”). The pro forma effects on
net income and earnings per share for stock options and ESPP stock purchases
were instead disclosed in a footnote to the financial statements. Compensation
expense was previously recognized for awards of non-vested stock, based upon
the
market value of the common stock on the date of award, on a straight-line basis
over the requisite service period with the effect of forfeitures recognized
as
they occurred.
The
following table represents the pro forma information for the years ended
December 31, 2005 and 2004 (as previously disclosed) under the Company’s stock
compensation plans had the compensation cost for the stock options and common
stock purchased under the ESPP been determined based on the fair value at the
grant-date consistent with the method prescribed by SFAS No.
123R:
42
Year
Ended December 31,
|
|||||||
(in
thousands, except per share data)
|
2005
|
2004
|
|||||
Net
income as reported
|
$
|
150,551
|
$
|
128,843
|
|||
Total
stock-based employee compensation cost included in the determination
of
net income, net of related income tax effects
|
2,061
|
1,638
|
|||||
Total
stock-based employee compensation cost determined under fair
value method
for all awards, net of related income tax effects
|
(5,069
|
)
|
(3,436
|
)
|
|||
Pro
forma net income
|
$
|
147,543
|
$
|
127,045
|
|||
Net
income per share:
|
|||||||
Basic,
as reported
|
$
|
1.09
|
$
|
0.93
|
|||
Basic,
pro forma
|
$
|
1.06
|
$
|
0.92
|
|||
|
|||||||
Diluted,
as reported
|
$
|
1.08
|
$
|
0.93
|
|||
Diluted,
pro forma
|
$
|
1.06
|
$
|
0.91
|
The
Company has adopted SFAS 123R using the modified-prospective transition method.
Under this transition method, compensation cost recognized for the year ended
December 31, 2006 includes:
· |
Compensation
cost for all share-based awards (expected to vest) granted prior
to, but
not yet vested as of January 1, 2006, based upon grant-date fair
value
estimated in accordance with the original provisions of SFAS 123;
and
|
· |
Compensation
cost for all share-based awards (expected to vest) granted during
the
year ended December 31, 2006 based upon grant-date fair value
estimated in accordance with the provisions of SFAS
123R.
|
Results
for prior periods have not been restated.
Upon
adoption of SFAS 123R, the Company continued to use the Black-Scholes valuation
model for valuing all stock options and shares purchased under the ESPP.
Compensation for non-vested stock awards is measured at fair value on the
grant-date based upon the number of shares expected to vest. Compensation cost
for all awards will be recognized in earnings, net of estimated forfeitures,
on
a straight-line basis over the requisite service period. The cumulative effect
of changing from recognizing compensation expense for non-vested stock awards
as
forfeitures occurred to recognizing compensation expense for non-vested awards
net of estimated forfeitures was not material.
The
adoption of SFAS 123R had the following effect on the Company for the year
ended
December 31, 2006:
(in
thousands)
|
2006
|
|||
Non-cash
stock-based compensation
|
$
|
(564
|
)
|
|
Reduction
(increase) in:
|
||||
Provision
for income taxes
|
$
|
(217
|
)
|
|
Net
income
|
$
|
(347
|
)
|
|
Basic
earnings per share
|
$
|
—
|
||
Diluted
earnings per share
|
$
|
—
|
||
Increase
(decrease) in deferred tax assets
|
$
|
(217
|
)
|
In
addition, prior to the adoption of SFAS 123R, the Company presented tax benefits
resulting from the exercise of stock options as operating cash flows in the
statement of cash flows. SFAS 123R requires that tax benefits associated with
share-based payments be classified under financing activities in the statement
of cash flows. This change in presentation in the accompanying Consolidated
Statement of Cash Flows has reduced net operating cash flows and increased
net
financing cash flows by $604,000 for the year ended December 31,
2006.
See
Note
11 for additional information regarding the Company’s stock-based compensation
plans and the assumptions used to calculate the fair value of stock-based
awards.
NOTE
2 • Business Combinations
Acquisitions
in 2006
During
2006, Brown & Brown acquired the assets and assumed certain liabilities of
32 entities. The aggregate purchase price of these acquisitions was
$155,869,000, including $138,695,000 of net cash payments, the issuance of
$3,696,000 in notes payable and the assumption of $13,478,000 of liabilities.
Substantially 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.
43
All
of
these acquisitions have been accounted for as business combinations and are
as
follows:
(in
thousands)
Name
|
Business
Segment
|
2006
Date
of
Acquisition
|
Net
Cash
Paid
|
Notes
Payable
|
Recorded
Purchase
Price
|
||||||||
Axiom
Intermediaries, LLC
|
Wholesale
Brokerage
|
January
1
|
$
|
60,333
|
$
|
—
|
$
|
60,333
|
|||||
Delaware
Valley Underwriting Agency,
Inc., et al (DVUA) |
Wholesale
Brokerage/National Programs
|
September
30
|
46,333
|
—
|
46,333
|
||||||||
Other
|
Various
|
Various
|
32,029
|
3,696
|
35,725
|
||||||||
Total
|
$
|
138,695
|
$
|
3,696
|
$
|
142,391
|
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
|
DVUA
|
Other
|
Total
|
|||||||||
Fiduciary
cash
|
$
|
9,598
|
$
|
—
|
$
|
—
|
$
|
9,598
|
|||||
Other
current assets
|
445
|
7
|
567
|
1,019
|
|||||||||
Fixed
assets
|
435
|
648
|
476
|
1,559
|
|||||||||
Purchased
customer accounts
|
14,022
|
22,667
|
18,682
|
55,371
|
|||||||||
Noncompete
agreements
|
31
|
52
|
581
|
664
|
|||||||||
Goodwill
|
45,600
|
24,942
|
17,107
|
87,649
|
|||||||||
Other
assets
|
—
|
9
|
—
|
9
|
|||||||||
Total
assets acquired
|
70,131
|
48,325
|
37,413
|
155,869
|
|||||||||
Other
current liabilities
|
(9,798
|
)
|
(1,843
|
)
|
(1,496
|
)
|
(13,137
|
)
|
|||||
Other
liabilities
|
—
|
(149
|
)
|
(192
|
)
|
(341
|
)
|
||||||
Total
liabilities assumed
|
(9,798
|
)
|
(1,992
|
)
|
(1,688
|
)
|
(13,478
|
)
|
|||||
Net
assets acquired
|
$
|
60,333
|
$
|
46,333
|
$
|
35,725
|
$
|
142,391
|
The
weighted average useful lives for the above acquired amortizable intangible
assets are as follows: purchased customer accounts, 15.0 years; and noncompete
agreements, 4.8 years.
Goodwill
of $87,649,000, all of which is expected to be deductible for income tax
purposes, was assigned to the Retail, National Programs, Wholesale Brokerage
and
Service Divisions in the amounts of $6,337,000, $10,561,000, $67,984,000 and
$2,767,000, respectively.
The
results of operations for the acquisitions completed during 2006 have been
combined with those of the Company since their respective acquisitions dates.
If
the acquisitions had occurred as of January 1, 2005, the Company’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)
|
|
2006
|
2005
|
|
|||
(UNAUDITED)
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
902,345
|
|
$
|
842,698
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
288,643
|
|
$
|
263,326
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
177,644
|
|
$
|
162,389
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.27
|
|
$
|
1.17
|
|
Diluted
|
|
$
|
1.26
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
139,634
|
|
|
138,563
|
|
Diluted
|
|
|
141,020
|
|
|
139,776
|
|
44
Additional
consideration paid to 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 the Company
in 2006 as a result of these adjustments totaled $48,824,000, of which
$49,221,000 was allocated to goodwill and $397,000 was a reduction of current
assets. Of the $48,824,000 net additional consideration paid, $14,640,000 was
paid in cash, $33,261,000 was issued in notes payable and $923,000 was assumed
as net liabilities. As of December 31, 2006, the maximum future contingency
payments related to acquisitions totaled
$169,947,000.
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.
|
|
|
Wholesale
Brokerage
|
|
|
January
1
|
|
|
10,215
|
|
|
-
|
|
|
10,215
|
|
Hull
& Company, Inc., et al.
|
|
|
Wholesale
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
|
|
45
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 Wholesale 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 to acquisitions totaled $189,611,000.
NOTE
3 • Goodwill
The
changes in goodwill for the years ended December 31, are as follows:
(in
thousands)
|
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Service
|
|
Total
|
|
|||||
Balance
as of January 1, 2005
|
|
$
|
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
|
|
Goodwill
of acquired businesses
|
|
|
38,681
|
|
|
23,307
|
|
|
72,115
|
|
|
2,767
|
|
|
136,870
|
|
Goodwill
disposed of relating to sales of businesses
|
|
|
(1,389
|
)
|
|
-
|
|
-
|
|
|
-
|
|
|
(1,389
|
)
|
|
Balance
as of December 31, 2006
|
|
$
|
329,504
|
|
$
|
142,329
|
|
$
|
209,865
|
|
$
|
2,823
|
|
$
|
684,521
|
|
46
NOTE
4 • Amortizable Intangible Assets
Amortizable
intangible assets at December 31 consisted of the following:
2006
|
2005
|
||||||||||||||||||||||||
(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
|
$
|
541,967
|
$
|
(149,764
|
)
|
$
|
392,203
|
14.9
|
$
|
498,580
|
$
|
(126,161
|
)
|
$
|
372,419
|
14.9
|
|||||||||
Noncompete
agreements
|
25,589
|
(21,723
|
)
|
3,866
|
7.7
|
34,154
|
(28,666
|
)
|
5,488
|
7.0
|
|||||||||||||||
Total
|
$
|
567,556
|
$
|
(171,487
|
)
|
$
|
396,069
|
$
|
532,734
|
$
|
(154,827
|
)
|
$
|
377,907
|
Amortization
expense recorded for other amortizable intangible assets for the years ended
December 31, 2006, 2005 and 2004 was $36,498,000, $33,245,000 and $22,146,000,
respectively.
Amortization
expense for other amortizable intangible assets for the years ending December
31, 2007, 2008, 2009, 2010 and 2011 is estimated to be $37,506,000, $36,613,000,
$36,144,000, $35,476,000, and $34,059,000, respectively.
NOTE
5 • Investments
Investments
at December 31 consisted of the following:
|
|
2006
|
|
2005
|
||||||||
|
|
Carrying
Value
|
|
Carrying
Value
|
||||||||
(in
thousands)
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
||||
Available-for-sale
marketable equity securities
|
|
$
|
240
|
|
$
|
15,181
|
|
$
|
216
|
|
$
|
7,644
|
Non-marketable
equity securities and certificates of deposit
|
|
|
2,669
|
|
|
645
|
|
|
2,532
|
|
|
777
|
Total
investments
|
|
$
|
2,909
|
|
$
|
15,826
|
|
$
|
2,748
|
|
$
|
8,421
|
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:
|
|
|
|
|
|
|
|
|
||||
2006
|
|
$
|
550
|
|
$
|
14,871
|
|
$
|
-
|
$
|
15,421
|
|
2005
|
|
$
|
550
|
|
$
|
7,312
|
|
$
|
(2
|
)
|
$
|
7,860
|
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
|
|
|||
|
|
|
|
|
|
|
|
|||
2006
|
|
$
|
119
|
|
$
|
25
|
|
$
|
-
|
|
2005
|
|
$
|
896
|
|
$
|
87
|
|
$
|
-
|
|
2004
|
|
$
|
1,107
|
|
$
|
526
|
|
$
|
(118
|
)
|
47
NOTE
6 • Fixed Assets
Fixed
assets at December 31 consisted of the following:
(in
thousands)
|
2006
|
2005
|
|||||
Furniture,
fixtures and equipment
|
$
|
90,146
|
$
|
83,275
|
|||
Leasehold
improvements
|
10,590
|
6,993
|
|||||
Land,
buildings and improvements
|
487
|
487
|
|||||
|
101,223
|
90,755
|
|||||
Less
accumulated depreciation and amortization
|
(57,053
|
)
|
(51,357
|
)
|
|||
Total
|
$
|
44,170
|
$
|
39,398
|
Depreciation
and amortization expense amounted to $11,309,000 in 2006, $10,061,000 in 2005
and $8,910,000 in 2004.
NOTE
7 • Accrued Expenses
Accrued
expenses at December 31 consisted of the following:
(in
thousands)
|
|
2006
|
|
2005
|
|
||
Accrued
bonuses
|
|
$
|
42,426
|
|
$
|
35,613
|
|
Accrued
compensation and benefits
|
|
|
16,213
|
|
|
15,179
|
|
Accrued
rent and vendor expenses
|
|
|
7,937
|
|
|
6,504
|
|
Reserve
for policy cancellations
|
|
|
7,432
|
|
|
5,019
|
|
Accrued
interest
|
|
|
4,524
|
|
|
5,302
|
|
Other
|
|
|
7,477
|
|
|
6,917
|
|
Total
|
|
$
|
86,009
|
|
$
|
74,534
|
|
NOTE
8 • Long-Term Debt
Long-term
debt at December 31 consisted of the following:
(in
thousands)
|
2006
|
2005
|
|||||
Unsecured
Senior Notes
|
|
$
|
225,000
|
|
$
|
200,000
|
|
Term
loan agreements
|
|
|
12,857
|
|
|
25,714
|
|
Revolving
credit facility
|
|
|
-
|
|
|
-
|
|
Acquisition
notes payable
|
|
|
6,310
|
|
|
43,889
|
|
Other
notes payable
|
|
|
167
|
|
|
206
|
|
Total
debt
|
|
|
244,334
|
|
|
269,809
|
|
Less
current portion
|
|
|
(18,082
|
)
|
|
(55,630
|
) |
Long-term
debt
|
|
$
|
226,252
|
|
$
|
214,179
|
In
July 2004, the Company 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, 2006 and 2005
there was an outstanding balance of $200.0 million on the Notes.
On
December 22, 2006, the Company entered into a Master Shelf and Note Purchase
Agreement (the "Master Agreement") with a national insurance company (the
"Purchaser"). The Purchaser also purchased Notes issued by the Company in
2004. The Master Agreement provides for a $200.0 million private
uncommitted “shelf” facility for the issuance of senior unsecured notes over a
three-year period, with interest rates that may be fixed or floating and with
such maturity dates, not to exceed ten (10) years, as the parties may
determine. The Master Agreement includes various covenants, limitations
and events of default similar to the Notes issued in 2004. The initial
issuance of notes under the Master Facility Agreement occurred on December
22,
2006, through the issuance of $25.0 million in Series C Senior Notes due
December 22, 2016, with a fixed interest rate of 5.66% per
annum.
48
Also
on December 22, 2006, the Company entered into a Second Amendment to Amended
and
Restated Revolving and Term Loan Agreement (the "Second Term Amendment") and
a
Third Amendment to Revolving Loan Agreement (the "Third Revolving Amendment")
with a national banking institution, amending the existing Amended and Restated
Revolving and Term Loan Agreement dated January 3, 2001 (the "Term Agreement")
and the existing Revolving Loan Agreement dated September 29, 2003, as amended
(the "Revolving Agreement"), respectively. The amendments provided covenant
exceptions for the notes issued or to be issued under the Master Agreement,
and
relaxed or deleted certain other covenants. In the case of the Third Revolving
Amendment, the lending commitment was reduced from $75.0 million to $20.0
million, the maturity date was extended from September 30, 2008 to December
20,
2011, and the applicable margins for advances and the availability fee were
reduced. Based on the Company's funded debt to EBITDA ratio, the
applicable margin for Eurodollar advances changed from a range of 0.625% to
01.625% to a range of 0.450% to 0.875%. The applicable margin for base
rate advances changed from a range of 0.00% to 0.125% to the Prime Rate less
1.000%. The availability fee changed from a range of 0.175% to 0.250% to a
range of 0.100% to 0.200%. The
90-day London Interbank Offering Rate (“LIBOR”) was 5.36% and 4.53% as of
December 31, 2006 and 2005, respectively. There were no borrowings against
this
facility at December 31, 2006 or 2005.
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 5.36% and 4.53% as of December 31, 2006
and
2005, respectively. The loan was fully funded on January 3, 2001 and as of
December 31, 2006 had an outstanding balance of $12,857,000. This loan is to
be
repaid in equal quarterly installments of $3,200,000 through December
2007.
All
four 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, 2006 and
2005.
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 $37,000, net of
related income taxes of approximately $22,000, was recorded in other assets
as
of December 31, 2006, and $36,000, net of related income taxes of approximately
$22,000, was recorded in other assets as of December 31, 2005; 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
April
2011, including interest in the range from 0.0% to 8.05%.
Interest
paid in 2006, 2005 and 2004 was $14,136,000, $13,726,000 and $2,773,000,
respectively.
At
December 31, 2006, maturities of long-term debt were $18,082,000 in 2007,
$889,000 in 2008, $147,000 in 2009, $157,000 in 2010, $100,059,000 in 2011
and
$125,000,000 in 2012 and beyond.
49
NOTE
9 • Income Taxes
Significant
components of the provision (benefit) for income taxes for the years ended
December 31 are as follows:
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
|||
Current:
|
|
|
|
|
|
|
|
|||
Federal
|
|
$
|
83,792
|
|
$
|
72,550
|
|
$
|
59,478
|
|
State
|
|
|
12,419
|
|
|
10,387
|
|
|
9,788
|
|
Total
current provision
|
|
|
96,211
|
|
|
82,937
|
|
|
69,266
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,139
|
|
|
8,547
|
|
|
6,967
|
|
State
|
|
|
2,341
|
|
|
2,095
|
|
|
1,873
|
|
Total
deferred provision
|
|
|
11,480
|
|
|
10,642
|
|
|
8,840
|
|
Total
tax provision
|
|
$
|
107,691
|
|
$
|
93,579
|
|
$
|
78,106
|
|
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:
|
|
2006
|
|
2005
|
|
2004
|
|
|||
Federal
statutory tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
income taxes, net of federal income tax benefit
|
|
|
3.4
|
|
|
3.3
|
|
|
3.7
|
|
State
income tax credits
|
|
|
-
|
|
|
-
|
|
(0.5
|
)
|
|
Non-deductible
employee stock purchase plan expense
|
0.4
|
-
|
-
|
|||||||
Interest
exempt from taxation and dividend exclusion
|
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Other,
net
|
|
|
-
|
|
|
0.2
|
|
(0.3
|
)
|
|
Effective
tax rate
|
|
|
38.5
|
%
|
|
38.3
|
%
|
|
37.7
|
%
|
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)
|
|
2006
|
|
2005
|
|
||
Deferred
tax liabilities:
|
|
|
|
|
|
||
Fixed
assets
|
|
$
|
3,051
|
|
$
|
3,454
|
|
Net
unrealized holding gain of available-for-sale securities
|
|
|
5,337
|
|
|
2,584
|
|
Prepaid
insurance and pension
|
|
|
2,516
|
|
|
2,219
|
|
Net
gain on cash-flow hedging derivative
|
|
|
22
|
|
|
22
|
|
Intangible
assets
|
|
|
51,127
|
|
|
37,379
|
|
Total
deferred tax liabilities
|
|
|
62,053
|
|
|
45,658
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
5,886
|
|
|
4,984
|
|
Accruals
and reserves
|
|
|
6,310
|
|
|
4,973
|
|
Net
operating loss carryforwards
|
|
|
634
|
|
|
537
|
|
Valuation
allowance for deferred tax assets
|
|
|
(498
|
)
|
|
(325
|
)
|
Total
deferred tax assets
|
|
|
12,332
|
|
|
10,169
|
|
Net
deferred tax liability
|
|
$
|
49,721
|
|
$
|
35,489
|
|
Income
taxes paid in 2006, 2005 and 2004 were $102,761,000, $77,143,000, and
$72,904,000, respectively.
50
At
December 31, 2006, Brown & Brown had a net operating loss carryforwards of
$463,000 and $18,466,000 for federal and state income tax reporting purposes,
respectively, portions of which expire in the years 2007 through 2021. The
federal carryforward was derived from insurance operations acquired by
Brown & Brown in 2001 and 1998. The state carryforward is derived from the
operating results of certain profit centers.
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 $7,585,000 in 2006, $7,762,000
in 2005 and $6,569,000 in 2004.
NOTE
11 • Stock-Based Compensation
Performance
Stock Plan
Brown
& Brown has adopted and the shareholders have approved a performance stock
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, 2006, 6,217,830 shares had been granted under the plan at initial
stock prices ranging from $1.90 to $30.55. As of December 31, 2006, 5,036,170
shares had met the first condition for vesting and had been awarded, and 526,312
shares had satisfied both conditions for vesting and had been distributed to
the
participants.
The
Company uses a path-depended lattice model to estimate the fair value of PSP
grants on the grant-date under SFAS 123R. A
summary
of PSP activity for the year ended December 31, 2006 is as follows:
Weighted-
Average
Grant
Date
Fair
Value
|
Granted
Shares
|
Awarded
Shares
|
Shares
Not
Yet
Awarded
|
|||||||
Outstanding
at January 1, 2006
|
$
|
5.21
|
5,851,682
|
5,125,304
|
726,378
|
|||||
Granted
|
$
|
18.48
|
262,260
|
868
|
261,392
|
|||||
Awarded
|
$
|
11.99
|
—
|
291,035
|
(291,035
|
)
|
||||
Vested
|
$
|
6.43
|
(28,696
|
)
|
(28,696
|
)
|
—
|
|||
Forfeited
|
$
|
5.93
|
(393,728
|
)
|
(352,341
|
)
|
(41,387
|
)
|
||
Outstanding
at December 31, 2006
|
$
|
5.92
|
5,691,518
|
5,036,170
|
655,348
|
The
weighted average grant-date fair value of PSP grants for years ended December
31, 2006, 2005 and 2004 was $18.48, $14.39 and $11.31, respectively. The total
fair market value of PSP grants that vested during each of the years ended
December 31, 2006, 2005 and 2004 was $862,000, $1,581,000 and $914,000,
respectively.
Employee
Stock Purchase Plan
The
Company has a shareholder-approved Employee Stock Purchase Plan (“ESPP”) with a
total of 12,000,000 authorized shares and 5,027,183 available for future
subscriptions. Employees of the Company who regularly work more than 20 hours
per week are eligible to participate in the plan. Participants, through payroll
deductions, may subscribe to purchase Company stock up to 10% of their
compensation, to a maximum of $25,000, during each annual subscription period
(August 1st
to the following July 31st)
at a cost of 85% of the lower of the stock price as of the beginning or ending
of the stock subscription period. For
the plan year ended July 31, 2006, 2005 and 2004, the Company issued 571,601,
521,948 and 546,344 shares of common stock in the month of August 2006, 2005
and
2004, respectively. These shares were issued at an aggregate purchase price
of
$10,557,000 or $18.47 per share in 2006, $9,208,000 or $17.64 per share in
2005
and $7,256,000 or $13.28 per share in 2004. For the five months ended December
31, 2006, 2005 and 2004 of the 2006-2007, 2005-2006 and 2004-2005 plan years,
191,140, 241,668 and 218,515 shares of common stock (from authorized but
unissued shares), respectively, were subscribed to by participants for proceeds
of approximately $4,817,000 $4,464,000 and $4,036,000, respectively.
51
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 day’s 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 upon achievement of certain performance goals. All
of
the options expire 10 years after the grant date.
The
Company uses the Black-Scholes option-pricing model to estimate the fair value
of stock options on the grant-date under SFAS 123R, which is the same valuation
technique previously used for pro forma disclosures under SFAS 123. The Company
did not grant any options during the year ended December 31, 2006, but did
grant
12,000 shares during the year ended December 31, 2005. The weighted average
fair
value of the incentive stock options granted during 2005 estimated on the date
of grant, using the Black-Scholes option-pricing model, was $8.51 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 35.0%;
risk-free interest rate of 4.5%; and an expected life of 6 years.
The
risk-free interest rate is based upon the U.S. Treasury yield curve on the
date
of grant with a remaining term approximating the expected term of the option
granted. The expected term of the options granted is derived from historical
data; grantees are divided into two groups based upon expected exercise behavior
and are considered separately for valuation purposes. The expected volatility
is
based upon the historical volatility of the Company’s common stock over the
period of time equivalent to the expected term of the options granted. The
dividend yield is based upon the Company’s best estimate of future dividend
yield.
A
summary of stock option activity for the years ended December 31, 2006, 2005
and
2004 is as follows:
Stock
Options
|
Shares
Under
option
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|||||||||
Outstanding
at January 1, 2004
|
2,227,276
|
$
|
10.18
|
||||||||||
Granted
|
—
|
$
|
—
|
||||||||||
Exercised
|
(154,248
|
)
|
$
|
4.96
|
|||||||||
Forfeited
|
—
|
$
|
—
|
||||||||||
Expired
|
—
|
$
|
—
|
||||||||||
Outstanding
at December 31, 2004
|
2,073,028
|
$
|
10.56
|
6.9
|
$
|
36,580
|
|||||||
Granted
|
12,000
|
$
|
22.06
|
||||||||||
Exercised
|
(68,040
|
)
|
$
|
4.84
|
|||||||||
Forfeited
|
—
|
$
|
—
|
||||||||||
Expired
|
—
|
$
|
—
|
||||||||||
Outstanding
at December 31, 2005
|
2,016,988
|
$
|
10.83
|
5.9
|
$
|
35,064
|
|||||||
Granted
|
—
|
$
|
—
|
||||||||||
Exercised
|
(123,213
|
)
|
$
|
6.11
|
|||||||||
Forfeited
|
(8,000
|
)
|
$
|
15.78
|
|||||||||
Expired
|
—
|
$
|
—
|
||||||||||
Outstanding
at December 31, 2006
|
1,885,775
|
$
|
11.11
|
4.9
|
$
|
32,241
|
|||||||
Exercisable
at December 31, 2006
|
1,185,067
|
$
|
8.29
|
4.2
|
$
|
23,607
|
|||||||
Exercisable
at December 31, 2005
|
783,672
|
$
|
4.88
|
5.2
|
$
|
18,281
|
|||||||
Exercisable
at December 31, 2004
|
698,312
|
$
|
4.86
|
6.2
|
$
|
16,304
|
52
The
following table summarizes information about stock options outstanding at
December 31, 2006:
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
|
|
|
810,444
|
|
|
3.3
|
|
$
|
4.84
|
|
|
810,444
|
|
$
|
4.84
|
$14.20
|
|
|
4,000
|
|
|
4.8
|
|
$
|
14.20
|
|
|
4,000
|
|
$
|
14.20
|
$15.78
|
|
|
1,059,331
|
|
|
6.2
|
|
$
|
15.78
|
|
|
370,623
|
|
$
|
15.78
|
$22.06
|
|
|
12,000
|
|
|
8.0
|
|
$
|
22.06
|
|
|
-
|
|
|
-
|
|
|
|
1,885,775
|
|
|
5.0
|
|
$
|
11.11
|
|
|
1,185,067
|
|
$
|
8.29
|
The
weighted average grant-date fair value of stock options granted during the
year
ended December 31, 2006, 2005 and 2004 was $0.00, $8.51 and $0.00, respectively.
The total intrinsic value of options exercised, determined as of the date of
exercise, during the years ended December 31, 2006, 2005 and 2004 was
$2,865,000, $1,381,000 and $2,234,000, respectively. The total intrinsic value
is calculated as the difference between the exercise price of all underlying
awards and the quoted market price of the Company’s stock for all in-the-money
stock options at December 31, 2006, 2005 and 2004.
There
were 1,545,996 option shares available for future grant under this plan as
of
December 31, 2006.
Summary
of Non-Cash Stock-Based Compensation Expense
The
non-cash stock-based compensation expense for the years ended December 31,
is as
follows:
(in
thousands)
|
2006
|
2005
|
2004
|
|||||||
Employee
Stock Purchase Plan
|
$
|
3,049
|
$
|
-
|
|
$
|
-
|
|
||
Performance
Stock Plan
|
|
1,874
|
|
3,337
|
|
2,625
|
||||
Incentive
Stock Option Plan
|
|
493
|
|
-
|
|
-
|
||||
$
|
5,416
|
$
|
3,337
|
$
|
2,625
|
Summary
of Unrecognized Compensation Expense
As
of December 31, 2006, there was approximately $19.8 million of unrecognized
compensation expense related to all non-vested share-based compensation
arrangements granted under the Company’s stock-based compensation plans. That
expense is expected to be recognized over a weighted-average period of
9.2
years.
53
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)
|
2006
|
2005
|
2004
|
|||||||
Unrealized
holding gain (loss) on available-for-sale securities, net of tax
benefit
of $2,752 for 2006; net of tax benefit of $300 for 2005; and net
of tax
benefit of $530 for 2004
|
$
|
4,697
|
$
|
(512
|
)
|
$
|
(649
|
)
|
||
Net
gain on cash-flow hedging derivative, net of tax effect of $0 for
2006,
net of tax effect of $289 for 2005; and net of tax effect of $557
for
2004
|
$
|
1
|
$
|
491
|
$
|
889
|
||||
Notes
payable issued or assumed for purchased customer accounts
|
$
|
36,957
|
$
|
42,843
|
$
|
1,976
|
||||
Notes
received on the sale of fixed assets and customer accounts
|
$
|
2,715
|
$
|
1,855
|
$
|
6,024
|
||||
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 upon 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, 2006, the aggregate future minimum lease payments under all
noncancelable lease agreements were as follows:
(in
thousands)
|
|
|
|
|
2007
|
|
$
|
20,955
|
|
2008
|
|
|
18,472
|
|
2009
|
|
|
15,129
|
|
2010
|
|
|
11,471
|
|
2011
|
|
|
6,868
|
|
Thereafter
|
|
|
9,398
|
|
Total
minimum future lease payments
|
|
$
|
82,293
|
|
|
|
|
|
|
Rental
expense in 2006, 2005 and 2004 for operating leases totaled $30,338,000,
$28,926,000 and $24,595,000, respectively.
54
Legal
Proceedings
Antitrust
Actions and Related Matters
As
disclosed in prior years, 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
Governmental Investigations
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 has received and responded 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), Illinois (Office of
Attorney General), 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). Agencies in Arizona, Virginia 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. On
December 8, 2006, Brown & Brown reached a settlement with the Florida
government agencies identified above which terminated the joint investigation
of
those agencies with respect to Brown & Brown, Inc. and its subsidiaries. The
settlement involved no finding of wrongdoing, no fines or penalties and no
prohibition of profit-sharing compensation. Pursuant to the terms of the
settlement, Brown & Brown, Inc. agreed to pay $1,800,000 to the
investigating agencies to be distributed to Florida governmental entity
policyholders of the Company plus $1,000,000 in attorneys’ fees and costs
associated with the investigation. Additionally, a Brown & Brown, Inc.
subsidiary, Program Management Services Inc., doing business as Public Risk
Underwriters®, agreed to pay $3,000,000 to the investigating agencies for
distribution to a local government self-insurance fund. The affirmative
obligations imposed under the settlement include continued enhanced disclosures
to Florida policyholders concerning compensation received by Brown & Brown,
Inc. and its subsidiaries .
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 profit-sharing
contingent commissions. Some of the other insurance intermediaries and insurance
companies have entered into agreements with governmental agencies and in the
Antitrust Actions, which collectively involve payments by these intermediaries
to agencies and to certain of their clients totaling in excess of $1 billion.
Many of these settlement agreements provided that the settling insurance
intermediaries would discontinue acceptance of any contingency
compensation.
55
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 profit-sharing
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.
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 profit-sharing
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.
56
NOTE
14• Business Concentrations
A
significant portion of business written by Brown & Brown is for customers
located in California, Florida, Georgia, Michigan, 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, 2006, approximately 5.3% and 4.9% of Brown & Brown’s
total revenues were derived from insurance policies underwritten by two separate
insurance companies, respectively. 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 the same two separate insurance
companies, respectively Should these insurance companies seek to terminate
its
arrangement with Brown & Brown, the Company 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 2006 and 2005 were as follows:
(in
thousands, except per share data)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
||||
2006
|
|
|
|
|
|
|
|
|
|
||||
Total
revenues
|
|
$
|
230,582
|
|
$
|
220,807
|
|
$
|
211,965
|
|
$
|
214,650
|
|
Total
expenses
|
|
$
|
149,146
|
|
$
|
149,840
|
|
$
|
146,400
|
|
$
|
152,577
|
|
Income
before income taxes
|
|
$
|
81,436
|
|
$
|
70,967
|
|
$
|
65,565
|
|
$
|
62,073
|
|
Net
income
|
|
$
|
50,026
|
|
$
|
44,431
|
|
$
|
40,270
|
|
$
|
37,623
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.29
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.29
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Quarterly
financial information is affected by seasonal variations. The timing of
profit-sharing 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, public and quasi-public entities, and market
niches; the Wholesale Brokerage Division, which markets and sells excess and
surplus commercial and personal lines 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, managed healthcare services and Medicare set-aside services. Brown
& Brown conducts all of its operations within the United States of
America.
57
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. 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, 2006
|
|
||||||||||||||||
(in
thousands)
|
|
Retail
|
|
National
Programs
|
|
Wholesale
Brokerage
|
|
Services
|
|
Other
|
|
Total
|
|
||||||
Total
revenues
|
|
$
|
517,989
|
|
$
|
157,448
|
|
$
|
163,346
|
|
$
|
32,606
|
|
$
|
6,615
|
|
$
|
878,004
|
|
Investment
income
|
|
|
139
|
|
|
432
|
|
|
4,017
|
|
|
45
|
|
|
6,846
|
|
|
11,479
|
|
Amortization
|
|
|
19,305
|
|
|
8,718
|
|
|
8,087
|
|
|
343
|
|
|
45
|
|
|
36,498
|
|
Depreciation
|
|
|
5,621
|
|
|
2,387
|
|
|
2,075
|
|
|
533
|
|
|
693
|
|
|
11,309
|
|
Interest
expense
|
|
|
18,903
|
|
|
10,554
|
|
|
18,759
|
|
|
440
|
|
|
(35,299
|
)
|
|
13,357
|
|
Income
before income taxes
|
|
|
145,749
|
|
|
48,560
|
|
|
26,865
|
|
|
7,963
|
|
|
50,904
|
|
|
280,041
|
|
Total
assets
|
|
|
1,103,107
|
|
|
544,272
|
|
|
618,374
|
|
|
32,554
|
|
|
(490,355
|
)
|
|
1,807,952
|
|
Capital
expenditures
|
|
|
5,952
|
|
|
3,750
|
|
|
2,085
|
|
|
588
|
|
|
2,604
|
|
|
14,979
|
|
|
|
Year
Ended December 31, 2005
|
|
||||||||||||||||
(in
thousands)
|
|
Retail
|
|
National
Programs
|
|
Wholesale
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
|
|
Wholesale
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
|
|
NOTE
17• Subsequent Events
From
January 1, 2007 through March 1, 2007, Brown & Brown acquired the assets and
assumed certain liabilities of five insurance intermediaries, a book of
business and the outstanding stock of two general insurance agency. The
aggregate purchase price of these acquisitions was $47,569,000, including
$40,818,000 of net cash payments, the issuance of $3,869,000 in notes payable
and the assumption of $2,882,000 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 four-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.
As
of December 31, 2006, the value of the Rock-Tenn
Company investment was $15,181,000. In late January 2007, the stock of Rock-Tenn
began trading in excess of $32.00 per share and the Board of Directors
authorized the sale of 275,000 shares. We realized a gain of $8,840,000 in
excess of our original cost basis. As of February 23, 2007, we have remaining
284,970 share of Rock-Tenn at a value of $9,891,000. We may sell these remaining
shares in 2007.
58
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, 2006 and 2005, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2006. 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,
2006
and 2005, and the results of its operations and its cash flows for each of
the
three years in the period ended December 31, 2006 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, 2006, 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 1, 2007 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
1, 2007
59
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 2006: Axiom Intermediaries,
NuQuest Resources, Inc. and Bridge Pointe, Inc., Ideal Insurance Agency,
Inc., Monarch Management Corporation and Texas Monarch Management
Corporation, Delaware Valley Underwriting Agency, Inc. et al., and ProTexn,
Inc.
and Best Practices Insurance Agency, Inc. Collectively, these acquisitions
represented 8.5% of total assets as of December 31, 2006, 2.5% of total revenue
and 1.3% 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, 2006. Management’s assessment of the
effectiveness of internal control over financial reporting as of December 31,
2006 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
1, 2007
/s/
J. Hyatt Brown
|
/s/
Cory T. Walker
|
|
|
J.
Hyatt Brown
|
Cory
T. Walker
|
Chief
Executive Officer
|
Chief
Financial Officer
|
60
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, 2006, 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 its assessment the internal control over
financial reporting at Axiom Intermediaries, NuQuest Resources, Inc. and Bridge
Pointe, Inc., Ideal Insurance Agency, Inc., Monarch Management Corporation
and Texas Monarch Management Corporation, Delaware Valley Underwriting Agency,
Inc. et al., and ProTexn, Inc. and Best Practices Insurance Agency, Inc.
(collectively the “2006 Excluded Acquisitions”), which were acquired during
2006 and whose financial statements constitute 8.5% of total assets, 2.5% of
revenues and 1.3% of net income of the consolidated financial statement amounts
as of and for the year ended December 31, 2006. Accordingly, our audit did
not
include the internal control over financial reporting at the 2006 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, 2006, 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, 2006,
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, 2006 of the Company and
our
report dated March 1, 2007, expressed an unqualified opinion on those financial
statements.
/s/
Deloitte & Touche LLP
Certified
Public Accountants
Jacksonville,
Florida
March
1, 2007
61
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 2006.
ITEM 9A. |
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation (the “Evaluation”) required by Rules 13a-15 and
15d-15 under the Exchange Act of 1934 (the “Exchange Act”), 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, 2006 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, 2006. 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.
62
PART
III
ITEM 10. |
Directors, Executive
Officers and Corporate
Governance.
|
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 SEC in connection with the Annual Meeting of Shareholders to be held
in
2007 (the “2007 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 are 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.
ITEM 11. |
Executive
Compensation.
|
The
information required by this item is incorporated herein by reference to the
2007 Proxy Statement under the heading “Executive
Compensation.”
ITEM 12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this item is incorporated herein by reference to the
2007 Proxy Statement under the heading “Security Ownership of Management and
Certain Beneficial Owners.”
ITEM 13. |
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by this item is incorporated herein by reference to the
2007 Proxy Statement under the heading “Management — Certain
Relationships and Related Transactions."
ITEM 14. |
Principal
Accountant Fees and
Services.
|
The
information required by this item is incorporated herein by reference to the
2007 Proxy Statement under the heading “Fees Paid to Deloitte & Touche LLP.”
63
PART
IV
ITEM 15. |
Exhibits
and Financial Statement
Schedules.
|
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).
|
|
|
10.1(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 (incorporated by reference to Exhibit
10.2(a) to
Form 10-K for the year ended December 31, 2005).
|
|
|
|
|
|
|
10.1(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 (incorporated by reference to Exhibit 10.2(ba) to Form
10-K for the
year ended December 31, 2005).
|
|
|
|
|
|
|
10.1(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 (incorporated by reference to Exhibit 10.2(c)
to
Form 10-K for the year ended December 31, 2005).
|
|
|
|
|
|
|
10.2
|
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).
|
|
|
|
|
|
|
10.3
|
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).
|
|
|
|
|
|
|
10.4
|
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).
|
|
|
|
|
|
|
10.5
|
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).
|
|
|
10.6(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).
|
|
|
|
|
|
|
10.6(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).
|
|
|
10.7
|
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).
|
64
|
|
10.8
|
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).
|
|
|
|
|
|
|
10.9
|
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).
|
|
|
|
|
|
|
10.10
|
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).
|
|
|
10.11
|
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).
|
|
|
10.12
|
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).
|
|
|
|
|
|
|
10.13
|
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).
|
|
|
10.14
|
Master
Shelf and Note Purchase Agreement Dated as of December 22, 2006,
by and
among Brown & Brown, Inc., and Prudential Investment Management, Inc.
and certain Prudential affiliates as purchasers of the 5.66% Series
C
Senior Notes due December 22, 2016.
|
10.15
|
Second
Amendment to Amended and Restated Revolving and Term Loan Agreement
dated
as of December 22, 2006, by and between Brown & Brown, Inc. and
SunTrust Bank.
|
||
10.16
|
Third
Amendment to Revolving Loan Agreement dated as of December 22,
2006, by
and between Brown & Brown, Inc. and SunTrust Bank.
|
||
10.17
|
Third
Amendment to Amended and Restated Revolving and Term Loan Agreement
dated
as of January 30, 2007 by and between Brown & Brown, Inc. and SunTrust
Bank.
|
||
10.18
|
Fourth
Amendment to Revolving Loan Agreement dated as of January 30, 2007
by and
between Brown & Brown, Inc. and SunTrust Bank.
|
||
|
|
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.
|
|
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32.2
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Section 1350
Certification by the Chief Financial Officer of the
Registrant.
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65
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.
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BROWN
& BROWN, INC.
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Registrant
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Date:
March 1, 2007
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By:
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/S/
J.
Hyatt
Brown
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J.
Hyatt Brown
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Chief
Executive Officer
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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
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Title
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Date
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*
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Chairman
of the Board and
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March
1, 2007
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J.
Hyatt Brown
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Chief
Executive Officer
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(Principal
Executive Officer)
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*
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Vice
Chairman and Chief Operating
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March
1, 2007
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Jim
W. Henderson
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Officer,
Director
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*
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Sr.
Vice President, Treasurer and
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March
1, 2007
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Cory
T. Walker
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Chief
Financial Officer (Principal
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Financial
and Accounting Officer)
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*
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Director
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March
1, 2007
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Samuel
P. Bell, III
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*
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Director
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March
1, 2007
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Hugh
M. Brown
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Director
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Bradley
Currey, Jr.
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*
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Director
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March
1, 2007
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Theodore
J. Hoepner
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*
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Director
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March
1, 2007
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David
H. Hughes
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*
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Director
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March
1, 2007
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Toni
Jennings
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*
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Director
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March
1, 2007
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John
R. Riedman
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*
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Director
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March
1, 2007
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Jan
E. Smith
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*
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Director
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March
1, 2007
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Chilton
D. Varner
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*By:
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/S/
LAUREL L. GRAMMIG
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Laurel
L. Grammig
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Attorney-in-Fact
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66
EXHIBIT
INDEX
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3.1
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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).
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3.2
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Bylaws
(incorporated by reference to Exhibit 3b to Form 10-K for the year
ended
December 31, 2002).
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10.1(a)
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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 (incorporated by reference to Exhibit 10.2(a)
to
Form 10-K for the year ended December 31, 2005).
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10.1(b)
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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 (incorporated by reference to Exhibit 10.2(b) to Form 10-K
for the
year ended December 31, 2005).
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10.1(c)
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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 (incorporated by reference to Exhibit 10.2(c)
to
Form 10-K for the year ended December 31, 2005).
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10.2
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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).
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10.3
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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).
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10.4
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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).
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10.5
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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).
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10.6(a)
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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).
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10.6(b)
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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).
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10.7
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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).
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67
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10.8
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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).
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10.9
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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).
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10.10
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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).
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10.11
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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).
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10.12
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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).
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10.13
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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).
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10.14
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Master
Shelf and Note Purchase Agreement Dated as of December 22,
2006, by and
among Brown & Brown, Inc., and Prudential Investment Management, Inc.
and certain Prudential affiliates as purchasers of the 5.66%
Series C
Senior Notes due December 22, 2016.
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10.15
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Second
Amendment to Amended and Restated Revolving and Term Loan Agreement
dated
as of December 22, 2006, by and between Brown & Brown, Inc. and
SunTrust Bank.
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10.16
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Third
Amendment to Revolving Loan Agreement dated as of December
22, 2006, by
and between Brown & Brown, Inc. and SunTrust Bank.
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10.17
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Third
Amendment to Amended and Restated Revolving and Term Loan Agreement
dated
as of January 30, 2007 by and between Brown & Brown, Inc. and SunTrust
Bank.
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10.18
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Fourth
Amendment to Revolving Loan Agreement dated as of January 30,
2007 by and
between Brown & Brown, Inc. and SunTrust Bank.
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21
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Subsidiaries
of the Registrant.
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23
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Consent
of Deloitte & Touche LLP.
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24
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Powers
of Attorney pursuant to which this Form 10-K has been signed
on behalf of
certain directors and officers of the Registrant.
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31.1
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Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer of the
Registrant.
|
|
|
|
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|
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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.
|
68