UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
| x |
ANNUAL REPORT PURSUANT
TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
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| For the fiscal year ended December 31, 2005 | |
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OR
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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 1-13619
BROWN
& BROWN, INC.
(Exact
name of Registrant as specified in its
charter)
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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:
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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
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No
x
The
aggregate market value of the voting Common Stock held by non-affiliates of
the
registrant, computed by reference to the last reported price at which the stock
was sold on June 30, 2005 (the last day of the registrant’s most recently
completed second fiscal quarter), was $2,490,874,100.
The
number of outstanding shares of the registrant’s Common Stock, $.10 par value,
outstanding as of March 10, 2006 was 139,397,938.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of Brown & Brown, Inc.’s Proxy Statement for the 2006 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
Report.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2005
Disclosure
Regarding Forward-Looking Statements
Brown
& Brown, Inc., together with its subsidiaries (collectively, “we”, “Brown
& Brown” or the “Company”), make “forward-looking statements” within the
“safe harbor” provision of the Private Securities Litigation Reform Act of 1995
throughout this report and in the documents we incorporate by reference into
this report. You can identify these statements by forward-looking words
such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan” and
“continue” or similar words. We have based these statements on our current
expectations about future events. Although we believe the
expectations expressed in the forward-looking statements included in this Form
10-K and those reports, statements, information and announcements are based
on
reasonable assumptions within the bounds of our knowledge of our business,
a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made
by us
or on our behalf. Many of these factors have previously been identified in
filings or statements made by us or on our behalf. Important factors which
could cause our actual results to differ materially from the forward-looking
statements in this report include:
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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, 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, 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, brokerage and service organization with origins
dating from 1939, headquartered in Daytona Beach and Tampa, Florida. We
market and sell to our customers insurance products and services, primarily
in
the property, casualty and employee benefits areas. As an agent and broker,
we
do not assume underwriting risks. Instead, we provide our customers with quality
insurance contracts, as well as other targeted, customized risk management
products and services.
We
are
compensated for our services primarily by commissions paid by insurance
companies and fees paid by customers for certain services. The commission is
usually a percentage of the premium paid by the insured. Commission rates
generally depend upon the type of insurance, the particular insurance company
and the nature of the services provided by us. In some cases, a commission
is
shared with other agents or brokers who have acted jointly with us in a
transaction. We may also receive from an insurance company a “contingent
commission”, which is a profit-sharing commission based primarily on
underwriting results, but may also contain considerations for volume, growth
and/or retention. Fees are principally generated by our Services Division,
which offers third-party claims administration, consulting for the self-funded
workers’ compensation insurance market, and managed healthcare services.
The amount of our revenue from commissions and fees is a function of, among
other factors, continued new business production, retention of existing
customers, acquisitions and fluctuations in insurance premium rates and
insurable exposure units.
Premium
pricing within the property and casualty insurance underwriting industry has
historically been cyclical, displaying a high degree of volatility based on
prevailing economic and competitive conditions. From the mid-1980s through
1999,
the property and casualty insurance industry experienced a “soft market” during
which the underwriting capacity of insurance companies expanded, stimulating
an
increase in competition and a decrease in premium rates and related commissions.
The effect of this softness in rates on our revenues was somewhat offset by
our
acquisitions and new business production. As a result of increasing “loss
ratios” (the comparison of incurred losses plus adjustment expenses against
earned premiums) of insurance companies through 1999, there was a general
increase in premium rates beginning in the first quarter of 2000 and continuing
into 2003. During 2003, the increases in premium rates began to moderate
and, in certain lines of insurance, the premium rates decreased. In 2004,
as general premium rates continued to moderate, the insurance industry
experienced the worst hurricane season since 1992 when Hurricane Andrew hit
south Florida. The insured losses from the 2004 hurricane season were absorbed
relatively easily by the insurance industry and the general insurance premium
rates continued to soften during 2005. During the third quarter of 2005, the
insurance industry experienced the worst hurricane season ever recorded.
Primarily as a result of these hurricanes, including Hurricanes Katrina, Rita
and Wilma, the total insured losses are estimated to be in excess of $50
billion. The full impact that the 2005 insured losses will have on the insurance
premium rates charged by insurance companies for 2006 is unknown, however,
there
appears to be a general consensus that there will be upward pressure on at
least
the insurance premium rates on coastal property, primarily in the southeastern
part of the United States.
As
of
December 31, 2005, our activities were conducted in 170 locations in 34 states
as follows:
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Florida
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38
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Arkansas
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3
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California
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12
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Minnesota
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3
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Georgia
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11
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Nevada
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3
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New
York
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10
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South
Carolina
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3
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Texas
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10
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Wisconsin
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3
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New
Jersey
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8
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Montana
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2
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Virginia
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8
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New
Hampshire
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2
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Colorado
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6
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North
Carolina
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2
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Washington
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5
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Connecticut
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1
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Arizona
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4
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Hawaii
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1
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Illinois
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4
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Kentucky
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1
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Indiana
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4
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Massachusetts
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1
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Louisiana
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4
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Missouri
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1
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Michigan
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4
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Nebraska
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1
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New
Mexico
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4
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Ohio
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1
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Oklahoma
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4
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Tennessee
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1
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Pennsylvania
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4
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Utah
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1
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Business
Combinations
Beginning
in 1993 through 2005, we acquired 205 insurance intermediary operations,
excluding acquired books of business (customer accounts), that had aggregate
estimated annual revenues of $570.7 million for the 12 calendar months
immediately preceding the dates of acquisition. Of these, 32 operations
were acquired during 2005, with aggregate estimated annual revenues of $123.0
million for the 12 calendar months immediately preceding the dates of
acquisition. During 2004, 32 operations were acquired with aggregate
estimated annual revenues of $103.3 million for the 12 calendar months
immediately preceding the dates of acquisition. During 2003, 23 operations
were acquired, with aggregate estimated annual revenues of $42.6 million for
the
12 calendar months immediately preceding the dates of acquisition. Additionally
in 2003, we acquired the remaining 25% ownership of Florida Intracoastal
Underwriters, Limited Company that we previously did not own.
See
Note
2 to the Consolidated Financial Statements for a summary of our 2005
acquisitions.
From
January 1, 2006 through March 14, 2006, Brown & Brown acquired the assets
and assumed certain liabilities of three insurance intermediary entities. See
Note 17 to the Consolidated Financial Statements for a summary of our 2006
acquisitions.
DIVISIONS
Our
business is divided into four reportable operating segments: (1) the Retail
Division; (2) the National Programs Division; (3) the Brokerage Division; and
(4) the Services Division. The Retail Division provides a broad range of
insurance products and services to commercial, public entity, professional
and
individual customers. The National Programs Division is comprised of two units:
Professional Programs, which provides professional liability and related package
products for certain professionals; and Special Programs, which markets targeted
products and services designated for specific industries, trade groups, public
entities, and market niches. The Brokerage Division markets and sells
excess and surplus commercial insurance and reinsurance, primarily through
independent agents and brokers. The Services Division provides clients
with third-party claims administration, consulting for the workers’ compensation
insurance market, and comprehensive medical utilization management services
in
both workers’ compensation and all-lines liability arenas.
The
following table sets forth a summary of (1) the commissions and fees revenue
(revenues from external customers) generated by each of our reportable operating
segments for 2005, 2004 and 2003, and (2) the percentage of our total
commissions and fees revenue represented by each segment for each such period:
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(in
thousands, except percentages)
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2005
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%
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2004
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%
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2003
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%
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Retail
Division
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$489,566
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63.1
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% |
$457,936
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71.8
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% |
$395,385
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72.5
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% |
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National
Programs Division
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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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90,385
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16.6
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Brokerage
Division
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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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31,738
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5.8
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Services
Division
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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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27,920
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5.1
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Other
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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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(141)
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(0.0)
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Total
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$775,543
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100.0
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% |
$638,267
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100.0
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% |
$545,287
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100.0
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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, 2005, our Retail Division operated in 27 states and employed 2,718
persons. Our retail insurance agency business provides a broad range of
insurance products and services to commercial, public entity, professional
and
individual customers. The categories of insurance principally sold by us
include: property insurance relating to physical damage to property and
resultant interruption of business or extra expense caused by fire, windstorm
or
other perils; casualty insurance relating to legal liabilities, workers’
compensation, commercial and private passenger automobile coverages; and
fidelity and surety bonds. We also sell and service group and individual life,
accident, disability, health, hospitalization, medical and dental insurance.
No
material part of our retail business is attributable to a single customer or
a
few customers. During 2005, commissions and fees from our largest single Retail
Division customer represented less than one percent of the Retail Division’s
total commissions and fees revenue.
In
connection with the selling and marketing of insurance coverages, we provide
a
broad range of related services to our customers, such as risk management
surveys and analysis, consultation in connection with placing insurance
coverages and claims processing. We believe these services are important factors
in securing and retaining customers.
National
Programs Division
As
of
December 31, 2005, our National Programs Division employed 645 persons. Our
National Programs Division consists of two units: Professional Programs and
Special Programs.
Professional
Programs.
Professional Programs provides professional liability and related package
insurance products for certain professionals. Professional Programs
tailors insurance products to the needs of a particular professional group;
negotiates policy forms, coverages and commission rates with an insurance
company; and, in certain cases, secures the formal or informal endorsement
of
the product by a professional association or sponsoring company. The
professional groups serviced by the Professional Programs include
dentists, lawyers, optometrists, opticians, insurance agents, financial service
representatives, benefit administrators, real estate title agents and escrow
agents. The Professional Protector Plan® for Dentists and the Lawyer’s
Protector Plan® are marketed and sold primarily through a national network of
independent agencies including certain of our retail offices, while certain
of
the professional liability programs of our CalSurance® and TitlePac® operations
are principally marketed and sold directly to our insured customers, in some
instances through certain of our retail offices. Under our agency agreements
with the insurance companies that underwrite these programs, we often have
authority to bind coverages (subject to established guidelines), to bill and
collect premiums and, in some cases, to adjust claims. For the programs
that we market through independent agencies, we receive a wholesale commission
or “override”, which is then shared with these independent agencies.
Below
are
brief descriptions of the programs offered to professional groups by the
Professional Programs unit of the National Programs Division.
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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 in
1973. 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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•
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Physicians:
Initiated in 1980, the Physicians’ Protector Plan® offered professional
liability insurance for physicians, surgeons and other healthcare
providers in select states. The contract with the underwriting
insurance company on this program expired in March 2003. Since a
replacement insurance company or program could not be negotiated,
we
terminated this program in 2004.
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Special
Programs.
Special Programs markets targeted products and services to specific industries,
trade groups, public entities, and market niches. All of the Special
Programs, except for Parcel Insurance Plan® (PIP®), are marketed and sold
primarily through independent agents, including certain of our retail
offices. Parcel Insurance Plan® markets and sells its insurance product
directly to insured customers. Under agency agreements with the insurance
companies that underwrite these programs, we often have authority to bind
coverages subject to established guidelines, to bill and collect premiums and,
in some cases, to adjust claims.
Below
are
brief descriptions of the Special Programs:
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•
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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 offices in Ephrata, Washington, Norcross, Georgia,
and
Kokomo, Indiana are program administrators offering unique property
and
casualty insurance products, risk management consulting, third-party
administration and related services designed for municipalities,
schools,
fire districts, and other public entities on a national basis.
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•
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Proctor
Financial, Inc.
(“Proctor”) provides insurance programs and compliance solutions for
financial institutions who service mortgage loans. Proctor’s
products include lender-placed fire and flood insurance, full insurance
outsourcing, mortgage impairment, and blanket equity insurance.
Proctor also writes surplus lines property business for its financial
institutions clients and acts as a wholesaler for this line of
business.
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•
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American
Specialty Insurance & Risk Services, Inc.
provides insurance and risk services for the sports and entertainment
industry with clients in professional sports, motor sports, amateur
sports, and the entertainment industry.
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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 unique
insurance products for the health and human service industry. AFC
works with retail agents in all states and targets home healthcare,
group
homes for the mentally and physically challenged, and drug and alcohol
facilities and programs for the developmentally disabled.
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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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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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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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Environmental
Protector Plan®.
Introduced in 1998, this program provides a variety of specialized
coverages, primarily to municipal mosquito control districts.
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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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Brokerage
Division
The
Brokerage Division markets excess and surplus commercial insurance products
and
services to retail agencies (including our retail offices), and reinsurance
products and services to insurance companies throughout the United States.
Brokerage Division offices represent various U.S. and U.K. surplus lines
insurance companies and certain offices are also Lloyd’s of London
correspondents. The Brokerage Division also represents admitted insurance
companies for smaller agencies that do not have access to large insurance
company representation. Excess and surplus insurance products include many
insurance coverages, including, personal lines homeowners, yachts, jewelry,
commercial property and casualty, commercial automobile, garage, restaurant,
builder’s risk and inland marine lines. Difficult-to-insure general liability
and products liability coverages are a specialty, as is excess workers’
compensation coverage. Retail agency business is solicited through mailings
and
direct contact with retail agency representatives. At December 31, 2005, the
Brokerage Division employed 806 persons.
In
September 2001, we established Brown & Brown Re, Inc., a subsidiary
headquartered in New York, New York that specializes in treaty and facultative
reinsurance brokerage services. Brown & Brown Re had approximately
$2.0 million in commission revenues in 2005.
On
January 1, 2006, we acquired the assets of Axiom Intermediaries, LLC. (Axiom)
with estimated annualized revenues of $14.0 million. Brown & Brown Re will
be merged into Axiom. The Axiom acquisition will substantially increase our
treaty and facultative reinsurance brokerage services.
In
March
2005, we acquired the assets of Hull & Company, Inc. (Hull) with estimated
annualized revenues of $63.0 million which along with acquisitions of several
other larger brokerage operations, essentially tripled the 2005 revenues of
this
Division over 2004 revenues.
Services
Division
At
December 31, 2005, our Services Division employed 285 persons and provided
the
following services: (1) insurance-related services, including comprehensive
risk
management and third-party administration (TPA) services for insurance entities
and self-funded or fully-insured workers’ compensation and liability plans; and
(2) comprehensive medical utilization management services for both workers’
compensation and all-lines liability insurance plans.
The
Services Division’s workers’ compensation and liability plan TPA services
include claims administration, access to major reinsurance markets, cost
containment consulting, services for secondary disability, and subrogation
recoveries and risk management services such as loss control. In 2005, our
three
largest workers’ compensation contracts represented approximately 61.6% of
our Services Divisions commissions and fees revenue, or approximately
2.1% of our total consolidated commissions and fees revenue. In addition, the
Services Division provides managed care services, including medical networks,
case management and utilization review services, certified by the American
Accreditation Health Care Commission.
In
2004,
we sold our Louisiana-based employee benefits TPA. In 2003, we sold a
similar operation based in Florida. We currently have no operations in the
employee benefits TPA business and have no current plans to re-enter this area
of the services business.
Employees
At
December 31, 2005, we had 4,540 employees. We have agreements with our
sales employees and certain other employees that include provisions restricting
their right to solicit our insured customers and employees after separation
from
employment with us. The enforceability of such agreements varies from state
to
state depending upon state statutes, judicial decisions and factual
circumstances. The majority of these agreements are at-will and terminable
by
either party; however, the covenants not to solicit our insured customers and
employees generally continue for a period of two years after cessation of
employment.
None
of
our employees is represented by a labor union, and we consider our
relations with our employees to be satisfactory.
Competition
The
insurance intermediary business is highly competitive, and numerous firms
actively compete with us for customers and insurance markets. Competition
in the insurance business is largely based on innovation, quality of service
and
price. There are a number of firms and banks with substantially greater
resources and market presence that compete with us in the southeastern United
States and elsewhere. This situation is particularly pronounced outside of
Florida.
A
number
of insurance companies are engaged in the direct sale of insurance, primarily
to
individuals, and do not pay commissions to third-party agents and brokers.
In
addition, the Internet continues to be a source for direct placement of personal
lines business. To date, such direct writing has had little effect on our
operations, primarily because our Retail Division is commercially oriented.
In
addition, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
and regulations enacted thereunder permit banks, securities firms and insurance
companies to affiliate. As a result, the financial services industry has
experienced and may experience further consolidation, which in turn has resulted
and could further result in increased competition from diversified financial
institutions, including competition for acquisition prospects.
Regulation,
Licensing and Agency Contracts
We
and/or
our designated employees must be licensed to act as agents or brokers by state
regulatory authorities in the states in which we conduct business. Regulations
and licensing laws vary by individual state and are often complex.
The
applicable licensing laws and regulations in all states are subject to amendment
or reinterpretation by state regulatory authorities, and such authorities are
vested in most cases with relatively broad discretion as to the granting,
revocation, suspension and renewal of licenses. The possibility exists that
we
and/or our employees could be excluded or temporarily suspended from carrying
on
some or all of our activities in, or otherwise subjected to penalties by, a
particular state.
Available
Information
We
make
available free of charge on our website, at www.bbinsurance.com, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange
Act) and the rules promulgated thereunder, as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and
Exchange Commission.
The
charters of the Audit, Compensation and Nominating/Governance Committees of
our
Board of Directors as well as our Corporate Governance Guidelines are also
available on our website or upon request. Requests for copies of any of
these documents should be directed in writing to Corporate Secretary, Brown
& Brown, Inc., 3101 West Martin Luther King Jr. Blvd., Suite 400, Tampa,
Florida 33607, or by telephone to (813) 222-4277.
As
referenced, this Annual Report on Form 10-K includes certain
forward-looking statements regarding various matters. The ultimate correctness
of those forward-looking statements is dependent upon a number of known and
unknown risks and events, and is subject to various uncertainties and other
factors that may cause our actual results, performance or achievements to be
different from those expressed or implied by those statements. Undue reliance
should not be placed on those forward-looking statements. The following
important factors, among others, as well as those factors set forth in our
other
SEC filings from time to time, could affect future results and events, causing
results and events to differ materially from those expressed or implied in
our
forward-looking statements. The
risks and uncertainties described below are not the only ones facing Brown
&
Brown Inc. and its subsidiaries. Additional risks and uncertainties, not
presently known to us or otherwise, may also impair our business operations.
WE
CANNOT ACCURATELY FORECAST OUR COMMISSION REVENUES BECAUSE OUR COMMISSIONS
DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HISTORICALLY
HAVE
VARIED AND, AS A RESULT, HAVE BEEN DIFFICULT TO PREDICT.
We
are
primarily engaged in insurance agency and brokerage activities and derive
revenues principally from commissions paid by insurance companies. The amount
of
such commissions is highly dependent on premium rates charged by insurance
companies. We do not determine insurance premiums. Premium rates are determined
by insurance companies based on a fluctuating market. Historically, property
and
casualty premiums have been cyclical in nature and have varied widely based
on
market conditions. From the mid-1980s through 1999, general premium levels
were
depressed as a result of the expanded underwriting capacity of insurance
companies and increased competition. In many cases, insurance companies lowered
commission rates and increased volume requirements. Significant reductions
in
premium rates occurred during the years 1986 through 1999. As a result of
increasing "loss ratios" (the comparison of incurred losses plus loss adjustment
expenses against earned premiums) experience by insurance companies through
1999, there was a general increase in premium rates beginning in the first
quarter of 2000 and continuing into 2003. During 2004, there was a rapid
transition as previously stable or increasing rates fell in most markets. These
rate declines were most pronounced in the property and casualty market, with
rates falling between 10% and 30% by year-end. Rate declines continued through
2005, although the pace of decline moderated in the latter part of the
year.
As
traditional risk-bearing insurance companies continue to outsource the
production of premium revenue to non-affiliated brokers or agents such as us,
those insurance companies may seek to reduce further their expenses by reducing
the commission rates payable to those insurance agents or brokers. The reduction
of these commission rates, along with general volatility and/or declines in
premiums, may significantly affect our profitability. Because we do not
determine the timing or extent of premium pricing changes, we cannot accurately
forecast our commission revenues, including whether they will significantly
decline. As a result, our budgets for future acquisitions, capital expenditures,
dividend payments, loan repayments and other expenditures may have to be
adjusted to account for unexpected changes in revenues, and any decreases in
premium rates may adversely affect our operations.
OUR
BUSINESS PRACTICES AND COMPENSATION ARRANGEMENTS ARE SUBJECT TO UNCERTAINTY
DUE
TO INVESTIGATIONS BY GOVERNMENTAL AUTHORITIES AND RELATED PRIVATE
LITIGATION.
The
business practices and compensation arrangements of the insurance intermediary
industry, including us, are subject to uncertainty due to investigations by
various governmental authorities and related private litigation. The
legislatures of various states may adopt new laws addressing contingent
commission arrangements, including laws prohibiting such arrangements, and
addressing disclosure of such arrangements to insureds, and various state
departments of insurance may adopt new regulations addressing these matters.
While it is not possible to predict the outcome of the governmental inquiries
and investigations into the insurance industry’s commission payment practices or
the responses by the market and government regulators, any material decrease
in
our contingent commissions is likely to have an adverse effect on our results
of
operations.
WE
ARE SUBJECT TO A NUMBER OF INVESTIGATIONS AND LEGAL PROCEEDINGS WHICH, IF
DETERMINED UNFAVORABLY FOR US, MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
In
addition to routine litigation and disclosed governmental investigations and
requests for information, we have been named as a defendant in two purported
class actions brought against a number of insurance intermediaries and insurance
companies, and have received a derivative demand from counsel for a purported
shareholder which could result in a purported securities class action based
on
claimed improprieties in the manner in which we are compensated by insurance
companies. The final outcome of these and similar matters, and related costs,
cannot be determined. An unfavorable resolution of these matters could adversely
affect our results of operations.
OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE
MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS AND THE OUTCOME OF CERTAIN
FACTUAL AND POTENTIAL CLAIMS, LAWSUITS AND PROCEEDINGS.
We
may be
subject to various actual and potential claims, lawsuits and other proceedings
relating principally to alleged errors and omissions in connection with the
placement of insurance in the ordinary course of business. Because we often
assist clients with matters involving substantial amounts of money, including
the placement of insurance and the handling of related claims, errors and
omissions claims against us may arise which allege potential liability for
all
or part of the amounts in question. Claimants may seek large damage awards
and
these claims may involve potentially significant legal costs. Such claims,
lawsuits and other proceedings could, for example, include claims for damages
based on allegations that our employees or sub-agents improperly failed to
procure coverage, report claims on behalf of clients, provide insurance
companies with complete and accurate information relating to the risks being
insured or to appropriately apply funds that we hold for our clients on a
fiduciary basis. We have established provisions against these items which we
believe to be adequate in the light of current information and legal advice,
and
we adjust such provisions from time to time according to
developments.
While
most of the errors and omissions claims made against us have, subject to our
self-insured deductibles, been covered by our professional indemnity insurance,
our business, results of operations, financial condition and liquidity may
be
adversely affected if, in the future, our insurance coverage proves to be
inadequate or unavailable or there is an increase in liabilities for which
we
self-insure. Our ability to obtain professional indemnity insurance in the
amounts and with the deductibles we desire in the future may be adversely
impacted by general developments in the market for such insurance or our own
claims experience. In addition, claims, lawsuits and other proceedings may
harm
our reputation or divert management resources away from operating our business.
WE
DERIVE A SIGNIFICANT PORTION OF OUR COMMISSION REVENUES FROM TWO INSURANCE
COMPANIES, THE LOSS OF WHICH COULD RESULT IN ADDITIONAL EXPENSE AND LOSS OF
MARKET SHARE.
For
the
year ended December 31, 2005, approximately 8.0% and 5.4%,
respectively, of our total revenues were derived from insurance policies
underwritten by two separate insurance companies, respectively. Should either
of
these insurance companies seek to terminate their arrangements with us, we
believe that other insurance companies are available to underwrite the business,
although some additional expense and loss of market share could possibly result.
No other insurance company accounts for 5% or more of our total revenues.
BECAUSE
OUR BUSINESS IS HIGHLY CONCENTRATED IN CALIFORNIA, FLORIDA, GEORGIA, NEW JERSEY,
NEW YORK, PENNSYLVANIA AND WASHINGTON, ADVERSE ECONOMIC CONDITIONS OR REGULATORY
CHANGES IN THESE STATES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
A
significant portion of our business is concentrated in California, Florida,
Georgia, New Jersey, New York, Pennsylvania and Washington. For the years ended
December 31, 2005 and December 31, 2004, we derived $554.8 million, or 70.6%,
and $468.7 million, or 72.5%, of our commissions and fees from our operations
located in these states, respectively. We believe that these revenues are
attributable predominately to clients in these states. We believe the regulatory
environment for insurance agencies in these states currently is no more
restrictive than in other states. The insurance business is a state-regulated
industry, and therefore, state legislatures may enact laws that adversely affect
the insurance industry. Because our business is concentrated in a few states,
we
face greater exposure to unfavorable changes in regulatory conditions in those
states than insurance agencies whose operations are more diversified through
a
greater number of states. In addition, the occurrence of adverse economic
conditions, natural or other disasters, or other circumstances specific to
or
otherwise significantly impacting these states could adversely affect our
financial condition and results of operations.
OUR
GROWTH STRATEGY DEPENDS IN PART ON THE ACQUISITION OF INSURANCE AGENCIES, WHICH
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS IN THE FUTURE AND WHICH, IF
CONSUMMATED, MAY NOT BE ADVANTAGEOUS TO US.
Our
growth strategy includes the acquisition of insurance agencies. Our ability
to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into our operations, and expand into new markets
will require us to continue to implement and improve our operations, financial,
and management information systems. Integrated, acquired entities may not
achieve levels of revenue, profitability, or productivity comparable to our
existing locations, or otherwise perform as expected. In addition, we compete
for acquisition and expansion opportunities with entities that have
substantially greater resources. Acquisitions also involve a number of special
risks, such as: diversion of management's attention; difficulties in the
integration of acquired operations and retention of personnel; entry into
unfamiliar markets; unanticipated problems or legal liabilities; and tax and
accounting issues, some or all of which could have a material adverse effect
on
the results of our operations and our financial condition.
OUR
CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF INCREASED COMPETITION FROM
INSURANCE COMPANIES AND THE FINANCIAL SERVICES INDUSTRY.
The
insurance agency business is highly competitive and we actively compete with
numerous firms for clients and insurance companies, many of which have
relationships with insurance companies or have a significant presence in niche
insurance markets, that may give them an advantage over us. Because
relationships between insurance agencies and insurance companies or clients
are
often local or regional in nature, this potential competitive disadvantage
is
particularly pronounced outside of Florida. A number of insurance companies
are
engaged in the direct sale of insurance, primarily to individuals, and do not
pay commissions to agents and brokers. In addition, as and to the extent that
banks, securities firms and insurance companies affiliate, the financial
services industry may experience further consolidation, and we therefore may
experience increased competition from insurance companies and the financial
services industry, as a growing number of larger financial institutions
increasingly, and aggressively, offer a wider variety of financial services,
including insurance, than we currently offer.
PROPOSED
TORT REFORM LEGISLATION, IF ENACTED, COULD DECREASE DEMAND FOR LIABILITY
INSURANCE, THEREBY REDUCING OUR COMMISSION REVENUES.
Legislation
concerning tort reform has been considered, from time to time, in the United
States Congress and in several states. Among the provisions considered for
inclusion in such legislation have been limitations on damage awards, including
punitive damages, and various restrictions applicable to class action lawsuits.
Enactment of these or similar provisions by Congress, or by states in which
we
sell insurance, could result in a reduction in the demand for liability
insurance policies or a decrease in policy limits of such policies sold, thereby
reducing our commission revenues.
WE
COMPETE IN A HIGHLY REGULATED INDUSTRY, WHICH MAY RESULT IN INCREASED EXPENSES
OR RESTRICTIONS ON OUR OPERATIONS.
We
conduct business in most states and are subject to comprehensive regulation
and
supervision by government agencies in the states in which we do business. The
primary purpose of such regulation and supervision is to provide safeguards
for
policyholders rather than to protect the interests of stockholders. The laws
of
the various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to, among other things, licensing to transact
business, licensing of agents, admittance of assets, regulating premium rates,
approving policy forms, regulating unfair trade and claims practices,
establishing reserve requirements and solvency standards, requiring
participation in guarantee funds and shared market mechanisms, and restricting
payment of dividends. Also, in response to perceived excessive cost or
inadequacy of available insurance, states have from time to time created state
insurance funds and assigned risk pools, which compete directly, on a subsidized
basis, with private insurance providers. We act as agents and brokers for such
state insurance funds in California and certain other states. These state funds
could choose to reduce the sales or brokerage commissions we receive. Any such
event, in a state in which we have substantial operations, such as Florida,
Arizona or New York, could substantially affect the profitability of our
operations in such state, or cause us to change our marketing focus. State
insurance regulators and the National Association of Insurance Commissioners
continually re-examine existing laws and regulations, and such re-examination
may result in the enactment of insurance-related laws and regulations, or the
issuance of interpretations thereof, that adversely affect our business.
Although we believe that we are in compliance in all material respects with
applicable local, state and federal laws, rules and regulations, there can
be no
assurance that more restrictive laws, rules or regulations will not be adopted
in the future that could make compliance more difficult or expensive.
Specifically, recently adopted federal financial services modernization
legislation could lead to additional federal regulation of the insurance
industry in the coming years, which could result in increased expenses or
restrictions on our operations.
PROFIT
SHARING CONTINGENT COMMISSIONS AND OVERRIDES PAID BY INSURANCE COMPANIES ARE
LESS PREDICTABLE THAN USUAL, WHICH IMPAIRS OUR ABILITY TO PREDICT THE AMOUNT
OF
SUCH COMMISSIONS THAT WE WILL RECEIVE.
We
derive
a portion of our revenues from profit sharing contingent commissions and
overrides paid by insurance companies. The aggregate of these commissions
generally accounts for 5.4% to 7.1% of the previous years total annual revenues
over the last three years. Profit sharing contingent commissions are special
revenue-sharing commissions paid by insurance companies based upon the volume
and the growth and/or profitability of the business placed with such companies
during the prior year. We primarily receive these commissions in the first
and
second quarters of each year. Override commissions are paid by insurance
companies based on the volume of business that we place with them and are
generally paid over the course of the year. Due to recent changes in our
industry, including the agreement of at least one carrier with government
regulators to cease payment of certain of such commissions and including changes
in underwriting criteria due in part to the high loss ratios experienced by
insurance companies, we cannot predict the payment of these commissions as
well
as we have been able to in the past. Further, we have no control over the
ability of insurance companies to estimate loss reserves, which affects our
ability to make profit-sharing calculations. Because these commissions affect
our revenues, any decrease in their payment to us could adversely affect the
results of our operations and our financial condition.
OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR LIQUIDITY MAY BE
MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS.
We
have
extensive operations and are subject to claims and litigation in the ordinary
course of business resulting from alleged errors and omissions. Because we
often
assist our clients with matters, including the placement of insurance coverage
and the handling of related claims, that involve substantial amounts of money,
errors and omissions claims against us may in turn allege our potential
liability for all or part of the amounts in question, claimants can seek large
damage awards and these claims can involve potentially significant defense
costs. Errors and omissions could include, for example, our employees or
sub-agents failing, whether negligently or intentionally, to place coverage
or
to notify insurance companies of claims on behalf of clients, to provide
insurance companies with complete and accurate information relating to the
risks
being insured or to appropriately apply funds that we hold for our clients
on a
fiduciary basis. It is not always possible to prevent and detect errors and
omissions and the precautions we take may not be effective in all cases. While
most of the errors and omissions claims made against us have, subject to our
self-insured deductibles, been covered by our professional liability insurance,
our results of operations, financial condition or liquidity may be adversely
affected if in the future our insurance coverage proves to be inadequate or
unavailable or there is an increase in liabilities for which we self-insure.
In
addition, errors and omissions claims may harm our reputation or divert
management resources away from operating our business.
WE
HAVE NOT DETERMINED THE AMOUNT OF RESOURCES AND THE TIME THAT WILL BE NECESSARY
TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY, WHICH
MAY
ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS.
Frequent
technological changes, new products and services and evolving industry standards
are all influencing the insurance business. The Internet, for example, is
increasingly used to transmit benefits and related information to clients and
to
facilitate business-to-business information exchange and transactions. We
believe that the development and implementation of new technologies will require
additional investment of our capital resources in the future. We have not
determined, however, the amount of resources and the time that this development
and implementation may require, which may result in short-term, unexpected
interruptions to our business, or may result in a competitive disadvantage
in
price and/or efficiency, as we endeavor to develop or implement new
technologies.
QUARTERLY
AND ANNUAL VARIATIONS IN OUR COMMISSIONS THAT RESULT FROM THE TIMING OF POLICY
RENEWALS AND THE NET EFFECT OF NEW AND LOST BUSINESS PRODUCTION MAY HAVE
UNEXPECTED EFFECTS ON OUR RESULTS OF OPERATIONS.
Our
commission income (including contingent commissions but excluding fees), can
vary quarterly or annually due to the timing of policy renewals and the net
effect of new and lost business production. The factors that cause these
variations are not within our control. Specifically, consumer demand for
insurance products can influence the timing of renewals, new business and lost
business, which includes generally policies that are not renewed, and
cancellations. In addition, as discussed, we rely on insurance companies for
the
payment of certain commissions. Because these payments are processed internally
by these insurance companies, we may not receive a payment that is otherwise
expected from a particular insurance company in one of our quarters or years
until after the end of that period, which can adversely affect our ability
to
budget for significant future expenditures. Quarterly and annual fluctuations
in
revenues based on increases and decreases associated with the timing of policy
renewals have had an adverse effect on our financial condition in the past,
and
we may experience such effects in the future.
WE
MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR INVESTMENT.
The
market price of our common stock may be subject to significant fluctuations
in
response to various factors, including: quarterly fluctuations in our operating
results; changes in securities analysts' estimates of our future earnings;
and
our loss of significant customers or significant business developments relating
to us or our competitors. Our common stock's market price also may be affected
by our ability to meet analysts' expectations and any failure to meet such
expectations, even if minor, could cause the market price of our common stock
to
decline. In addition, stock markets have generally experienced a high level
of
price and volume volatility, and the market prices of equity securities of
many
companies have experienced wide price fluctuations not necessarily related
to
the operating performance of such companies. These broad market fluctuations
may
adversely affect our common stock's market price. In the past, securities class
action lawsuits frequently have been instituted against companies following
periods of volatility in the market price of such companies' securities. If
any
such litigation is instigated against us, it could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on our business, results of operations and financial
condition.
THE
LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT TEAM, PARTICULARLY OUR CHAIRMAN
AND
CHIEF EXECUTIVE OFFICER, J. HYATT BROWN, COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND FUTURE OPERATING RESULTS.
We
believe that our future success depends, in part, on our ability to attract
and
retain experienced personnel, including its senior management, brokers and
other
key personnel. The loss of any of our senior managers or other key personnel,
or
our inability to identify, recruit and retain such personnel, could materially
and adversely affect our business, operating results and financial condition.
Although we operate with a decentralized management system, the loss of the
services of J. Hyatt Brown, our Chairman, and Chief Executive Officer, who
beneficially owned approximately 16% of our outstanding common stock as
of February 2, 2006, and is key to the development and implementation of
our business strategy, could adversely affect our financial condition and future
operating results. We maintain a $5 million "key man" life insurance policy
with
respect to Mr. Brown. We also maintain a $20 million insurance policy on the
lives of Mr. Brown and his wife. Under the terms of an agreement with Mr. and
Mrs. Brown, at the option of the Brown estate, we will purchase, upon the death
of the later to die of Mr. Brown or his wife, shares of our common stock owned
by Mr. and Mrs. Brown up to the maximum number that would exhaust the proceeds
of the policy.
CERTAIN
OF OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL.
At
February 2, 2006, our executive officers, directors and certain of their family
members collectively beneficially owned approximately 20% of our outstanding
common stock, of which J. Hyatt Brown, our Chairman and Chief Executive Officer,
beneficially owned approximately 16%. As a result, our executive officers,
directors and certain of their family members have significant influence over
(1) the election of our Board of Directors, (2) the approval or
disapproval of any other matters requiring stockholder approval, and
(3) the affairs and policies of Brown and Brown.
RECENTLY
ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS MAY TO INCREASE OUR
COSTS.
The
Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes
in
some of our corporate governance, securities disclosure and compliance
practices. In response to the requirements of that Act, the Securities and
Exchange Commission and the New York Stock Exchange have promulgated new rules
on a variety of subjects. Compliance with these new rules has increased our
legal and financial and accounting costs, and we expect these increased costs
to
continue indefinitely. We also expect these developments to make it more
difficult and more expensive for us to obtain director and officer liability
insurance, and we may be forced to accept reduced coverage or incur
substantially higher costs to obtain coverage. Likewise, these developments
may
make it more difficult for us to attract and retain qualified members of our
board of directors or qualified executive officers.
DUE
TO INHERENT LIMITATIONS, THERE CAN BE NO ASSURANCE THAT OUR SYSTEM OF DISCLOSURE
AND INTERNAL CONTROLS AND PROCEDURES WILL BE SUCCESSFUL IN PREVENTING ALL ERRORS
OR FRAUD, OR IN INFORMING MANAGEMENT OF ALL MATERIAL INFORMATION IN TIMELY
MANNER.
Our
management, including our CEO and CFO, does not expect that our disclosure
controls and internal controls and procedures will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system reflects that there
are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty and that breakdowns can occur simply because of error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, a control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
IF
WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2006 AND FUTURE
YEAR-ENDS AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002,
INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS,
WHICH COULD RESULT IN A DECREASE IN THE VALUE OF YOUR
SHARES.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission adopted rules requiring public companies to include
an
annual report on internal control over financial reporting on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal control over financial reporting. In addition, the public accounting
firm auditing the company’s financial statements must attest to and report on
management’s assessment of the effectiveness of the company’s internal control
over financial reporting. While we continuously conduct a rigorous review of
our
internal control over financial reporting in order to assure compliance with
the
Section 404 requirements, if our independent auditors interpret the
Section 404 requirements and the related rules and regulations differently
from us or if our independent auditors are not satisfied with our internal
control over financial reporting or with the level at which it is documented,
operated or reviewed, they may decline to attest to management’s assessment or
issue a qualified report. A qualified opinion could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements.
THERE
ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS
USED
IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH GAAP IN THE UNITED
STATES OF AMERICA ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS COULD
HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
The
consolidated and condensed Consolidated Financial Statements included in the
periodic reports we file with the Securities and Exchange Commission are
prepared in accordance with accounting principles generally accepted in the
United States (“US GAAP”). The preparation of financial statements in accordance
with GAAP in the United States of America involves making estimates, judgments
and assumptions that affect reported amounts of assets (including intangible
assets), liabilities and related reserves, revenues, expenses and income.
Estimates, judgments and assumptions are inherently subject to change in the
future, and any such changes could result in corresponding changes to the
amounts of assets, liabilities, revenues, expenses and income. Any such changes
could have a material adverse effect on our financial position and results
of
operations.
None.
We
lease
our executive offices, which are located at 220 South Ridgewood Avenue, Daytona
Beach, Florida 32114, and 3101 W. Martin Luther King Jr. Blvd., Suite 400,
Tampa, Florida 33607. We lease offices at each of our 170 locations with the
exception of the following, where we own the buildings in which our offices
are
located: Dansville and Jamestown, New York. In addition, we own a building
in Loreauville, Louisiana where we no longer have an office, as well as a parcel
of undeveloped property outside of Lafayette, Louisiana. There are no
outstanding mortgages on our owned properties. Our operating leases expire
on various dates. These leases generally contain renewal options and rent
escalation clauses based on increases in the lessors’ operating expenses and
other charges. We expect that most leases will be renewed or replaced upon
expiration. We believe that our facilities are suitable and adequate for
present purposes, and that the productive capacity in such facilities is
substantially being utilized. From time to time, we may have unused space
and seek to sublet such space to third parties, depending on the demand for
office space in the locations involved. In the future, we may need to
purchase, build or lease additional facilities to meet the requirements
projected in our long-term business plan. See Note 13 to the Consolidated
Financial Statements for additional information on our lease commitments.
See
Note
13 to the Consolidated Financial Statements for information regarding our legal
proceedings.
No
matters were submitted to a vote of security holders during our fourth quarter
ended December 31, 2005.
Our
common stock is listed on the New York Stock Exchange (NYSE) under the symbol
“BRO”. The table below sets forth, for the quarterly periods indicated, the
intra-day high and low sales prices for our common stock as reported on the
NYSE
Composite Tape and dividends declared on our common stock. All per share amounts
have been restated to give effect to the two-for-one common stock split effected
on November 28, 2005.
|
High
|
Low
|
Cash
Dividends
Per
Common
Share
|
||||||||
|
2004
|
||||||||||
|
First
Quarter
|
$
|
19.72
|
$
|
16.01
|
$
|
0.035
|
||||
|
Second
Quarter
|
$
|
21.84
|
$ |
18.47
|
$
|
0.035
|
||||
|
Third
Quarter
|
$
|
23.08
|
$
|
20.18
|
$
|
0.035
|
||||
|
Fourth
Quarter
|
$
|
23.38
|
$
|
19.30
|
$
|
0.040
|
||||
|
2005
|
|
|||||||||
|
First
Quarter
|
$
|
24.27
|
$
|
21.13
|
$
|
0.040
|
||||
|
Second
Quarter
|
$
|
23.75
|
$
|
21.00
|
$
|
0.040
|
||||
|
Third
Quarter
|
$
|
25.39
|
$
|
21.31
|
$
|
0.040
|
||||
|
Fourth
Quarter
|
$
|
31.90
|
$
|
23.85
|
$
|
0.050
|
||||
On
March
10, 2006, there were 139,397,938 shares of our common stock outstanding, held
by
approximately 1,238 shareholders of record.
We
intend
to continue to pay quarterly dividends, subject to continued capital
availability and a determination that cash dividends continue to be in the
best
interests of our stockholders. Our dividend policy may be affected by, among
other items, our views on potential future capital requirements, including
those
relating to creation and expansion of sales distribution channels and
investments and acquisitions, legal risks, stock repurchase programs and
challenges to our business model.
Equity
Compensation Plan Information
The
following table sets forth information as of December 31, 2005, with
respect to compensation plans under which the Company’s equity securities are
authorized for issuance:
|
Plan
Category
|
Number
of Securities to be issued
upon
exercise
of outstanding
options,
warrants
and
rights (a)
|
Weighted-average
exercise price
of
outstanding
options,
warrants
and
rights (b)
|
Number
of securities remaining available for
future
issuance under equity compensation
plans
(excluding securities reflected
in
column (a)) (c)
|
|||
|
|
||||||
|
Equity
compensation plans approved
by shareholders
|
2,016,988
|
$10.69
|
15,187,482
|
|||
| Equity compensation plans not approved by shareholders |
-
|
-
|
-
|
|||
|
Total
|
2,016,988
|
$10.69
|
15,187,482
|
Sales
of Unregistered Securities
We made
no sales of unregistered securities during the fourth quarter of 2005.
Issuer
Purchases of Equity Securities
We
did
not purchase any shares of Brown & Brown, Inc. common stock during the
fourth quarter of 2005.
ITEM
6. Selected
Financial Data.
The
following selected Consolidated Financial Data for each of the five fiscal
years
in the period ended December 31, 2005 have been derived from our Consolidated
Financial Statements. Such data should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of Part II of this Annual Report and with our Consolidated
Financial Statements and related Notes thereto in Item 8 of Part II of this
Annual Report.
| (in thousands, except per share data, number of employees and percentages) (1) |
Year
Ended December
31,
|
|||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
REVENUES
|
||||||||||||||||
|
Commissions
& fees (2)
|
$
|
775,543
|
$
|
638,267
|
$
|
545,287
|
$
|
452,289
|
$
|
359,697
|
||||||
|
Investment
income
|
6,578
|
2,715
|
1,428
|
2,945
|
3,686
|
|||||||||||
|
Other
income
|
3,686
|
5,952
|
4,325
|
508
|
1,646
|
|||||||||||
|
Total
revenues
|
785,807
|
646,934
|
551,040
|
455,742
|
365,029
|
|||||||||||
|
EXPENSES
|
||||||||||||||||
|
Employee
compensation and benefits
|
374,943
|
314,221
|
268,372
|
224,755
|
187,653
|
|||||||||||
|
Non-cash
stock grant compensation
|
3,337
|
2,625
|
2,272
|
3,823
|
1,984
|
|||||||||||
|
Other
operating expenses
|
105,622
|
84,927
|
74,617
|
66,554
|
56,815
|
|||||||||||
|
Amortization
|
33,245
|
22,146
|
17,470
|
14,042
|
15,860
|
|||||||||||
|
Depreciation
|
10,061
|
8,910
|
8,203
|
7,245
|
6,536
|
|||||||||||
|
Interest
|
14,469
|
7,156
|
3,624
|
4,659
|
5,703
|
|||||||||||
|
Total
expenses
|
541,677
|
439,985
|
374,558
|
321,078
|
274,551
|
|||||||||||
|
Income
before income taxes and minority interest
|
244,130
|
206,949
|
176,482
|
134,664
|
90,478
|
|||||||||||
|
Income
taxes
|
93,579
|
78,106
|
66,160
|
49,271
|
34,834
|
|||||||||||
|
Minority
interest, net of tax
|
-
|
-
|
-
|
2,271
|
1,731
|
|||||||||||
|
Net
income
|
$
|
150,551
|
$
|
128,843
|
$
|
110,322
|
$
|
83,122
|
$
|
53,913
|
||||||
|
EARNINGS
PER SHARE INFORMATION
|
||||||||||||||||
|
Net
income per share - diluted
|
$
|
1.08
|
$
|
0.93
|
$
|
0.80
|
$
|
0.61
|
$
|
0.43
|
||||||
|
Weighted
average number of shares outstanding - diluted
|
139,776
|
138,888
|
137,794
|
136,086
|
126,444
|
|||||||||||
|
Dividends
declared per share
|
$
|
0.1700
|
$
|
0.1450
|
$
|
0.1213
|
$
|
0.1000
|
$
|
0.0800
|
||||||
|
YEAR-END
FINANCIAL POSITION
|
||||||||||||||||
|
Total
assets
|
$
|
1,608,660
|
$
|
1,249,517
|
$
|
865,854
|
$
|
754,349
|
$
|
488,737
|
||||||
|
Long-term
debt
|
$
|
214,179
|
$
|
227,063
|
$
|
41,107
|
$
|
57,585
|
$
|
78,195
|
||||||
|
Shareholders'
equity (3)
|
$
|
764,344
|
$
|
624,325
|
$
|
498,035
|
$
|
391,590
|
$
|
175,285
|
||||||
|
Total
shares outstanding
|
139,383
|
138,318
|
137,122
|
136,356
|
126,388
|
|||||||||||
|
OTHER
INFORMATION
|
||||||||||||||||
|
Number
of full-time equivalent employees
|
4,540
|
3,960
|
3,517
|
3,384
|
2,921
|
|||||||||||
|
Revenue
per average number of employees
|
$
|
184,896
|
$
|
173,046
|
$
|
159,699
|
$
|
144,565
|
$
|
144,166
|
||||||
|
Book
value per share at year-end
|
$
|
5.48
|
$
|
4.51
|
$
|
3.63
|
$
|
2.87
|
$
|
1.39
|
||||||
|
Stock
price at year-end
|
$
|
30.54
|
$
|
21.78
|
$
|
16.31
|
$
|
16.16
|
$
|
13.65
|
||||||
|
Stock
price earnings multiple at year-end
|
28.35
|
23.41
|
20.38
|
26.49
|
32.12
|
|||||||||||
|
Return
on beginning shareholders' equity
|
24%
|
|
26%
|
|
28%
|
|
47%
|
|
46%
|
|
||||||
|
(1)
|
All
share and per share information has been restated to give effect
to a
two-for-one common stock split that became effective November 28,
2005.
|
|
(2)
|
See
Note 2 to the Consolidated Financial Statements for information regarding
business purchase transactions which impact the comparability of
this
information.
|
|
(3)
|
Shareholders’
equity as of December 31, 2005, 2004, 2003, 2002 and 2001 included
net
increases of $4,446,000, $4,467,000, $4,227,000, $2,106,000 and
$4,393,000, respectively, as a result of the Company’s applications of
Statement of Financial Accounting Standards (SFAS) 115, “Accounting for
Certain Investments in Debt and Equity Securities,” and SFAS 133,
“Accounting for Derivatives Instruments and Hedging Activities.”
|
GENERAL
The
following discussion should be read in conjunction
with our
Consolidated Financial Statements and the related Notes
to
those Consolidated Financial Statements, included
elsewhere in this Annual Report. All share and per share information has been
restated to give effect to a two-for-one common stock split that become
effective November 28, 2005.
We are a diversified insurance agency, brokerage and services organization
headquartered in Daytona Beach and Tampa, Florida. Since 1993, our stated
corporate objective has been to increase our net income per share by at least
15% every year. We have increased revenues from $95.6 million in 1993 (as
originally stated, without giving effect to any subsequent acquisitions
accounted for under the pooling-of-interests method
of
accounting) to $785.8 million in 2005, a compound
annual
growth rate of 19.2%. In the same period, we increased net income from $8.0
million (as originally stated, without giving effect to any subsequent
acquisitions accounted for under the pooling-of-interests method of accounting)
to $150.6 million in 2005, a compound annual
growth
rate of 27.7%. We have also increased net income per share 15.0% or more for
13
consecutive years, excluding the effect of a one-time investment gain of $1.3
million in 1994 and favorable adjustments to our income tax reserves
of
$0.7
million in 1994 and $0.5 million in 1995, respectively.
Since 1993, excluding the historical impact of poolings, our
pre-tax margins (income before income taxes and minority interest divided by
total revenues) improved in all but one year, and in that year, the pre-tax
margin was essentially flat. These improvements
have resulted primarily from net new business
growth
(new business production offset by lost business), revenues generated by
acquisitions and continued operating efficiencies. Our revenue growth in 2005
was driven by: (i) net new business growth; and (ii) the acquisition of 32
agency entities and several books of business (customer accounts), generating
total annualized revenues of approximately $125.9 million.
Our
commissions and fees revenue are comprised of commissions paid by insurance
companies and fees paid directly by customers. Commission revenues generally
represent a percentage of the premium paid by the insured and are materially
affected by fluctuations in both premium rate
levels charged by insurance companies and the insureds’
underlying “insurable exposure units,” which are units that insurance companies
use to measure or express insurance exposed to risk (such as property values,
sales and payroll levels) so as to determine what premium to charge the insured.
These premium rates are established by insurance companies based upon many
factors, including reinsurance rates, none of which we control. Beginning in
1986 and continuing through 1999, commission revenues were adversely influenced
by a consistent decline in premium rates resulting from intense competition
among property and casualty insurance companies for market share. Among other
factors, this condition of a prevailing decline in premium rates, commonly
referred to as a “soft market,” generally resulted in flat to reduced
commissions on renewal business. The effect of this softness in rates on our
commission revenues was somewhat offset by our acquisitions and net new business
production. As a result of increasing “loss ratios” (the comparison of incurred
losses plus adjustment expenses against earned premiums) of insurance companies
through 1999, there was a general increase in premium rates beginning in the
first quarter of 2000 and continuing into 2003. During 2003, the increases
in
premium rates began to moderate, and in certain lines of insurance, premium
rates decreased. In 2004, as general premium rates continued to moderate, the
insurance industry experienced the worst hurricane season since 1992 when
Hurricane Andrew hit south Florida. The insured losses from the 2004 hurricane
season were absorbed relatively easily by the insurance industry and the general
insurance premium rates continued to soften during 2005. During the third
quarter of 2005, the insurance industry experienced the worst hurricane season
ever recorded. Primarily as a result of these hurricanes, including Hurricanes
Katrina, Rita and Wilma, the total insured losses are estimated to be in excess
of $50 billion. The full impact that the 2005 insured losses will have on the
insurance premium rates charged by insurance companies for 2006 is unknown,
however, there appears to be a general consensus that there will be upward
pressure on at least the insurance premium rates on coastal property, primarily
in the southeastern part of the United States.
The
volume of business from new and existing insured customers,
fluctuations in insurable exposure units and changes in general
economic and competitive conditions further impact
our revenues. For example, the increasing costs of litigation settlements and
awards have caused some customers
to seek higher levels of insurance coverage. Conversely,
level
rates of inflation and the general decline of
economic activity in recent years have limited the increases
in the
values of insurable exposure units. Still, our revenues
continue to grow as a result of an intense focus on net new business growth
and
acquisitions. We anticipate that results of operations will continue to be
influenced by these competitive and economic conditions in 2006.
We
also
earn “contingent commissions,” which are profit-sharing
commissions based primarily on underwriting
results,
but may also reflect considerations for volume, growth and/or retention. These
commissions are primarily received in the first and second quarters of each
year, based on underwriting results and other aforementioned considerations
for
the prior year(s), and, over the last three years, have averaged approximately
6.0% of the previous year’s total commissions and fees revenue. Contingent
commissions are included in our total commissions
and fees in the Consolidated Statements of Income in the year received. The
term
“core commissions and fees” excludes contingent commissions and therefore
represents
the revenues earned directly from specific insurance
policies
sold, and specific fee-based services rendered.
Fee
revenues are generated primarily by our Services Division,
which provides insurance-related services, including
third-party administration and consulting for the self-funded workers’
compensation markets.
In each of the past three years, fee revenues generated by the Services
Division
have declined as a percentage of our total commissions and fees, from 5.1%
in
2003 to 3.4% in 2005. This declining trend is anticipated to continue as the
revenues from our other reportable segments grow at a faster pace.
Investment
income consists primarily of interest earnings on premiums and advance premiums
collected and held in a fiduciary capacity before being remitted to insurance
companies. Our policy is to invest available funds in high-quality, short-term
fixed income investment securities. Investment income also includes gains and
losses realized from the sale of investments.
Acquisitions
During
2005, we acquired the assets of 32 insurance
intermediary operations and several books of business (customer accounts).
The
aggregate purchase price was $288.6 million, including $244.0 million of net
cash payments, the issuance of $38.1 million in notes payable and the assumption
of $6.5 million of liabilities. These acquisitions had estimated aggregate
annualized revenues of $125.9 million.
During
2004, we acquired the assets of 29 insurance intermediary operations, several
books of business (customer accounts) and the outstanding stock of three general
insurance agencies. The aggregate purchase price was $199.3 million, including
$190.6 million of net cash payments, the issuance of $1.4 million in notes
payable and the
assumption of $7.3 million of liabilities. These acquisitions
had
estimated aggregate annualized revenues of $104.1 million.
During
2003, we acquired the assets and certain liabilities of 23 insurance
intermediary operations, as well as the remaining 25% minority interest in
Florida Intracoastal Underwriters, and several books of business (customer
accounts). The aggregate purchase price was $86.2 million including $84.5
million of net cash payments, the issuance of $1.5 million in notes payable
and
the assumption of $0.2 million of liabilities. These acquisitions had estimated
aggregate annualized revenues of $45.8 million.
Critical
Accounting Policies
Our
Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in
the
United States of America (GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses. We continually evaluate our
estimates, which are based on historical experience and on various other
assumptions that we believe to be reasonable
under the circumstances. These estimates form the basis for our judgments about
the carrying values of our assets and liabilities, which values are not readily
apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We
believe that, of our significant accounting policies (see “Note 1 - Summary of
Significant Accounting Policies” of the Notes to Consolidated Financial
Statements), the following critical accounting policies may involve a higher
degree of judgment and complexity.
Revenue
Recognition
Commission
revenues are recognized as of the effective date
of
the insurance policy or the date the policy premium is billed to the
customer,
whichever is later. At that date, the earnings process has been completed,
and
we can reliably estimate the impact of policy cancellations for refunds and
establish reserves accordingly. Management determines the policy cancellation
reserve based upon historical cancellation experience adjusted by known
circumstances. Subsequent commission adjustments are recognized upon
notification from the insurance
companies. Contingent commissions from insurance
companies are recognized when determinable, which is when such commissions
are
received. Fee revenues are recognized as services are rendered.
Business
Acquisitions and Purchase Price Allocations
We
have
significant intangible assets that were acquired through
business acquisitions. These assets consist of purchased
customer accounts, noncompete agreements, and the excess of costs over the
fair
value of identifiable net assets acquired (goodwill). The determination of
estimated useful lives and the allocation of the purchase price to the
intangible assets requires significant judgment and affects the amount of future
amortization and possible impairment charges.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
“Business Combinations,” all of our business combinations initiated after June
30, 2001 have been accounted for using the purchase method. In connection with
these acquisitions, we record the estimated value of the net tangible assets
purchased and the value of the identifiable intangible assets purchased, which
typically consist of purchased customer accounts
and noncompete agreements. Purchased customer accounts
include the physical records and files obtained from acquired businesses that
contain information about insurance policies, customers and other matters
essential to policy renewals, but it primarily represents the present value
of
the underlying cash flows expected to be received over the estimated future
renewal periods of insurance policies comprising those purchased customer
accounts. The valuation of purchased customer accounts involves significant
estimates and assumptions concerning matters such as cancellation frequency,
expenses and discount rates. Any change in these assumptions could affect the
carrying value of purchased customer accounts. Noncompete agreements are valued
based on the duration and any unique features of each specific agreement.
Purchased customer accounts and noncompete agreements are amortized on a
straight-line basis over the related estimated lives and contract periods,
which
range from five to 15 years. The excess of the purchase price of an acquisition
over the fair value of the identifiable tangible and intangible assets is
assigned to goodwill and is no longer amortized, in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets” (SFAS No. 142).
Intangible
Assets Impairment
Effective
January 1, 2002, we adopted SFAS No. 142, which requires that goodwill be
subject to at least an annual assessment for impairment by applying a fair-value
based test. Amortizable intangible assets are amortized over their useful lives
and are subject to lower-of-cost-or-market impairment testing. SFAS No. 142
requires us to compare the fair value of each reporting unit with its carrying
value to determine if there is potential impairment of goodwill. If the fair
value of the reporting unit is less than its carrying value, an impairment
loss
would be recorded to the extent that the fair value of the goodwill within
the
reporting unit is less than its carrying value. Fair value is estimated based
on
multiples of revenues, earnings before interest, income taxes, depreciation
and
amortization (EBITDA), and pre-tax income.
Management
assesses the recoverability of our goodwill on an annual basis, and of our
amortizable intangibles and other long-lived assets whenever events or changes
in circumstances
indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to historical
or projected future operating results; (ii) significant
negative
industry or economic trends; (iii) significant decline in our stock price for
a
sustained period; and (iv) significant decline in our market capitalization.
If
the recoverability of these assets is unlikely because of the existence of
one
or more of the above-referenced factors, an impairment analysis is performed.
Management must make assumptions regarding estimated future cash flows and
other
factors to determine the fair value of these assets. If these estimates or
related assumptions change in the future, we may be required to revise the
assessment and, if appropriate, record an impairment charge. We completed our
most recent evaluation of impairment for goodwill as of November 30, 2005 and
identified no impairment as a result of the evaluation.
Reserves
for Litigation
We
are
subject to numerous litigation claims that arise in the ordinary course of
business. In accordance with SFAS No. 5, “Accounting for Contingencies,” if it
is probable that an asset has been impaired or a liability has been incurred
at
the date of the
financial statements and the amount of the loss is estimable, an accrual for
the
costs to resolve these claims is recorded in accrued expenses in the
accompanying Consolidated Balance Sheets. Professional
fees
related to these claims are included in other operating expenses in the
accompanying Consolidated Statements of Income.
Management, with the assistance of outside counsel,
determines whether it is probable that a liability has been incurred and
estimates the amount of loss based upon analysis of individual issues. New
developments or changes in settlement
strategy in dealing with these matters may significantly
affect
the required reserves and impact our net income.
Derivative
Instruments
In
2002,
we entered into one derivative financial instrument - an interest rate exchange
agreement, or “swap” - to manage the exposure to fluctuations in interest rates
on our $90 million variable rate debt. As of
December
31, 2005, we maintained this swap agreement, whereby
we pay a fixed rate on the notional amount to a bank and the bank pays us a
variable rate on the notional amount equal to a base London InterBank Offering
Rate (LIBOR). We have assessed this derivative as a highly effective cash flow
hedge, and accordingly, changes in the fair market value of the swap are
reflected in other comprehensive income. The fair market value of this
instrument is determined by quotes obtained from the related counter-parties
in
combination with a valuation model utilizing discounted cash flows. The
valuation
of this derivative instrument is a significant estimate
that is
largely affected by changes in interest rates. If interest rates increase or
decrease, the value of this instrument will change accordingly.
New
Accounting Pronouncements
See
Note
1 of the Notes to Consolidated Financial Statements for a discussion of the
effects of the adoption of new accounting standards.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 2005, 2004 AND 2003
The
following discussion and analysis regarding results of operations and liquidity
and capital resources should be considered in conjunction with the accompanying
Consolidated Financial Statements and related Notes.
Financial
information relating to our Consolidated Financial Results is as follows (in
thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
|||||||||||||
|
REVENUES
|
|||||||||||||||||
|
Commissions
and fees
|
$
|
740,567
|
21.9
|
%
|
$
|
607,615
|
18.5
|
%
|
$
|
512,753
|
|||||||
|
Contingent
commissions
|
34,976
|
14.1
|
%
|
30,652
|
(5.8)
|
%
|
32,534
|
||||||||||
|
Investment
income
|
6,578
|
142.3
|
%
|
2,715
|
90.1
|
%
|
1,428
|
||||||||||
|
Other
income, net
|
3,686
|
(38.1)
|
%
|
5,952
|
37.6
|
%
|
4,325
|
||||||||||
|
Total
revenues
|
785,807
|
21.5
|
%
|
646,934
|
17.4
|
%
|
551,040
|
||||||||||
|
EXPENSES
|
|||||||||||||||||
|
Employee
compensation and benefits
|
374,943
|
19.3
|
%
|
314,221
|
17.1
|
%
|
268,372
|
||||||||||
|
Non-cash
stock grant compensation
|
3,337
|
27.1
|
%
|
2,625
|
15.5
|
%
|
2,272
|
||||||||||
|
Other
operating expenses
|
105,622
|
24.4
|
%
|
84,927
|
13.8
|
%
|
74,617
|
||||||||||
|
Amortization
|
33,245
|
50.1
|
%
|
22,146
|
26.8
|
%
|
17,470
|
||||||||||
|
Depreciation
|
10,061
|
12.9
|
%
|
8,910
|
8.6
|
%
|
8,203
|
||||||||||
|
Interest
|
14,469
|
102.2
|
%
|
7,156
|
97.5
|
%
|
3,624
|
||||||||||
|
Total
expenses
|
541,677
|
23.1
|
%
|
439,985
|
17.5
|
%
|
374,558
|
||||||||||
|
Income
before income taxes
|
$
|
244,130
|
18.0
|
%
|
$
|
206,949
|
17.3
|
%
|
$
|
176,482
|
|||||||
|
Net
internal growth rate - core commissions
and fees
|
3.1%
|
|
4.3%
|
|
5.9
|
||||||||||||
|
Employee
compensation and benefits ratio
|
47.7%
|
|
48.6%
|
|
48.7
|
||||||||||||
|
Other
operating expenses ratio
|
13.4%
|
|
13.1%
|
|
13.5
|
||||||||||||
|
Capital
expenditures
|
$
|
13,426
|
$
|
10,152
|
$
|
15,946
|
|||||||||||
|
Total
assets at December 31
|
$
|
1,608,660
|
$
|
1,249,517
|
$
|
865,854
|
|||||||||||
Commissions
and Fees
Commissions
and
fees
revenue, including contingent commissions, increased 21.5% in 2005, 17.1% in
2004 and 20.6% in 2003. Core commissions and fees revenue increased 3.1% in
2005, 4.3% in 2004 and 5.9% in 2003, when excluding commissions and fees revenue
generated from acquired operations and also from divested operations. The 2005
results reflect the continued moderation of the premium rate growth that began
in 2004 compared with the slightly higher premium growth rates that occurred
in
2003.
Investment
Income
Investment
income increased
to $6.6 million in 2005, compared with $2.7 million in 2004 and $1.4 million
in
2003.
The
increases in 2005 over 2004, and 2004 over 2003 were primarily the result of
higher
investment yields earned each sequential year along with higher average
available cash balances for each successive year.
Other
Income, net
Other
income consists primarily of gains and losses from the sale and
disposition of assets. In 2005, gains of $2.7 million were recognized from
the
sale of customer accounts as compared with $4.8 million and $4.0 million in
2004
and 2003, respectively. Although we are not in the business of selling customer
accounts, we periodically will sell an office or a book of business (one or
more
customer accounts) that does not produce reasonable margins or demonstrate
a
potential for growth. For these reasons, in 2004, we sold all four of our retail
offices in North Dakota and our sole remaining operation in the medical
third-party administration services business.
Employee
Compensation and Benefits
Employee
compensation and benefits increased
approximately 19.3% in 2005, 17.1% in 2004 and 19.4% in 2003, primarily as
a
result of acquisitions and an increase in
commissions paid on net new business. Employee compensation and benefits as
a
percentage of total revenues were 47.7%
in 2005,
48.6% in 2004 and 48.7% in 2003, reflecting a gradual improvement in personnel
efficiencies as revenues grow. We had 4,540 full-time equivalent employees
at
December 31, 2005, compared with 3,960 at December 31, 2004 and 3,517 at
December 31, 2003.
Non-Cash
Stock Grant Compensation
Non-cash
stock grant compensation expense represents the
expense required to be recorded under Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock
Issued to Employees,” relating to our stock performance
plan,
which is more fully described in Note 11 of the Notes to Consolidated Financial
Statements.
The
annual cost of this stock performance plan increases only when our average
stock
price over a 20-trading-day period increases by increments of 20% or
more
from
the price at the time of the original grant, or when additional
shares are granted and the average stock price increases.
Since
the
first vesting condition for performance stock grants issued in 2001 was
satisfied in 2002, when a 20-trading-day average stock price of $17.50 was
reached, we issued another significant set of performance stock grants in
January 2003 at a grant price per share of $17.50. There will be no expense
relating to this set of performance stock grants until the 20-trading-day
average stock price exceeds the $17.50 performance stock grant price by an
increment of 20%. Additionally, other grants are periodically issued to new
and
existing employees.
During
2004, the average stock price exceeded the $21.00 average price for a
20-trading-day period required for the first 20% of the shares granted in
January 2003 to be awarded, and therefore we began the annual expensing of
such
shares. As a result, the 2004 expense increased to $2.6 million from $2.3
million in 2003. During 2005, the average stock price exceeded the $28.00
average price for a 20-trading-day period required for the second and third
20%
increments of the shares granted in January 2003 to be awarded, and as a result,
the 2005 expense increased to $3.3 million from $2.6 million in
2004.
During
2003, since the average price of our stock never exceeded any of the 20%
thresholds of the grants priced at $17.50 per share, the only expense related
to
our stock performance plan was the annual expense of grants issued prior to
2003, which was then partially offset by expense credits from forfeitures.
As a
result, the 2003 expense decreased to $2.3 million from $3.8 million in
2002.
Other
Operating Expenses
As
a
percentage of total revenues, other operating expenses increased to 13.4% in
2005 from 13.1% in 2004, which in turn was a decrease from 13.5% in 2003. Legal
and professional fee expenses increased $4.4 million in 2005 over the amount
expended in 2004, which in turn was $1.2 million greater than what was expended
in 2003. The increase in legal and professional fee expenses was primarily
the
result of the various ongoing investigations and litigation relating to agent
and broker compensation, including contingent commissions, by state regulators
and, to a lesser extent, by the requirements of compliance with the
Sarbanes-Oxley Act of 2002. Offsetting these expenses in 2004 was approximately
$1.0 million in reductions to our litigation and claims reserve. Excluding
the
impact of these increased legal and professional fee expenses, other operating
expenses declined as a percentage of total revenues each year from 2003 to
2005,
which is attributable to the effective cost containment measures brought about
by our initiative designed to identify areas of excess expense. This decrease
is
also due to the fact that, in a net internal revenue growth environment, certain
significant other operating expenses such as office rent, office supplies,
data
processing, and telephone costs, increase at a slower rate than commissions
and
fees revenue increase during the same period.
Amortization
Amortization
expense
increased $11.1 million, or 50.1% in 2005, increased $4.7 million, or 26.8%
in
2004, and
increased $3.4 million, or 24.4% in 2003. As
part
of our annual impairment assessment as of November 30, 2004, management
determined that the maximum
amortization period for the intangible asset, purchased
customer accounts, should be reduced from 20 years
to
15 years. A change in accounting estimate was recognized
to reflect this decision, resulting in an increase in the 2005 and 2004
amortization expense of $6.4 million, and $0.5 million, a decrease in
net
income of $3.9 million and $0.3 million, and a decrease of $0.03 and nil ($0)
earnings per share, respectively. The
remaining increases
in 2005
and 2004 were due to the amortization of additional intangible assets as a
result of new acquisitions.
Depreciation
Depreciation
increased 12.9% in 2005, 8.6% in 2004 and 13.2% in 2003. These increases were
primarily due to the purchase of new computers, related equipment and software,
and the depreciation associated with new acquisitions.
Interest
Expense
Interest
expense increased
$7.3
million, or 102.2%, in 2005 and $3.5 million or 97.5% in 2004 as a result of
the
funding of $200 million of unsecured senior notes in the third quarter of 2004.
Income
Taxes
The
effective tax rate on income from
operations was 38.3% in 2005, 37.7% in 2004 and 37.5% in 2003. The higher
effective tax rate in 2005, compared with 2004 and 2003, was primarily the
result of increased amounts of business conducted in states having higher state
tax rates.
RESULTS
OF OPERATIONS - SEGMENT INFORMATION
As
discussed in Note 16 of the Notes to Consolidated Financial
Statements, we operate in four reportable segments: the Retail, National
Programs, Brokerage and Service Divisions. On a divisional basis, increases
in
amortization, depreciation
and interest expenses are the result of new acquisitions within that division
in
a particular year. Likewise, other
income in each division primarily reflects net gains on sales
of
customer accounts and fixed assets. Additionally, increases in non-cash stock
grant compensation is more dependent
on increases in the Company’s 20 trading-day average stock price than on the
divisional results. As such, in evaluating the operational
efficiency of a division, management places greater emphasis on the net internal
growth rate of core commissions and fees revenue, the gradual
improvement
of
the ratio of employee compensation and benefits to total revenues, and the
gradual improvement of the ratio of other
operating expenses to total revenues.
Retail
Division
The
Retail Division provides a broad range of insurance products
and services to commercial, public entity, professional
and individual insured customers. More than 96% of the Retail Division’s
commissions and fees revenue are commission-based.
Since the majority of our operating expenses do not
change as premiums fluctuate, we believe that most of any fluctuation
in the commissions that we receive
will be
reflected in our pre-tax income. The Retail Division’s commissions and fees
revenue accounted for 72.5% of our total
consolidated commissions and fees revenue in 2003 but declined to 63.1% in
2005,
mainly due to continued acquisitions in the National Programs and Brokerage
Divisions.
Financial
information relating to Brown & Brown’s Retail Division is as follows (in
thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
461,236
|
6.8
|
%
|
$
|
431,767
|
16.4
|
%
|
$
|
371,004
|
||||||||
|
Contingent
commissions
|
28,330
|
8.3
|
%
|
26,169
|
7.3
|
%
|
24,381
|
|||||||||||
|
Investment
income
|
159
|
(72.0)
|
%
|
567
|
930.9
|
%
|
55
|
|||||||||||
|
Other
income, net
|
1,477
|
(48.1)
|
%
|
2,845
|
(20.3)
|
%
|
3,570
|
|||||||||||
|
Total
revenues
|
491,202
|
6.5
|
%
|
461,348
|
15.6
|
%
|
399,010
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
233,124
|
3.4
|
%
|
225,438
|
15.4
|
%
|
195,323
|
|||||||||||
|
Non-cash
stock grant compensation
|
2,198
|
37.5
|
%
|
1,599
|
(12.9)
|
%
|
1,835
|
|||||||||||
|
Other
operating expenses
|
81,063
|
4.2
|
%
|
77,780
|
15.3
|
%
|
67,487
|
|||||||||||
|
Amortization
|
19,368
|
26.5
|
%
|
15,314
|
22.7
|
%
|
12,476
|
|||||||||||
|
Depreciation
|
5,641
|
(1.6)
|
%
|
5,734
|
(0.6)
|
%
|
5,771
|
|||||||||||
|
Interest
|
20,927
|
(4.2)
|
%
|
21,846
|
23.2
|
%
|
17,732
|
|||||||||||
|
Total
expenses
|
362,321
|
4.2
|
%
|
347,711
|
15.7
|
%
|
300,624
|
|||||||||||
|
Income
before income taxes
|
$
|
128,881
|
13.4
|
%
|
$
|
113,637
|
15.5
|
%
|
$
|
98,386
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
0.6%
|
|
2.7%
|
|
4.0%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
47.5%
|
|
48.9%
|
|
49.0%
|
|
||||||||||||
|
Other
operating expenses ratio
|
16.5%
|
|
16.9%
|
|
16.9%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
6,186
|
$
|
5,568
|
$
|
5,904
|
||||||||||||
|
Total
assets at December 31
|
$
|
1,002,781
|
$
|
843,823
|
$
|
623,648
|
||||||||||||
The
Retail Division’s total revenues in 2005 increased $29.9
million to $491.2 million, a 6.5% increase over 2004. Of this increase,
approximately $28.9 million related
to core commissions and fees revenue from acquisitions for which
there
were no comparable revenues in 2004. The remaining increase was primarily
due to
net new business growth. The Retail Division’s net internal growth rate in core
commissions and fees revenue was 0.6% in 2005, excluding revenues recognized
in
2005 from new acquisitions and the 2004 commissions and fees revenue from
divested business. The net internal growth rate of core commissions and fees
revenue for the Retail Division in 2004 and 2003 was 2.7% and 4.0%,
respectively. The decline in the net internal growth rate from core commissions
and fees revenue from 2003 to 2005 primarily reflects the softening of insurance
premium rates during that period.
Income
before income taxes in 2005 increased $15.2 million to $128.9 million, a
13.4%
increase over 2004. This increase was due to revenues from acquisitions,
a
positive net internal growth rate and the continued focus on holding our
general
expense growth rate to a lower percentage than our revenue growth rate.
The
Retail Division’s total revenues in 2004 increased $62.3
million to $461.3 million, a 15.6% increase over 2003. Of this increase,
approximately $59.9 million related
to core commissions and fees revenue from acquisitions for which
there
were no comparable revenues in 2003. The remaining increase was primarily
due to
net new business growth. During
2004, we sold our four retail offices in North Dakota and other books of
businesses in various offices. With
respect to these assets sold during 2004, $6.7 million
of
core
commissions and fees revenue were earned in 2003 for which there were no
revenues recognized in the comparable 2004 period. Therefore, the Retail
Division’s net internal growth rate in core commissions and fees revenue was
2.7% in 2004, excluding revenues recognized in 2004 from new acquisitions
and
the 2003 core commissions and fees revenue from divested business.
Income
before income taxes in 2004 increased $15.3 million to $113.6 million, a
15.5%
increase over 2003. This increase was due to revenues from acquisitions,
a
positive net internal growth rate and the continued focus on holding our
general
expense growth rate to a lower percentage than our revenue growth
rate.
National
Programs Division
The
National Programs Division is comprised of two units: Professional Programs,
which provides professional liability and related package products for certain
professionals
delivered through nationwide networks of independent
agents;
and Special Programs, which markets targeted products and services designated
for specific industries, trade groups, public entities and market niches. Like
the Retail Division, the National Programs Division’s revenues
are primarily commission-based.
Financial
information relating to our National Programs
Division
is as follows (in thousands, except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
131,149
|
18.1
|
%
|
$
|
111,080
|
28.0
|
%
|
$
|
86,787
|
||||||||
|
Contingent
commissions
|
1,998
|
141.6
|
%
|
827
|
(77.0)
|
%
|
3,598
|
|||||||||||
|
Investment
income
|
367
|
164.0
|
%
|
139
|
(2.8)
|
%
|
143
|
|||||||||||
|
Other
income (loss), net
|
416
|
804.3
|
%
|
46
|
(154.8)
|
%
|
(84
|
)
|
||||||||||
|
Total
revenues
|
133,930
|
19.5
|
%
|
112,092
|
23.9
|
%
|
90,444
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
54,238
|
19.8
|
%
|
45,278
|
37.4
|
%
|
32,951
|
|||||||||||
|
Non-cash
stock grant compensation
|
359
|
52.8
|
%
|
235
|
36.6
|
%
|
172
|
|||||||||||
|
Other
operating expenses
|
20,414
|
23.1
|
%
|
16,581
|
26.5
|
%
|
13,110
|
|||||||||||
|
Amortization
|
8,103
|
37.8
|
%
|
5,882
|
31.1
|
%
|
4,488
|
|||||||||||
|
Depreciation
|
1,998
|
26.2
|
%
|
1,583
|
31.0
|
%
|
1,208
|
|||||||||||
|
Interest
|
10,433
|
21.3
|
%
|
8,603
|
26.3
|
%
|
6,810
|
|||||||||||
|
Total
expenses
|
95,545
|
22.2
|
%
|
78,162
|
33.1
|
%
|
58,739
|
|||||||||||
|
Income
before income taxes
|
$
|
38,385
|
13.1
|
%
|
$
|
33,930
|
7.0
|
%
|
$
|
31,705
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
3.9%
|
|
4.5%
|
|
11.2%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
40.5%
|
|
40.4%
|
|
36.4%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.2%
|
|
14.8%
|
|
14.5%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
3,067
|
$
|
2,693
|
$
|
2,874
|
||||||||||||
|
Total
assets at December 31
|
$
|
445,146
|
$
|
359,551
|
$
|
273,363
|
||||||||||||
Total
revenues in 2005 increased $21.8 million to $133.9
million, a 19.5% increase over 2004. Of this increase, approximately
$17.9 million related to core commissions and fees revenue from acquisitions
for
which there were no comparable revenues in 2004. The National Program Division’s
net internal growth
rate for core commissions and fees revenue was 3.9%, excluding core commissions
and fees revenue recognized in 2005 from new acquisitions. The majority of
the
internally generated growth in the 2005 core commissions and fees revenue
was
primarily related to increasing insurance premium rates in our condominium
program at our Florida Intracoastal Underwriters (FIU) profit center that
occurred as a result of the 2005 and 2004 hurricane seasons.
Income
before income taxes and minority interest in 2005 increased $4.5 million
to
$38.4 million, a 13.1% increase over 2004, of which the majority related
to the
revenues derived from acquisitions completed in 2005 and the increased earnings
at FIU.
Total
revenues in 2004 increased $21.6 million to $112.1
million, a 23.9% increase over 2003. Of this increase, approximately
$21.6 million related to core commissions and fees revenue from acquisitions
for
which there were no comparable revenues in 2003. During 2004, we discontinued
several programs,
including our professional medical program, which
generated approximately $1.2 million in revenues in
2003
but for which there were no comparable revenues in 2004.
Therefore, the National Program Division’s net internal growth
rate for core commissions and fees revenue in 2004 was 4.5%, excluding core
commissions
and fees revenue recognized in 2004 from new acquisitions and the 2003 core
commissions and fees revenue from divested business. The net internal growth
rate for core commissions and fees revenue for the National Programs Division
in
2003 was 11.2%. The decline in the net internal growth rates from core
commissions and fees revenue from 2003 to 2004 was primarily related to
declining insurance premium rates in our condominium program with our FIU
profit
center.
Income
before income taxes and minority interest in 2004 increased $2.2 million
to
$33.9 million, a 7.0% increase over 2003, of which the majority related to
the
revenues derived from acquisitions completed in 2004, but offset primarily
by
lower earnings at FIU. The ratio of employee compensation and benefits to
total
revenues and the ratio of other operating expenses to total revenue were
higher
in 2004 than 2003, primarily due to two reasons: (1) 2004 total revenues
reflected $2.8 million less profit-sharing contingency commissions income
than
in 2003 due primarily to the impact of the 2004 hurricanes in Florida, and
(2)
the 2003 and 2004 acquisitions reporting in this Division
accounted for 27% of the Division’s total revenues, but
operated at a lower aggregate operating profit margin of approximately 38.0%,
thereby diluting the historical aggregate operating profit margin of this
Division.
Brokerage
Division
The
Brokerage Division markets and sells excess and surplus commercial and personal
lines insurance and reinsurance, primarily through independent agents and
brokers. Like the Retail and National Programs Divisions, the Brokerage
Division’s revenues are primarily commission-based.
Financial
information relating to our Brokerage Division is as follows (in thousands,
except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
120,889
|
218.7
|
%
|
$
|
37,929
|
39.5
|
%
|
$
|
27,183
|
||||||||
|
Contingent
commissions
|
4,648
|
27.1
|
%
|
3,656
|
(19.7)
|
%
|
4,555
|
|||||||||||
|
Investment
income
|
1,599
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Other
(loss) income, net
|
(23
|
)
|
(227.8)
|
%
|
18
|
800.0
|
%
|
2
|
||||||||||
|
Total
revenues
|
127,113
|
205.5
|
%
|
41,603
|
31.1
|
%
|
31,740
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
59,432
|
200.4
|
%
|
19,782
|
47.3
|
%
|
13,426
|
|||||||||||
|
Non-cash
stock grant compensation
|
164
|
64.0
|
%
|
100
|
(39.0)
|
%
|
164
|
|||||||||||
|
Other
operating expenses
|
19,808
|
153.9
|
%
|
7,800
|
38.9
|
%
|
5,614
|
|||||||||||
|
Amortization
|
5,672
|
649.3
|
%
|
757
|
142.6
|
%
|
312
|
|||||||||||
|
Depreciation
|
1,285
|
153.0
|
%
|
508
|
53.5
|
%
|
331
|
|||||||||||
|
Interest
|
12,446
|
843.6
|
%
|
1,319
|
72.4
|
%
|
765
|
|||||||||||
|
Total
expenses
|
98,807
|
226.5
|
%
|
30,266
|
46.8
|
%
|
20,612
|
|||||||||||
|
Income
before income taxes
|
$
|
28,306
|
149.7
|
%
|
$
|
11,337
|
1.9
|
%
|
$
|
11,128
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
24.9%
|
|
14.1%
|
|
19.7%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
46.8%
|
|
47.5%
|
|
42.3%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.6%
|
|
18.7%
|
|
17.7%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
1,969
|
$
|
694
|
$
|
824
|
||||||||||||
|
Total
assets at December 31
|
$
|
476,653
|
$
|
128,699
|
$
|
74,390
|
||||||||||||
Total
revenues in 2005 increased $85.5 million to $127.1 million, a 205.5% increase
over 2004. Of this increase, approximately $73.3 million related to core
commissions and fees revenue from acquisitions for which there were no
comparable revenues in 2004. The majority of this acquired revenue was from
the
March 1, 2005 acquisition of Hull & Company, which represented the largest
acquisition in our history. Commissions and fees revenue of Hull & Company
for the twelve months preceding March 1, 2005 was approximately $63.0 million.
The Brokerage Division’s net internal growth rate for core commissions and fees
revenue in 2005 was 24.9%, excluding core commissions and fees revenue
recognized in 2005 from new acquisitions. The strong net internal growth
rate
was generated primarily from two of our operations, one of which focuses
on
property accounts in the southeastern United States, and the other which
focuses
on construction accounts in the western part of the United States. In addition
to the increase in net new business, both of these markets experienced increases
in insurance premium rates during 2005.
As
a
result of the Brokerage Division’s significant acquisitions in 2005 and late
2004, as well as the net new business growth from existing operations, income
before income taxes in 2005 increased $17.0 million to $28.3 million, a 149.7%
increase over 2004. The ratio of employee compensation and benefits
to total revenues and the ratio of other operating expenses
to total revenue improved in 2005 over 2004, primarily due to two reasons:
(1)
the majority of the operations acquired in 2005 and 2004 operated at higher
operating profit margins than the Brokerage Division's 2004 combined margins,
and (2) during 2005, one of our largest brokerage profit center's branch
improved their operating profit margins by over 9%.
Total
revenues in 2004 increased $9.9 million to $41.6 million, a 31.1% increase
over
2003. Of this increase, approximately $7.0 million related to core commissions
and fees revenues from acquisitions for which there were no comparable revenues
in 2003. The Brokerage Division’s net internal growth rate for core commissions
and fees revenues in 2004 was 14.1%, excluding core commissions and fees
revenues recognized in 2004 from new acquisitions. The net internal growth
rate
for core commissions and fees revenues for the Brokerage Division in 2003
was
19.7%. The decline in the net internal growth rates from core commissions
and
fees revenues in 2004 from 2003 was primarily related to the decline in the
net
new business generated by our reinsurance brokerage unit and the gradual
softening of insurance premium
rates.
As
a
result of the Brokerage Division’s net new business growth, income before income
taxes in 2004 increased $0.2 million to $11.3 million, a 1.9% increase over
2003. The ratio of employee compensation and benefits
to total revenues and the ratio of other operating expenses
to total revenue were higher in 2004 than 2003, primarily due to two reasons:
(1) 2004 total revenues
reflected $0.9 million less profit-sharing contingency
commissions than in 2003, and (2) during 2004, we started several new profit
center branches and the start-up salaries and operational costs diluted the
Division’s normal operating profit margins.
Services
Division
The
Services Division provides insurance-related services, including third-party
administration, consulting for the workers’ compensation and employee benefit
self-insurance markets, and managed healthcare services. Unlike our other
segments, approximately 98.0% of the Services Division’s 2005 commissions and
fees revenue is generated from fees, which are not significantly affected by
fluctuations in general insurance premiums.
Financial
information relating to our Services Division is as follows (in thousands,
except percentages):
|
2005
|
Percent
Change
|
2004
|
Percent
Change
|
2003
|
||||||||||||||
|
REVENUES
|
||||||||||||||||||
|
Commissions
and fees
|
$
|
26,565
|
2.9
|
%
|
$
|
25,807
|
(7.6)
|
%
|
$
|
27,920
|
||||||||
|
Contingent
commissions
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Investment
income
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Other
income, net
|
952
|
(5.0)
|
%
|
1,002
|
49.3
|
%
|
671
|
|||||||||||
|
Total
revenues
|
27,517
|
2.6
|
%
|
26,809
|
(6.2)
|
%
|
28,591
|
|||||||||||
|
EXPENSES
|
||||||||||||||||||
|
Employee
compensation and benefits
|
15,582
|
4.2
|
%
|
14,961
|
(5.8)
|
%
|
15,876
|
|||||||||||
|
Non-cash
stock grant compensation
|
122
|
13.0
|
%
|
108
|
(32.9)
|
%
|
161
|
|||||||||||
|
Other
operating expenses
|
4,339
|
(11.0)
|
%
|
4,873
|
(23.9)
|
%
|
6,407
|
|||||||||||
|
Amortization
|
43
|
19.4
|
%
|
36
|
(2.7)
|
%
|
37
|
|||||||||||
|
Depreciation
|
435
|
12.4
|
%
|
387
|
(8.5)
|
%
|
423
|
|||||||||||
|
Interest
|
4
|
(94.2)
|
%
|
69
|
(57.4)
|
%
|
162
|
|||||||||||
|
Total
expenses
|
20,525
|
0.4
|
%
|
20,434
|
(11.4)
|
%
|
23,066
|
|||||||||||
|
Income
before income taxes
|
$
|
6,992
|
9.7
|
%
|
$
|
6,375
|
15.4
|
%
|
$
|
5,525
|
||||||||
|
Net
internal growth rate - core commissions
and fees
|
9.2%
|
|
16.6%
|
|
7.9%
|
|
||||||||||||
|
Employee
compensation and benefits ratio
|
56.6%
|
|
55.8%
|
|
55.5%
|
|
||||||||||||
|
Other
operating expenses ratio
|
15.8%
|
|
18.2%
|
|
22.4%
|
|
||||||||||||
|
Capital
expenditures
|
$
|
350
|
$
|
788
|
$
|
234
|
||||||||||||
|
Total
assets at December 31
|
$
|
18,766
|
$
|
13,760
|
$
|
13,267
|
||||||||||||
Total
revenues in 2005 increased $0.7 million net to $27.5
million, a 2.6% increase over 2004. The
Services Division’s net internal growth rate for core commissions and fees
revenue was 9.2% in 2005, excluding the 2004 core commissions and fees
revenue
from divested business. The
positive net internal
growth rates from core commissions and fees revenue primarily
reflect the strong net new business growth from our workers’ compensation and
public entity third-party administration (TPA) businesses.
Income
before income taxes in 2005 increased $0.6 million to $7.0 million, a 9.7%
increase over 2004, primarily due to strong net new business
growth.
Total
revenues in 2004 decreased $1.8 million to $26.8
million, a 6.2% decrease from 2003. Of this decrease,
approximately $6.6 million related to core commissions and fees revenue
from
medical TPA business units sold in 2004 and 2003. These operations were
sold
because their respective operating profit margins were not expected to
exceed
the 10%-12% range, which were not acceptable returns to us in our culture.
The
Services Division’s net internal growth rate for core commissions and fees
revenue was 16.6% in 2004, excluding the 2003 core commissions and fees
revenue
from divested business. The net internal growth rate for core
commissions and fees revenue for the Services Division in 2003 was
7.9%.
The positive net internal
growth rates from core commissions and fees revenue for 2003 and
2004
primarily reflect the strong net new business growth from our workers’
compensation and public entity TPA businesses.
Income
before income taxes in 2004 increased $0.9 million to $6.4 million, a 15.4%
increase over 2003, primarily due to strong net new business growth and
the
elimination of the lower margin medical TPA businesses sold in 2003 and
2004.
Other
As
discussed in Note 16 of the Notes to Consolidated Financial Statements, the
“Other” column in the Segment Information table includes any income and expenses
not allocated to reportable segments, and corporate-related items, including
the
inter-company interest expense charge to the reporting segment.
Quarterly
Operating Results
The
following table sets forth our quarterly results for 2005 and 2004.
|
(in
thousands, except per share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
2005
|
|||||||||||||
|
Total
revenues
|
$
|
202,374
|
$
|
195,931
|
$
|
190,645
|
$
|
196,857
|
|||||
|
Income
before income taxes
|
$
|
70,513
|
$
|
60,468
|
$
|
55,689
|
$
|
57,460
|
|||||
|
Net
income
|
$
|
43,018
|
$
|
37,033
|
$
|
34,783
|
$
|
35,717
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.26
|
|||||
|
Diluted
|
$
|
0.31
|
$
|
0.27
|
$
|
0.25
|
$
|
0.25
|
|||||
|
2004
|
|||||||||||||
|
Total
revenues
|
$
|
165,565
|
$
|
157,942
|
$
|
160,381
|
$
|
163,046
|
|||||
|
Income
before income taxes
|
$
|
59,360
|
$
|
52,529
|
$
|
48,256
|
$
|
46,804
|
|||||
|
Net
income
|
$
|
36,348
|
$
|
32,153
|
$
|
30,086
|
$
|
30,256
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Basic
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
|
Diluted
|
$
|
0.26
|
$
|
0.23
|
$
|
0.22
|
$
|
0.22
|
|||||
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash
and cash equivalents of $100.6 million at December 31, 2005 reflected a decrease
of $87.5 million from
the
$188.1 million balance at December 31, 2004. During
2005,
$215.1
million of cash was provided from operating activities.
Also
during this period, $262.2 million of cash was used for acquisitions, $13.4
million was used for additions
to fixed assets,
$16.1 million was used for payments on long-term debt and $23.6 million was
used
for payment of dividends.
Our
cash
and cash equivalents of $188.1 million at December
31, 2004 reflected an increase of $131.2 million over
the
$56.9 million balance at December 31, 2003. During
2004,
$170.2
million of cash was provided from operating activities,
and $200.0 million was provided from the issuance
of new privately-placed, unsecured senior notes. Also
during this period, $202.7 million of cash was used for acquisitions, $10.2
million was used for additions
to fixed assets,
$18.6 million was used for payments on long-term debt
and
$20.0
million was used for payment of dividends.
Our
cash
and cash equivalents of $56.9 million at December 31, 2003 reflected a decrease
of $11.1 million from our December 31, 2002 balance of $68.0 million. During
2003, $142.7 million of cash was provided from operating activities. Also during
the period, $100.3 million of cash was used for acquisitions, $15.9 million
was
used for additions to fixed assets, $28.0 million was used for payments on
long-term debt and $16.6 million was used for payments of dividends.
Our
ratio of current assets to current liabilities
(the “current ratio”) was 1.06 and 1.48 at December 31, 2005 and 2004,
respectively.
As
of
December 31, 2005, our contractual cash obligations were as
follows:
Contractual
Cash Obligations
|
(in
thousands)
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5 Years
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Long-term
debt
|
$
|
269,792
|
$
|
55,623
|
$
|
13,806
|
$
|
304
|
$
|
200,059
|
||||||
|
Capital
lease obligations
|
17
|
7
|
10
|
-
|
-
|
|||||||||||
|
Other
long-term liabilities
|
11,830
|
9,174
|
946
|
653
|
1,057
|
|||||||||||
|
Operating
leases
|
85,821
|
20,731
|
32,373
|
21,075
|
11,642
|
|||||||||||
|
Interest
obligations
|
85,709
|
13,129
|
23,775
|
23,326
|
25,479
|
|||||||||||
|
Maximum
future acquisition contingency payments
|
189,611
|
107,277
|
82,325
|
9
|
-
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
642,780
|
$
|
205,941
|
$
|
153,235
|
$
|
45,367
|
$
|
238,237
|
||||||
In
July
2004, we completed a private placement of $200.0 million
of unsecured senior notes (the “Notes”). The $200.0 million
is divided into two series: Series A, for $100.0 million due in 2011 and bearing
interest at 5.57% per year; and Series B, for $100.0 million due in 2014 and
bearing interest at 6.08% per year. The closing on the Series B Notes occurred
on July 15, 2004. The closing on the Series A Notes occurred on September 15,
2004. We have used the proceeds from the Notes for general corporate purposes,
including acquisitions and repayment of existing debt. As of December 31, 2005,
there was an outstanding balance of $200.0 million on the Notes.
In
September 2003, we established an unsecured revolving credit facility with
a
national banking institution that provided for available borrowings of up to
$75.0 million, with a maturity date of October 2008, bearing an interest rate
based upon the 30-, 60- or 90-day LIBOR plus 0.625% to 1.625%, depending upon
our quarterly ratio of funded debt to earnings before interest, taxes,
depreciation, amortization and non-cash stock grant compensation.
A commitment fee of 0.175% to 0.375% per annum
was
assessed on the unused balance. The 90-day LIBOR was 4.53% as of December 31,
2005. There were no borrowings against this facility at December 31,
2005.
In
January 2001, we entered into a $90.0 million, unsecured seven-year term loan
agreement with a national banking institution. Borrowings under this facility
bear interest based upon the 30-, 60- or 90-day LIBOR plus a credit risk spread
ranging from 0.50% to 1.00%, depending upon our quarterly ratio of funded debt
to earnings before interest, taxes, depreciation, amortization and non-cash
stock grant compensation. The 90-day LIBOR was 4.53% as of December 31, 2005.
The loan was fully funded on January 3, 2001, and a balance of $25.7 million
remained outstanding as of December 31, 2005. This loan is to be repaid
in
equal quarterly principal installments of $3.2 million
through
December 2007. Effective January 2, 2002, we entered into an interest rate
swap
agreement with a national banking institution to lock in an effective fixed
interest rate of 4.53% for the remaining six years of the term loan, excluding
our credit risk spread of between 0.50% and 1.00%.
In
1991,
we entered into a long-term unsecured credit agreement with a major insurance
company that provided for borrowings at an interest rate equal to the prime
rate
(9.25% at December 31, 2002) plus 1.00%. In accordance with an August 1, 1998
amendment to this credit agreement, the outstanding balance was repaid in August
2003, thus ending the credit agreement.
All
of
our credit agreements require us to maintain certain financial ratios and comply
with certain other covenants. We were in compliance with all such covenants
as
of December 31, 2005 and 2004.
Neither
we nor our subsidiaries has ever incurred off-balance sheet obligations through
the use of, or investment in, off-balance sheet derivative financial instruments
or structured finance or special purpose entities organized as corporations,
partnerships or limited liability companies or trusts.