No Edicts

No Edicts

INSURANCE by Fran Gilpin | Associate Editor

Stephen S. van Wert, a top executive at Brown & Brown Inc. in Tampa, says there is one thing that sets the large insurance broker apart from others. "Even though it's a publicly traded company," he says, "it's very good about creating an entrepreneurial culture within the company."

Whatever the culture, it seems to be working. Last year, Brown & Brown, which has dual headquarters in Daytona Beach and Tampa, increased net income by 17%. Brown & Brown has grown earnings a minimum of 15% for 52 consecutive quarters, according to van Wert.

"It's nuts," says van Wert.

As Brown & Brown expands by acquisition into a national player in insurance brokerage, the company is using its heftier size to get better rates from major carriers. "On a corporate basis, we produce tremendous volume," says van Wert. "That's very helpful in getting the best deal for the insured customer. Ultimately, that's what wins the customer."

He expects that edge will put even more distance between Brown & Brown and smaller local agents.

"Frankly," he says, "it's an unfair advantage for an insurer to come to us versus their local broker because we can just beat them over the head pretty good."

It's not all blue sky ahead for Brown & Brown, though.

At the end of 2005, the company had 170 offices around the country. About 22% of them were in Florida. Since the company still sells mostly property and casualty insurance, that means the violent Atlantic hurricane seasons of the past two years have complicated the Brown & Brown outlook.

Standard & Poor's Corp. rates the stock only a "hold." Part of the reason is that S&P believes the massive storm-related losses of the past two years along the coastal southeastern United States will make it harder for Brown & Brown to find coverage for customers.

What happens if most experts are proven wrong and 2006 turns out to be a quiet year in the Atlantic and Caribbean? Jack Suber, the retail operations chief for Brown & Brown's personal and commercial lines in Tampa, considers the question for a moment.

"We pray for another one next year," Suber replies.

Earn their business

Van Wert started his career as an attorney specializing in mergers and acquisitions. But the Duke University law school graduate tired of it. "The billable hours thing versus being an entrepreneur," van Wert says. "This suits my personality more than sitting in a library and doing lots of research."

One of the programs that he operates now for Brown & Brown is insuring lawyers against professional malpractice claims. Unlike some other lines, Brown & Brown does the underwriting, policy issuance and claims processing for all of its legal malpractice insurance.

From these specialty and other products gushes lots of free cash to finance the frequent acquisitions engineered by Brown & Brown Chairman and Chief Executive J. Hyatt Brown.

From 1993 through 2005, Brown & Brown acquired 205 other companies, including 32 last year alone. One of the 1990s acquisitions was an insurance agency formerly owned by ex-Tampa Mayor William F. Poe. Brown & Brown has maintained a corporate presence in Tampa since then.

At one time, politics was also a part of Hyatt Brown's life. Brown & Brown's biggest shareholder was speaker of the Florida House of Representatives in the late 1970s.

There are other political connections within the firm: A former House colleague of Brown's, Samuel P. Bell III, sits on Brown & Brown's board of directors and has chaired the compensation committee. Bell is married to former Florida Education Commissioner Betty Castor, who started her political career in Tampa.

And Bell isn't the only Gulf Coast connection on the Brown & Brown board. Bradenton businessman Jan E. Smith is also a company director.

On a larger level, politics have also been connected to the firm, in terms of investigations into insurance companies nationwide. New York Attorney General Eliot Spitzer's well-documented crusade against corporate fraud cost the world's biggest insurance broker, Marsh & McClennan Cos. Inc., $850 million to settle. The probe, launched by Spitzer before he officially announced his run for New York's 2006 gubernatorial race, has yet to ensnare Brown & Brown, although more than a dozen state attorneys general have subpoenaed the company's records.

Brown & Brown's empowerment of local offices probably has saved the company from the expensive fate of Marsh & McClennan, which was accused of accepting kickbacks from carriers to recommend their policies to business clients.

"Brown & Brown has never said: 'You, as the retail agent, have to go through this wholesaler to access this insurance company,'" says van Wert. "It goes counter to what we believe,"

With Brown & Brown scooping up more local agencies, insurers are beating a path to Daytona Beach to see what it would take to get more customers from Hyatt Brown and company President Jim W. Henderson. Van Wert says Brown and Henderson tell the insurers to earn the business from Brown & Brown agents in the field.

Storm clouds

Past governance issues, hurricanes remain Brown & Brown's biggest headache. Besides higher premiums, its brokers have to work harder to find carriers.

Whereas one carrier might have once been willing to cover tens of millions of dollars in commercial property losses, the new limit could be just $10 million. Florida agents have to layer the coverage above that figure by scrounging up other carriers to share the greater risk.

"In order for the market to be viable, you have to have capital coming into the market," Suber says of the Florida situation. "Right now, people are putting the capital elsewhere because they're not sure what return they're going to make."

That reality has dawned on investors, if not yet on some Florida politicians and property owners along the coast. "I think a lot of people are, it's like, burn me once in 2004," says van Wert. "Burn me twice, 2005. Am I some sort of moron to put the capital out in 2006?"

Van Wert says he believes in letting the market handle Florida's impending property insurance crisis. As Suber points out, however, Citizens Property Insurance Corp., the state government-backed insurer of last resort, is running a $1.4 billion deficit from paying too many claims on damaged seaside real estate.

Mother Nature may the only one who can provide a short-term solution. "You need a storm-free season," Suber says.

BROWN & BROWN INC. AT A GLANCE

Annual results in thousands, except per share data

Statement of income 12/31/2004 12/31/2005

Revenues

Commissions and fees $638,267 $775,543

Investment income $2,715 $6,578

Other income, net $5,952 $3,686

Total revenues $646,934 $785,807

Expenses

Employee compensation and benefits $314,221 $374,943

Non-cash stock grant compensation $2,625 $3,337

Other operating expenses $84,927 $105,622

Amortization $22,146 $33,245

Depreciation $8,910 $10,061

Interest $7,156 $14,469

Total expenses $439,985 $541,677

Income before income taxes $206,949 $244,130

Income taxes $78,106 $93,579

Net income $128,843 $150,551 Net income per share (diluted): $0.93 $1.08

Shares outstanding, diluted 138,888 139,776

Balance Sheet 12/31/2004 12/31/2005

Assets

Current Assets:

Cash and cash equivalents $188,106 $100,580

Restricted cash and investments $147,483 $229,872

Short-term investments $3,163 $2,748

Premiums, commissions and fees receivable $172,395 $257,930

Other current assets $28,819 $28,637

Total current assets $539,966 $619,767

Fixed assets, net $33,438 $39,398

Goodwill $360,843 $549,040

Amortizable intangible assets, net $293,009 $377,907

Investments $9,328 $8,421

Other assets $12,933 $14,127

Total assets $1,249,517 $1,608,660

Liabilities and shareholders equity

Current Liabilities:

Premiums payable to insurance companies $242,414 $397,466

Premium deposits and credits due customers $32,273 $34,027

Accounts payable $16,257 $21,161

Accrued expenses $58,031 $74,534

Current portion of long-term debt $16,135 $55,630

Total current liabilities $365,110 $582,818

Long-term debt $227,063 $214,179

Deferred income taxes, net $24,859 $35,489

Other liabilities $8,160 $11,830

Shareholders Equity:

Common stock, par value $0.10 per share; $13,832 $13,938

Additional paid-in capital $180,364 $193,313

Retained earnings $425,662 $552,647

Accumulated other comprehensive income,

net of related income tax effect of $2,606 at

2005 and $2,617 at 2004 $4,467 $4,446

Total shareholders equity $624,325 $764,344

Total liabilities and shareholders equity $1,249,517 $1,608,660