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6: Brown & Brown Inc.


Even as market conditions make growth harder to achieve, Brown & Brown Inc. continues its upward trajectory in all four key areas of its business.

The Daytona Beach, Fla.-based company's brokerage revenues increased 11.5% last year, to $864.7 million, vaulting it to the sixth-largest brokerage in the world.

Gross revenues rose 11.7% to $878 million. Net income grew 14.5% to $172.3 million.

Those growth rates will be hard to maintain as insurance rates continue to drop, conceded J. Hyatt Brown, chairman and chief executive officer. Still, "we're getting very close to a goal we set five years ago to achieve $1 billion in revenue and a 40% operating margin," Mr. Brown said.

Brown & Brown's 2006 operating margin--also known as earnings before interest, taxes, depreciation and amortization, or EBITDA--was 39% in 2006.

Continuing softness in property and casualty markets has created "a substantial head wind" for Brown & Brown, Mr. Brown said. But, "we sell more insurance when prices are going down than when they're going up. That's the bright side," he said.

Another positive for Brown & Brown, which has long held a growth-by-acquisition strategy, is that more agencies and brokerage firms consider selling as returns decline, Mr. Brown noted. "We spent $56 million on acquisitions in 2006, and in the first half this year we've spent about $46 million."

In late 2005, Brown & Brown acquired reinsurance brokerage operations when it bought Axiom Intermediaries L.L.C. Reinsurance revenues in 2006 grew to $11.1 million from slightly more than $2 million a year earlier.

One of the company's largest acquisitions in the past year was ALCOS Inc., a Sterling Heights, Mich.-based agency with about $18 million in annual revenue. Roughly $11 million of that was in employee benefits business, an area where Brown & Brown continues to grow.

"We'd like to have 25% of our retail business be employee benefits," Mr. Brown said, adding that benefits accounted for $92 million, or about 17%, of its retail revenue last year. Benefit products that Brown & Brown markets include group products for medical, life, dental and disability as well as ancillary products such as long-term care insurance, he said.

Most benefits business is placed for accounts in which Brown & Brown already places property/casualty coverages, but "it flows both ways," Mr. Brown said.

Brown & Brown has four core operating segments:

c Retail, which generated $518 million in revenues in 2006, up nearly 6% from the year before. This division includes products and services for both commercial and personal lines customers.

c National programs, for which revenues rose more than 18% to $157 million. Brown & Brown sells professional liability and related coverages to a variety of professions, including dentists, attorneys, insurance agents, benefit administrators and real estate agents.

c Wholesale brokerage, which posted revenues of $163 million, up more than 28%. This unit markets excess and surplus lines for retail agencies as well as reinsurance.

c Services, which comprise third-party administration, consulting and managed health care business. Revenues in this division were $32.6 million, up 18% from 2005.

Among other highlights of the past year, Brown & Brown in January announced that Regional Executive Vp J. Powell Brown was elected president and will succeed his father, Hyatt Brown, as CEO in July 2009--the year Brown & Brown will celebrate its 70th anniversary. Jim W. Henderson, chief operating officer, was elevated to the additional role of vice chairman.

The company also stepped up its process for recruiting producers, a move enabled by the success of Brown & Brown University, which the company created four years ago "to specifically take people who were young in the business or came from another business" and learn the technical aspects of insurance from a proven sales leader in the company, Hyatt Brown explained. "We've put 100 new graduates through each year, and they end up being in the top 100 of our 600 producers very quickly," Mr. Brown said.

The majority of Brown & Brown's business is conducted as an agency, representing hundreds of insurers around the country, but it also has broker relationships, such as placing wholesale business on behalf of other retail agents and brokers, Mr. Brown said.

Brown & Brown's core customers are middle-market businesses and public entities, and most insurance programs are placed on a commission basis. Brown & Brown defines the middle market as accounts generating commissions between $5,000 and $250,000, with the average account about $25,000, Mr. Brown said. The company does place risks for some Fortune 1000 accounts, though fee-based business is only about 2% of its revenues, he said.

Unlike some of its larger competitors, Brown & Brown openly accepts contingent and other supplemental compensation from underwriters.

Most of those payments are in the form of profit-based contingent commissions, and Brown & Brown reported $41 million of such compensation in 2006, up from $35 million in 2005. All forms of compensation the company may receive--though not necessarily dollar amounts, which often are not known immediately--are fully disclosed to clients, Mr. Brown said.

In receiving profit-based payments, "we're performing a service not only to our customer but to the carrier as well," Mr. Brown said. "We share in profits if there are profits" and there's "an incentive for the agent to write a profitable account."

To help clients mitigate risk, Brown & Brown insists on risk reviews at every renewal and assesses clients' exposures if they acquire new assets or open new locations, said Mr. Brown, in citing an example.

"We're constantly upgrading" our customers' knowledge of their exposures, and "risk management is a constant piece of our service," he said.

Two of Brown & Brown's strengths are its "very strong sales culture" and "almost manic focus on margin expansion and expense control," said Meyer Shields, an analyst at Stifel, Nicolaus & Co. Inc. in Baltimore.

"Its margins are unrivaled in the industry," he said. One of the key differentiators from its competitors is Brown & Brown "has been very successful in exercising control over its sales force." But the company is facing tougher market conditions in which to maintain its historically high growth rates, Mr. Shields said.

On July 6, Brown & Brown's stock closed at $25.27 per share. Its 52-week high was $31.94 and its 52-week low was $24.65.