t62698_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended March 31, 2008
   
 
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from  _____________  to ________________

Commission file number 001-13619
 
BROWN & BROWN, INC.
(Exact name of Registrant as specified in its charter)
 
Florida
(State or other jurisdiction of
incorporation or organization)
 
 
220 South Ridgewood Avenue,
Daytona Beach, FL
(Address of principal executive offices)
graphic®
59-0864469
(I.R.S. Employer Identification Number)
 
 
32114
(Zip Code)
 
Registrant's telephone number, including area code: (386) 252-9601
Registrant's Website: www.bbinsurance.com


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 90days.    Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)

 
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 number of shares of the Registrant's common stock, $.10 par value, outstanding as of May 5, 2008 was 140,723,532.
 
 
 
BROWN & BROWN, INC.
 
INDEX
 

 
PAGE NO.
   
 
       
   
   
3
   
4
   
5
   
6
 
17
 
30
 
31
       
 
       
 
31
 
31
 
32
       
32

2
 
PART I -FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS (UNAUDITED)
 
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 
(in thousands, except per share data)
  
For the three months
ended March 31,
  
   
2008
    
2007
  
             
REVENUES
            
Commissions and fees
  
$
253,528
    
$
245,559
  
Investment income
    
1,999
      
11,579
  
Other income, net
    
1,188
      
1,375
  
Total revenues
    
256,715
      
258,513
  
                 
EXPENSES
                
Employee compensation and benefits
    
121,187
      
110,810
  
Non-cash stock-based compensation
    
1,944
      
1,502
  
Other operating expenses
    
31,204
      
31,923
  
Amortization
    
11,116
      
9,502
  
Depreciation
    
3,246
      
3,040
  
Interest
    
3,434
      
3,634
  
Total expenses
    
172,131
      
160,411
  
                 
Income before income taxes
    
84,584
      
98,102
  
                 
Income taxes
    
32,824
      
38,375
  
                 
Net income
  
$
51,760
    
$
59,727
  
                 
Net income per share:
                
Basic
  
$
0.37
    
$
0.43
  
Diluted
  
$
0.37
    
$
0.42
  
                 
Weighted average number of shares outstanding:
                
Basic
    
140,704
      
140,221
  
Diluted
    
141,327
      
141,194
  
                 
Dividends declared per share
  
$
0.07
    
$
0.06
  

See accompanying notes to condensed consolidated financial statements.
3
 

BROWN & BROWN, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except per share data)
  
March 31,
2008
    
December 31,
2007
  
             
ASSETS
            
Current Assets:
            
Cash and cash equivalents
  
$
16,990
    
$
38,234
  
Restricted cash and investments
    
239,350
      
254,404
  
Short-term investments
    
4,673
      
2,892
  
Premiums, commissions and fees receivable
    
231,471
      
240,680
  
Deferred income taxes
    
-
      
17,208
  
Other current assets
    
55,022
      
33,964
  
Total current assets
    
547,506
      
587,382
  
                 
Fixed assets, net
    
62,199
      
62,327
  
Goodwill
    
896,544
      
846,433
  
Amortizable intangible assets, net
    
459,098
      
443,224
  
Other assets
    
20,802
      
21,293
  
                 
Total assets
  
$
1,986,149
    
$
1,960,659
  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                
Current Liabilities:
                
Premiums payable to insurance companies
  
$
376,829
    
$
394,034
  
Premium deposits and credits due customers
    
35,956
      
41,211
  
Accounts payable
    
35,665
      
18,760
  
Accrued expenses
    
52,472
      
90,599
  
Current portion of long-term debt
    
7,421
      
11,519
  
Total current liabilities
    
508,343
      
556,123
  
                 
Long-term debt
    
252,627
      
227,707
  
                 
Deferred income taxes, net
    
69,048
      
65,736
  
                 
Other liabilities
    
14,300
      
13,635
  
                 
Shareholders' Equity:
                
Common stock, par value $0.10 per share;
                
authorized 280,000 shares; issued and
                
outstanding 140,724 at 2008 and 140,673 at 2007
    
14,072
      
14,067
  
Additional paid-in capital
    
234,342
      
231,888
  
Retained earnings
    
893,403
      
851,490
  
Accumulated other comprehensive income, net of related income tax
                
effect of $9 at 2008 and $8 at 2007
    
14
      
13
  
                 
Total shareholders' equity
    
1,141,831
      
1,097,458
  
 
               
Total liabilities and shareholders' equity
  
$
1,986,149
    
$
1,960,659
  

See accompanying notes to condensed consolidated financial statements.
4
 
 BROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
 
 
   
For the three months
ended March 31,
  
(in thousands)
  
2008
    
2007
  
             
Cash flows from operating activities:
            
Net income
  
$
51,760
    
$
59,727
  
Adjustments to reconcile net income to net cash provided by operating activities:
            
Amortization
    
11,116
      
9,502
  
Depreciation
    
3,246
      
3,040
  
Non-cash stock-based compensation
    
1,944
      
1,502
  
Deferred income taxes
    
20,519
      
1,920
  
Net loss (gain) on sales of investments, fixed
                
assets and customer accounts
    
60
      
(9,518
)
Changes in operating assets and liabilities, net of effect
                
from acquisitions and divestitures:
                
Restricted cash and investments decrease
    
15,054
      
1,402
  
Premiums, commissions and fees receivable decrease
    
11,181
      
39,882
  
Other assets (increase) decrease
    
(20,518
) 
    
6,257
  
Premiums payable to insurance companies (decrease)
    
(17,383
)
    
(36,724
) 
Premium deposits and credits due customers (decrease)
    
(5,256
) 
    
(699
) 
Accounts payable increase
    
11,709
      
30,998
  
Accrued expenses (decrease)
    
(38,638
)
    
(39,792
)
Other liabilities increase
    
665
      
1,894
  
Net cash provided by operating activities
    
45,459
      
69,391
  
                 
Cash flows from investing activities:
                
Additions to fixed assets
    
(4,061
)
    
(16,280
)
Payments for businesses acquired, net of cash acquired
    
(72,551
)
    
(41,672
)
Proceeds from sales of fixed assets and customer accounts
    
2,135
      
1,351
  
Purchases of investments
    
(1,788
)
    
(29
)
Proceeds from sales of investments
    
50
      
9,090
  
Net cash used in investing activities
    
(76,215
)
    
(47,540
)
                 
Cash flows from financing activities:
                
Proceeds from long-term debt
    
25,000
      
-
  
Payments on long-term debt
    
(6,156
)
    
(5,487
)
Borrowings on revolving credit facility
    
-
      
12,240
  
Payments on revolving credit facility
    
-
      
(12,240
) 
Income tax benefit from issuance of common stock
    
-
      
4,273
  
Issuances of common stock for employee stock benefit plans
    
515
      
609
  
Cash dividends paid
    
(9,847
)
    
(8,403
)
Net cash provided by (used in) financing activities
    
9,512
      
(9,008
)
Net (decrease) increase in cash and cash equivalents
    
(21,244
)
    
12,843
  
Cash and cash equivalents at beginning of period
    
38,234
      
88,490
  
Cash and cash equivalents at end of period
  
$
16,990
    
$
101,333
  
 
 
See accompanying notes to condensed consolidated financial statements.
5
 
BROWN & BROWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 · Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “we”, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty arena. Brown & Brown's business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance and reinsurance, primarily through independent agents and brokers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designed for specific industries, trade groups, public and quasi-public entities and market niches; and the Services Division, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers' compensation and all-lines liability areas, as well as Medicare set-aside services.
 
NOTE 2 · Basis of Financial Reporting
 
The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited, condensed, consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. 
 
Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
 
NOTE 3 · Net Income Per Share
 
Basic net income per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the period. Basic net income per share excludes dilution. Diluted net income per share reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock.
 
The following table sets forth the computation of basic net income per share and diluted net income per share:

   
For the three months
ended March 31,
  
(in thousands, except per share data)
  
2008
    
2007
  
             
Net income
  
$
51,760
    
$
59,727
  
                 
Weighted average number of common shares outstanding
    
140,704
      
140,221
  
                 
Dilutive effect of stock options using the
                
treasury stock method
    
623
      
973
  
                 
Weighted average number of shares outstanding
    
141,327
      
141,194
  
                 
Net income per share:
                
Basic
  
$
0.37
    
$
0.43
  
Diluted
  
$
0.37
    
$
0.42
  
 
6

NOTE 4 · New Accounting Pronouncements
 
Fair Value Measurements — In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for the measurement of assets and liabilities that uses fair value and expands disclosures about fair value measurements. SFAS 157 will apply whenever another GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years.  The adoption of SFAS 157 did not have any impact on the amounts reported on the Company’s condensed consolidated financial statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company elected not to report any financial assets or liabilities at fair value under SFAS 159 in its first quarter 2008 condensed consolidated financial statements.
 
Business Combinations — In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141R”). SFAS 141R requires that upon initially obtaining control, an acquirer will recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. Additionally, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. Transaction costs will be expensed as incurred. SFAS 141R also modifies the recognition for preacquisition contingencies, such as environmental or legal issues, restructuring plans and acquired research and development value in purchase accounting. SFAS 141R amends SFAS No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination, either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The Company expects to adopt SFAS 141R on January 1, 2009 and is currently assessing the potential impact that the adoption could have on the Company’s financial statements.
 
Noncontrolling Interests in Consolidated Financial Statements — In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”), an amendment of Accounting Research Bulletin (“ARB”) No. 51 (“ARB 51”). SFAS 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for, and reporting of, transactions between the reporting entity and holders of such noncontrolling interests. Under SFAS 160, noncontrolling interests are considered equity and should be reported as an element of consolidated equity. Net income will encompass the total income of all consolidated subsidiaries and there will be separate disclosure on the face of the income statement of the attribution of that income between the controlling and noncontrolling interests; increases and decreases in the noncontrolling ownership interest amount will be accounted for as equity transactions. SFAS 160 is effective for the first annual reporting period beginning on or after December 15, 2008, and earlier application is prohibited. SFAS 160 is required to be adopted prospectively, except for reclassify noncontrolling interests to equity, separate from the parent’s shareholders’ equity, in the consolidated statement of financial position and recasting consolidated net income (loss) to include net income (loss) attributable to both the controlling and noncontrolling interests, both of which are required to be adopted retrospectively. Since all of the Company’s subsidiaries are 100% owned, we do not expect the adoption of SFAS 160 will have a significant impact to our financial statements.
 
NOTE 5 · Business Combinations
 
Acquisitions in 2008
 
For the three months ended March 31, 2008, Brown & Brown acquired the assets and assumed certain liabilities of eight insurance intermediaries, the stock of one insurance intermediary and several book of business (customer accounts). The aggregate purchase price of these acquisitions was $79,367,000, including $71,475,000 of net cash payments, the issuance of $1,987,000 in notes payable and the assumption of $5,905,000 of liabilities. All of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill. Acquisitions are initially recorded at preliminary fair values. Subsequently, the Company completes the final fair value allocations and any adjustments to assets or liabilities acquired are recorded in the current period.

7
 
All of these acquisitions have been accounted for as business combinations and are as follows:

(in thousands)
 
Name
  
Business
Segment
  
2008
Date of
Acquisition
  
Net
Cash
Paid
    
Notes
Payable
    
Recorded
Purchase
Price
  
Smith Peabody & Stiles Insurance Agency
  
Retail
  
January 1
  
$
13,285
    
$
-
    
$
13,285
  
LDP Consulting Group, Inc.
  
Retail
  
January 24
    
39,226
      
-
      
39,226
  
Other
  
Various
  
Various
    
18,964
      
1,987
      
20,951
  
Total
          
$
71,475
    
$
1,987
    
$
73,462
  
 
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

(in thousands)
  
Smith
Peabody &
Stiles
    
LDP
    
Other
    
Total
  
Fiduciary cash
  
$
-
    
$
166
    
$
-
    
$
166
  
Other current assets
    
-
      
1,121
      
853
      
1,974
  
Fixed assets
    
75
      
19
      
99
      
193
  
Goodwill
    
8,980
      
29,115
      
10,771
      
48,866
  
Purchased customer accounts
    
4,218
      
13,958
      
9,788
      
27,964
  
Noncompete agreements
    
12
      
55
      
126
      
193
  
Other assets
    
-
      
11
      
-
      
11
  
Total assets acquired
    
13,285
      
44,445
      
21,637
      
79,367
  
Other current liabilities
    
-
      
(5,219
)
 
  
(686
) 
    
(5,905
)
Total liabilities assumed
    
-
      
(5,219
)
 
  
(686
)
    
(5,905
)
Net assets acquired
  
$
13,285
    
$
39,226
    
$
20,951
    
$
73,462
  

The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and noncompete agreements, 5.0 years.
 
Goodwill of $48,866,000, all of which is expected to be deductible for income tax purposes, was assigned to the Retail, Wholesale Brokerage, National Programs and Services Divisions in the amounts of $47,767,000, $779,000, $320,000 and nil, respectively.

8
 
The results of operations for the acquisitions completed during 2008 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of the beginning of each period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

 
   
For the three months
  
(UNAUDITED)
  
ended March 31,
  
(in thousands, except per share data)
  
2008
    
2007
  
             
Total revenues
  
$
258,531
    
$
266,392
  
Income before income taxes
    
85,285
      
101,023
  
Net income
    
52,189
      
61,505
  
                 
Net income per share:
                
Basic
  
$
0.37
    
$
0.44
  
Diluted
  
$
0.37
    
$
0.44
  
                 
Weighted average number of shares outstanding:
                
Basic
    
140,704
      
140,221
  
Diluted
    
141,327
      
141,194
  
 
Additional consideration paid to sellers as a result of purchase price “earn-out” provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2008 as a result of these adjustments totaled $1,298,000, all of which was allocated to goodwill. Of the $1,298,000 net additional consideration paid, $1,242,000 was paid in cash and $56,000 was issued in notes payable. As of March 31, 2008, the maximum future contingency payments related to acquisitions totaled $181,580,000.

Acquisitions in 2007
 
For the three months ended March 31, 2007, Brown & Brown acquired the assets and assumed certain liabilities of seven insurance intermediaries, the stock of two insurance intermediaries and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $53,433,000, including $42,652,000 of net cash payments, the issuance of $4,015,000 in notes payable and the assumption of $6,766,000 of liabilities. All of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill. Acquisitions are initially recorded at preliminary fair values. Subsequently, the Company completes the final fair value allocations and any adjustments to assets or liabilities acquired are recorded in the current period.

All of these acquisitions have been accounted for as business combinations and are as follows:
 
(in thousands)
      
2007
  
Net
          
Recorded
  
   
Business
  
Date of
  
Cash
    
Notes
    
Purchase
  
Name
  
Segment
  
Acquisition
  
Paid
    
Payable
    
Price
  
ALCOS, Inc.
  
Retail
  
March 1
  
$
30,850
    
$
3,500
    
$
34,350
  
Other
  
Various
  
Various
    
11,802
      
515
      
12,317
  
Total
          
$
42,652
    
$
4,015
    
$
46,667
  
 
9
 
The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

(in thousands)
  
ALCOS
    
Other
    
Total
  
Fiduciary cash
  
$
627
    
$
716
    
$
1,343
  
Other current assets
    
1,224
      
515
      
1,739
  
Fixed assets
    
720
      
102
      
822
  
Goodwill
    
28,970
      
8,192
      
37,162
  
Purchased customer accounts
    
7,820
      
4,180
      
12,000
  
Noncompete agreements
    
130
      
112
      
242
  
Other assets
    
115
      
10
      
125
  
Total assets acquired
    
39,606
      
13,827
      
53,433
  
Other current liabilities
    
(2,098
)
    
(761
)
    
(2,859
)
Deferred income taxes
    
(3,083
)
    
(749
)
    
(3,832
)
Non-current other liabilities
    
(75
) 
    
-
      
(75
)
Total liabilities assumed
    
(5,256
)
    
(1,510
)
    
(6,766
)
Net assets acquired
  
$
34,350
    
$
12,317
    
$
46,667
  

The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and noncompete agreements, 5.0 years.
 
Goodwill of $37,162,000, of which $5,366,000 is expected to be deductible for income tax purposes, was assigned to the Retail, Wholesale Brokerage, National Programs and Services Divisions in the amounts of $4,304,000, $241,000, $374,000 and $447,000, respectively.

The results of operations for the acquisitions completed during 2007 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as the beginning of each period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.


   
For the three months
  
(UNAUDITED)
  
ended March 31,
  
(in thousands, except per share data)
  
2007
    
2006
  
             
Total revenues
  
$
262,255
    
$
237,820
  
Income before income taxes
    
        99,088
      
83,311
  
Net income
    
        60,327
      
51,178
  
                 
Net income per share:
                
Basic
  
$
0.43
    
$
0.37
  
Diluted
  
$
0.43
    
$
0.36
  
                 
Weighted average number of shares outstanding:
                
Basic
    
     140,221
      
139,383
  
Diluted
    
      141,194
      
140,823
  

10
 
Additional consideration paid to sellers as a result of purchase price “earn-out” provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2007 as a result of these adjustments totaled $4,269,000, all of which was allocated to goodwill. Of the $4,269,000 net additional consideration paid, $363,000 was paid in cash, $3,886,000 was issued in notes payable and $20,000 was assumed as net liabilities. As of March 31, 2007, the maximum future contingency payments related to acquisitions totaled $202,318,000.

NOTE 6 · Goodwill
 
Goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. Brown & Brown completed its most recent annual assessment as of November 30, 2007 and identified no impairment as a result of the evaluation.
 
The changes in goodwill for the three months ended March 31, 2008 are as follows:
 
         
Wholesale
    
National
              
(in thousands)
  
Retail
    
Brokerage
    
Programs
    
Services
    
Total
  
Balance as of January 1, 2008
  
$
453,485
    
$
242,730
    
$
146,948
    
$
3,270
    
$
846,433
  
Goodwill of acquired businesses
    
48,770
      
1,074
      
320
      
-
      
50,164
  
Goodwill disposed of relating to sales of businesses
    
-
      
(53
) 
    
-
      
-
      
(53
) 
Balance as of March 31, 2008
  
$
502,255
    
$
243,751
    
$
147,268
    
$
3,270
    
$
896,544
  

NOTE 7 · Amortizable Intangible Assets
 
Amortizable intangible assets at March 31, 2008 and December 31, 2007 consisted of the following:
 
   
March 31, 2008
    
December 31, 2007
  
                     
Weighted
                      
Weighted
  
   
Gross
          
Net
    
Average
    
Gross
          
Net
    
Average
  
   
Carrying
    
Accumulated
    
Carrying
    
Life
    
Carrying
    
Accumulated
    
Carrying
    
Life
  
(in thousands)
  
Value
    
Amortization
    
Value
    
(years)
    
Value
    
Amortization
    
Value
    
(years)
  
Purchased customer accounts
  
$
654,724
    
$
(198,082
)
  
$
456,642
      
14.9
    
$
628,123
    
$
(187,543
)
  
$
440,580
      
14.9
  
Noncompete agreements
    
26,040
      
(23,584
)
    
2,456
      
7.7
      
25,858
      
(23,214
)
    
2,644
      
7.7
  
        Total
  
$
680,764
    
$
(221,666
)
  
$
459,098
            
$
653,981
    
$
(210,757
)
  
$
443,224
          
   
Amortization expense for other amortizable intangible assets for the years ending December 31, 2008, 2009, 2010, 2011 and 2012 is estimated to be $44,276,000, $43,854,000, $43,176,000, $41,754,000, and $41,138,000, respectively.
 
NOTE 8 · Investments
 
Investments consisted of the following:

   
March 31, 2008
    
December 31, 2007
  
   
Carrying Value
    
Carrying Value
  
(in thousands)
  
Current
    
Non-
Current
    
Current
    
Non-
Current
  
Available-for-sale marketable equity securities 
  
$
48
    
$
-
    
$
46
    
$
-
  
Non-marketable equity securities and certificates of deposit 
    
4,625
      
391
      
2,846
      
355
  
Total investments 
  
$
4,673
    
$
391
    
$
2,892
    
$
355
  
 
11



The following table summarizes available-for-sale securities:

(in thousands)
  
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Estimated
Fair
Value
  
Marketable equity securities:
                        
March 31, 2008 
  
$
25
    
$
23
    
$
-
    
$
48
  
December 31, 2007
  
$
25
    
$
21
    
$
-
    
$
46
  
 
The following table summarizes the proceeds and realized gains/(losses) on non-marketable equity securities and certificates of deposit for the three months ended March 31, 2008 and 2007:

(in thousands)
    
Proceeds
    
Gross
Realized
Gains
    
Gross
Realized
Losses
  
For the three months ended:
                    
March 31, 2008 
    
$
50
    
$
78
    
$
-
  
March 31, 2007 
    
$
9,090
    
$
8,841
    
$
500
  

As of December 31, 2006, our largest security investment was 559,970 common stock shares of Rock-Tenn Company, a New York Stock Exchange-listed company, which we had owned for more than 25 years. Our investment in Rock-Tenn Company accounted for 81% of the total value of our available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit as of December 31, 2006. Rock-Tenn Company's closing stock price at December 31, 2006 was $27.11. In late January 2007, the Board of Directors authorized the sale of half of our investment in Rock-Tenn Company, and subsequently authorized the sale of the balance of the shares. We realized a gain in excess of our original cost basis of $8,840,000 in the first quarter of 2007 and $9,824,000 in the second quarter of 2007 as the results of these sales. As of June 30, 2007, we no longer own any shares of Rock-Tenn Company.
 
NOTE 9 · Long-Term Debt
 
Long-term debt at March 31, 2008 and December 31, 2007 consisted of the following:
 
(in thousands)
  
2008
    
2007
  
Unsecured senior notes
  
$
250,000
    
$
225,000
  
Acquisition notes payable
    
9,875
      
14,025
  
Revolving credit facility
    
-
      
-
  
Term loan agreements
    
-
      
-
  
Other notes payable
    
173
      
201
  
Total debt
    
260,048
      
239,226
  
Less current portion
    
(7,421
)
    
(11,519
)
Long-term debt
  
$
252,627
    
$
227,707
  
 
In July 2004, the Company completed a private placement of $200.0 million of unsecured senior notes (the “Notes”). The $200.0 million is divided into two series: Series A, for $100.0 million due in 2011 and bearing interest at 5.57% per year; and Series B, for $100.0 million due in 2014 and bearing interest at 6.08% per year. The closing on the Series B Notes occurred on July 15, 2004. The closing on the Series A Notes occurred on September 15, 2004. Brown & Brown has used the proceeds from the Notes for general corporate purposes, including acquisitions and repayment of existing debt. As of March 31, 2008 and December 31, 2007 there was an outstanding balance of $200.0 million on the Notes.
 
12
 
On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The Purchaser also purchased Notes issued by the Company in 2004. The Master Agreement provides for a $200.0 million private uncommitted “shelf” facility for the issuance of senior unsecured notes over a three-year period, with interest rates that may be fixed or floating and with such maturity dates, not to exceed ten years, as the parties may determine. The Master Agreement includes various covenants, limitations and events of default similar to the Notes issued in 2004. The initial issuance of notes under the Master Facility Agreement occurred on December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed interest rate of 5.66% per annum. On February 1, 2008 we issued $25.0 million in Series D Senior Notes due January 15, 2015, with a fixed interest rate of 5.37% per annum.
 
Also on December 22, 2006, the Company entered into a Second Amendment to Amended and Restated Revolving and Term Loan Agreement (the “Second Term Amendment”) and a Third Amendment to Revolving Loan Agreement (the “Third Revolving Amendment”) with a national banking institution, amending the existing Amended and Restated Revolving and Term Loan Agreement dated January 3, 2001 (the “Term Agreement”) and the existing Revolving Loan Agreement dated September 29, 2003, as amended (the “Revolving Agreement”), respectively. The amendments provided covenant exceptions for the notes issued or to be issued under the Master Agreement, and relaxed or deleted certain other covenants. In the case of the Third Revolving Amendment, the lending commitment was reduced from $75.0 million to $20.0 million, the maturity date was extended from September 30, 2008 to December 20, 2011, and the applicable margins for advances and the availability fee were reduced. Based on the Company's funded debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, the applicable margin for Eurodollar advances changed from a range of London Interbank Offering Rate (“LIBOR”) LIBOR plus 0.625% to 1.625% to a range of LIBOR plus 0.450% to 0.875%. The applicable margin for base rate advances changed from a range of LIBOR plus 0.000% to 0.125% to the Prime Rate less 1.000%. The availability fee changed from a range of 0.175% to 0.250% to a range of 0.100% to 0.200%. The 90-day LIBOR was 2.68% and 4.70% as of March 31, 2008 and December 31, 2007, respectively. There were no borrowings against this facility at March 31, 2008 or December 31, 2007.
 
In January 2001, Brown & Brown entered into a $90.0 million unsecured seven-year term loan agreement with a national banking institution, bearing an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.50% to 1.00%, depending upon Brown & Brown's quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization and non-cash stock-based compensation. The 90-day LIBOR was 2.68% and 4.70% as of March 31, 2008 and December 31, 2007, respectively. The loan was fully funded on January 3, 2001 and was to be repaid in equal quarterly installments of $3,200,000 through December 2007. As of December 31, 2007 the outstanding balance had been paid in full.
 
All four of these credit agreements require Brown & Brown to maintain certain financial ratios and comply with certain other covenants. Brown & Brown was in compliance with all such covenants as of March 31, 2008 and December 31, 2007.
 
To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90.0 million term loan, Brown & Brown entered into an interest rate exchange ( or “swap”) agreement that effectively converted the floating rate LIBOR-based interest payments to fixed interest rate payments at 4.53%. This agreement did not affect the required 0.50% to 1.00% credit risk spread portion of the term loan. In accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended, the fair value of the interest rate swap of approximately $37,000, net of related income taxes of approximately $22,000, was recorded in other assets as of December 31, 2006 with the related change in fair value reflected as other comprehensive income. Brown & Brown has designated and assessed the derivative as a highly effective cash flow hedge. As of December 31, 2007, the interest rate swap agreement expired in conjunction with the final principal payment on the term loan.

Acquisition notes payable represent debt incurred to former owners of certain insurance operations acquired by Brown & Brown. These notes and future contingent payments are payable in monthly, quarterly and annual installments through April 2011, including interest in the range from 0.00% to 9.00%.


13

NOTE 10 · Supplemental Disclosures of Cash Flow Information and Non-Cash Financing and Investing Activities

 (in thousands)
  
For the three months
ended March 31,
  
   
2008
    
2007
  
Cash paid during the period for:
            
Interest
  
$
5,778
    
$
6,118
  
Income taxes
  
$
124
    
$
1,192
  

Brown & Brown's significant non-cash investing and financing activities are summarized as follows:
 
   
For the three months
ended March 31,
  
(in thousands)
  
2008
    
2007
  
             
Unrealized holding gain (loss) on available-for-sale securities, net of tax effect of $1 for 2008; net of tax benefit of $1,826 for 2007
  
$
1
    
$
(3,199
) 
Net (loss) gain on cash-flow hedging derivative, net of tax benefit of $0 for 2008, net of tax benefit of $9 for 2007
  
$
-
    
$
(16
) 
Notes payable issued or assumed for purchased customer accounts
  
$
2,042
    
$
7,900
  

NOTE 11 · Comprehensive Income

The components of comprehensive income, net of related income tax effects, are as follows:
 
   
For the three months
  
   
ended March 31,
  
(in thousands)
  
2008
    
2007
  
             
Net income
  
$
51,760
    
$
59,727
  
Net unrealized holding gain (loss) on available-for-sale securities
    
1
      
(3,199
) 
Net (loss) gain on cash-flow hedging derivative
    
-
      
(16
) 
Comprehensive income
  
$
51,761
    
$
56,512
  

NOTE 12 · Legal and Regulatory Proceedings
 
Governmental Investigations
 
As previously disclosed in our public filings, offices of the Company are party to profit-sharing contingent compensation agreements with certain insurance companies, including agreements providing for potential payment of revenue-sharing commissions by insurance companies based primarily on the overall profitability of the aggregate business written with that insurance company, and/or additional factors such as retention ratios and overall volume of business that an office or offices place with the insurance company. Additionally, to a lesser extent, some offices of the Company are party to override commission agreements with certain insurance companies, and these agreements provide for commission rates in excess of standard commission rates to be applied to specific lines of business, such as group health business, based primarily on the overall volume of such business that the office or offices in question place with the insurance company. The Company has not chosen to discontinue receiving profit-sharing contingent compensation or override commissions.

14
 
As previously reported, governmental agencies in a number of states have looked or are looking into issues related to compensation practices in the insurance industry, and the Company continues to respond to written and oral requests for information and/or subpoenas seeking information related to this topic. To date, requests for information and/or subpoenas have been received from governmental agencies such as attorneys general and departments of insurance. Agencies in Arizona, Virginia and Washington have concluded their respective investigations of subsidiaries of Brown & Brown, Inc. based in those states with no further action as to these entities.

The Company cannot currently predict the impact or resolution of the various governmental inquiries and thus cannot reasonably estimate a range of possible loss, which could be material, or whether the resolution of these matters may harm the Company's business and/or lead to a decrease in or elimination of profit-sharing contingent compensation and override commissions, which could have a material adverse impact on the Company's consolidated financial condition.
 
Other
 
The Company is involved in numerous pending or threatened proceedings by or against Brown & Brown, Inc. or one or more of its subsidiaries that arise in the ordinary course of business. The damages that may be claimed against the Company in these various proceedings are substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits, and to vigorously protect its interests.
 
Among the above-referenced claims, and as previously described in the Company's public filings, over the past several years, there have been a number of threatened and pending legal claims and lawsuits against Brown & Brown, Inc. and Brown & Brown Insurance Services of Texas, Inc. (BBTX), a subsidiary of Brown & Brown, Inc., arising out of BBTX's involvement with the procurement and placement of workers' compensation insurance coverage for entities including several professional employer organizations. One such action, styled Great American Insurance Company, et al. v. The Contractor's Advantage, Inc., et al., Cause No.2002-33960, is currently being tried in the 189th Judicial District Court in Harris County, Texas.  The plaintiffs in this case assert numerous causes of action, including fraud, civil conspiracy, federal Lanham Act and RICO violations, breach of fiduciary duty, breach of contract, negligence and violations of the Texas Insurance Code against BBTX, Brown & Brown, Inc. and other defendants, and seeks recovery of punitive or extraordinary damages (such as treble damages) and attorneys' fees. Although the ultimate outcome of the matters referenced in this section titled “Other” cannot be ascertained and liabilities in indeterminate amounts may be imposed on Brown & Brown, Inc. or its subsidiaries, on the basis of present information, availability of insurance and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company's consolidated financial position. However, as (i) one or more of the Company's insurance carriers could take the position that portions of these claims are not covered by the Company's insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded, and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters.
 
For a more complete discussion of the foregoing matters, please see Item 3 of Part I of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for our fiscal year ended December 31, 2007 and Note 13 to the Consolidated Financial Statements contained in Item 8 of Part II thereof.
 
NOTE 13 · Segment Information
 
Brown & Brown's business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, governmental, professional and individual customers; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance, and reinsurance, primarily through independent agents and brokers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designed for specific industries, trade groups, public and quasi-public entities, and market niches; and the Services Division, which provides insurance-related services, including third-party administration, consulting for the workers' compensation and employee benefit self-insurance markets, managed healthcare services and Medicare set-aside services. Brown & Brown conducts all of its operations within the United States of America except for one start-up wholesale brokerage operation based in London, England that commenced business in March 2008 and which has less then $300,000 of revenues.

15
 
Summarized financial information concerning Brown & Brown's reportable segments for the three months ended March 31, 2008 and 2007 is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the inter-company interest expense charge to the reporting segment.
 
   
For the three months ended March 31, 2008
  
         
Wholesale
    
National
                    
(in thousands)
  
Retail
    
Brokerage
    
Programs
    
Services
    
Other
    
Total
  
Total revenues
  
$
157,213
    
$
46,334
    
$
44,070
    
$
7,938
    
$
1,160
    
$
256,715
  
Investment income
    
191
      
459
      
109
      
5
      
1,235
      
1,999
  
Amortization
    
6,218
      
2,498
      
2,275
      
115
      
10
      
11,116
  
Depreciation
    
1,460
      
738
      
641
      
112
      
295
      
3,246
  
Interest
    
6,331
      
4,797
      
2,117
      
194
      
(10,005
)
    
3,434
  
Income before income taxes
    
47,332
      
7,236
      
16,036
      
1,776
      
12,204
      
84,584
  
Total assets
    
1,466,811
      
643,717
      
553,612
      
40,193
      
(718,184
)
    
1,986,149
  
Capital expenditures
    
1,168
      
1,246
      
396
      
55
      
1,196
      
4,061
  


   
For the three months ended March 31, 2007
  
         
Wholesale
    
National
                    
(in thousands)
  
Retail
    
Brokerage
    
Programs
    
Services
    
Other
    
Total
  
Total revenues
  
$
150,819
    
$
48,586
    
$
38,725
    
$
8,961
    
$
11,422
    
$
258,513
  
Investment income
    
46
      
705
      
123
      
6
      
10,699
      
11,579
  
Amortization
    
4,884
      
2,234
      
2,259
      
115
      
10
      
9,502
  
Depreciation
    
1,389
      
601
      
697
      
151
      
202
      
3,040
  
Interest
    
4,295
      
4,855
      
2,694
      
165
      
(8,375
)
    
3,634
  
Income before income taxes
    
53,547
      
10,845
      
11,232
      
2,094
      
20,384
      
98,102
  
Total assets
    
1,178,751
      
610,859
      
527,186
      
33,715
      
(523,104
)
    
1,827,407
  
Capital expenditures
    
1,407
      
569
      
459
      
123
      
13,722
      
16,280
  

NOTE 14 · Subsequent Events
 
From April 1, 2008 through May 7, 2008, Brown & Brown acquired the assets and assumed certain liabilities of five insurance intermediaries and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $37,502,000, including $36,264,000 of net cash payments, the issuance of $727,000 in notes payable and the assumption of $511,000 of liabilities. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract and hire high-quality individuals. Acquisition purchase prices are based primarily on a multiple of average annual operating profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill.
 
16
 
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED IN 2007, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.
 
GENERAL
 
We are a diversified insurance agency, wholesale brokerage and services 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 the 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.
 
Our commissions and fees revenue is comprised of commissions paid by insurance companies and fees paid directly by customers. Commission revenues generally represent a percentage of the policy 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) in order to determine what premium to charge the insured. These premium rates are established by insurance companies based upon many factors, including reinsurance rates paid by insurance carriers, none of which we control. Beginning in 1986 and continuing through 1999, commission revenues were adversely influenced by a consistent decline in premium rates resulting from intense competition among property and casualty insurance companies for market share. This condition of a prevailing decline in premium rates, commonly referred to as a “soft market,” generally resulted in flat to reduced commissions on renewal business. The effect of this softness in rates on our commission revenues was somewhat offset by our acquisitions and net new business production. As a result of increasing “loss ratios” (the comparison of incurred losses plus adjustment expenses against earned premiums) of insurance companies through 1999, there was a general increase in premium rates beginning in the first quarter of 2000 and continuing into 2003.  During 2003, the increases in premium rates began to moderate, and in certain lines of insurance, premium rates decreased. In 2004, as general premium rates continued to moderate, the insurance industry experienced the worst hurricane season since 1992 (when Hurricane Andrew hit south Florida). The insured losses from the 2004 hurricane season were absorbed relatively easily by the insurance industry and the general insurance premium rates continued to soften during 2005. During the third quarter of 2005, the insurance industry experienced the worst hurricane season ever recorded. As a result of the significant losses incurred by the insurance carriers due to these hurricanes, the insurance premium rates in 2006 increased on coastal property, primarily in the southeastern region of the United States. In the other regions of the United States, insurance premium rates generally declined during 2006. In addition to significant insurance pricing declines in the State of Florida, as discussed below in the “Florida Insurance Overview”, the insurance premium rates continued a gradual decline during 2007 in most of the other regions of the United States. One industry segment that was hit especially hard during 2007 was the home-building industry in southern california, and, to a lesser extent, Nevada, Arizona and Florida. We have a wholesale brokerage operation that focuses on placing property and casualty insurance products for that home-building segment and a program operation that places errors and omissions professional liability coverages for title agents. Both of these operations’ 2007 and first-quarter of 2008 revenues were negatively affected by these national economic trends.

The volume of business from new and existing insured customers, fluctuations in insurable exposure units and changes in general economic and competitive conditions further impact our revenues. For example, the increasing costs of litigation settlements and awards have caused some customers to seek higher levels of insurance coverage. Conversely, level rates of inflation or general declines in economic activity could limit increases in the values of insurable exposure units. Historically, our revenues have continued to grow as a result of an intense focus on net new business growth and acquisitions: however in 2007, substantial governmental involvement in the Florida insurance marketplace resulted in a substantial loss of revenues. We anticipate that results of operations will continue to be influenced by these competitive and economic conditions in 2008.
 
We also earn “profit-sharing contingent commissions,” which are profit-sharing commissions based primarily on underwriting results, but may also reflect considerations for volume, growth and/or retention. These commissions are primarily received in the first and second quarters of each year, based on underwriting results and other aforementioned considerations for the prior year(s). Over the last three years profit-sharing contingent commissions have averaged approximately 5.8% of the previous year's total commissions and fees revenue. Profit-sharing contingent commissions are primarily included in our total commissions and fees in the Consolidated Statements of Income in the year received. The term “core commissions and fees” excludes profit-sharing contingent commissions and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered. Recently, four national insurance carriers announced the replacement of the current loss-ratio based profit-sharing contingent commission calculation with a fixed-based methodology referred to as “Guaranteed Supplemental Commissions” (“GSC’s”). Since these new GSC’s are not subject to the uncertainty of loss ratios, they are accrued throughout the year based on actual premiums written.  As of March 31, 2008, $2.4 million was accrued for GSC’s earned during 2008 that will be collected in the first quarter of 2009.  Since the original GSC’s contracts were not formalized until the second quarter of 2007, there was no GSC’s accrual established at March 31, 2007; however, a $3.3 million accrual was established as of June 30, 2007 for the GSC’s earned for the first six months of 2007.

17
 
Fee revenues are generated primarily by: (1) our Services Division, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers’ compensation and all-lines liability arenas, as well as Medicare set-aside services; and (2) our Wholesale Brokerage and National Program Divisions which earn fees primarily for the issuance of insurance policies on behalf of insurance carriers. In each of the past three years, fee revenues have increased as a percentage of our total commissions and fees, from 13.6% in 2005 to 14.3% in 2007.
 
Investment income historically 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 in accordance with applicable law. Investment income also includes gains and losses realized from the sale of investments. In 2007, we sold our investment in Rock-Tenn Company which we had owned for over 25 years, for a net gain of $18.7 million.
 
Other income consists primarily of gains and losses from the sale and disposition of assets. 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.
 
Florida Insurance Overview
 
Many states have established “Residual Markets”, which are governmental or quasi-governmental insurance facilities that provide coverage to individuals and/or businesses that cannot buy insurance in the private marketplace, i.e., “insurers of last resort”. These facilities can be for any type of risk or exposure; however, the most common are usually automobile or high-risk property coverage. Residual Markets can also be referred to as: “FAIR Plans,” “Windstorm Pools,” “Joint Underwriting Associations,” or may even be given names styled after the private sector, such as “Citizens Property Insurance Corporation.”
 
In August 2002, the Florida Legislature created “Citizens Property Insurance Corporation” (“Citizens”) to be the “insurer of last resort” in Florida and, as such, Citizens therefore charged insurance rates that were higher than those prevailing in the private insurance marketplace. In each of 2004 and 2005, four major hurricanes made landfall in Florida, and as a result of the significant insurance property losses caused by these storms, the insurance rates increased in 2006. To counter the increased property insurance rates, the State of Florida caused Citizens to essentially cut its property insurance rates in half beginning in January 2007. By state law, Citizens has guaranteed their rates through January 1, 2010. As a result, Citizens became the most competitive risk-bearer on commercial habitational coastal property exposures, such as condominiums, apartments, and certain assisted living facilities. Additionally, Citizens became the only insurance market for certain homeowner policies throughout Florida. By the end of 2007, Citizens was the largest single underwriter of coastal property in Florida.
 
Because Citizens became the principal direct competitor of the risk-bearers that participate in our Florida Intracoastal Underwriters (“FIU”) condominium program and the excess and surplus lines insurers that are represented by our wholesale brokerage operations offering property coverages such as our Hull & Company subsidiary, these programs and operations lost significant amounts of revenue to Citizens during 2007.  Citizens’ impact on our Florida Retail Division was less pronounced because to our Retail Division offices, Citizens was now simply another risk-bearer with which to write business, although at slightly lower commission rates and with more onerous requirements for placing coverage. In 2008, the insurance rates charged by Citizens are expected to be similar to the 2007 rates and therefore, the sequential year impact of Citizens’ rates on our results may not be as significant as they were in 2007.
 
In the second half of 2007, the standard insurance companies started to become more competitive in the casualty (liability) business, including workers’ compensation business. The rates in the Florida casualty business began to drop as much as 20%-25% compared with 2006 rates. These competitive rates are likely to continue for at least the first nine months of 2008. 
 
18
 
Company Overview – First Quarter of 2008
 
Following year 2007, in which we experienced four consecutive quarters of negative internal growth, we again experienced negative internal growth in the first quarter of 2008.  For the first quarter of 2008, our total core commissions and fees decreased $8.1 million or 4.1%, primarily because of the continued “soft” insurance marketplace in the United States, governmental involvement in the Florida insurance marketplace and the negative impact of the economy on the home-building industry. Offsetting the negative internal revenue growth was an active quarter of nine acquisitions (as well as books of business purchases) with estimated annual revenues of $30.2 million which contributed to the $26.1 million of total core commissions and fees related to acquisitions in the first quarter of 2008.
 
During the first quarter of 2008, we had no gains or losses on the sale of investments.  However, during 2007, we recorded an $18.7 million gain on the sale of our investment in Rock-Tenn Company, of which we recognized $8.8 million in the first quarter and $9.9 million in the second quarter.
 
Acquisitions
 
During the first quarter of 2008, we acquired the assets and assumed certain liabilities of eight insurance intermediary operations, the stock of one insurance intermediary and several books of business (customer accounts). The aggregate purchase price was $79.4 million, including $71.5 million of net cash payments, the issuance of $2.0 million in notes payable and the assumption of $5.9 million of liabilities. These acquisitions had estimated aggregate annualized revenues of $30.2 million.
 
During the first quarter of 2007, we acquired the assets and assumed certain liabilities of seven insurance intermediary operations, the stock of two insurance intermediaries and several books of business (customer accounts). The aggregate purchase price was $53.4 million, including $42.6 million of net cash payments, the issuance of $4.0 million in notes payable and the assumption of $6.8 million of liabilities. These acquisitions had estimated aggregate annualized revenues of $25.5 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 and reporting policies, the more critical policies include our accounting for revenue recognition, business acquisitions and purchase price allocations, intangible asset impairments, reserves for litigation and derivative interests. In particular, the accounting for these areas requires significant judgments to be made by management.  Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements” in our Annual Report on Form 10-K for the year ended December 31, 2007 on file with the Securities and Exchange Commission for details regarding our critical and significant accounting policies.
 
19
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 
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 Condensed Consolidated Financial Results for the three-month periods ended March 31, 2008 and 2007 is as follows (in thousands, except percentages):
 
   
For the three months
  
   
ended March 31,
  
               
%
  
   
2008
    
2007
    
Change
  
REVENUES
                  
Commissions and fees
  
$
217,181
    
$
201,502
    
7.8
%
Profit-sharing contingent commissions
    
36,347
      
44,057
    
(17.5
)%
Investment income
    
1,999
      
11,579
    
(82.7
)%
Other income, net
    
1,188
      
1,375
    
(13.6
)% 
Total revenues
    
256,715
      
258,513
    
(0.7
)%
                       
EXPENSES
                      
Employee compensation and benefits
    
121,187
      
110,810
    
9.4
%
Non-cash stock-based compensation
    
1,944
      
1,502
    
29.4
%
Other operating expenses
    
31,204
      
31,923
    
(2.3
)%
Amortization
    
11,116
      
9,502
    
17.0
%
Depreciation
    
3,246
      
3,040
    
6.8
%
Interest
    
3,434
      
3,634
    
(5.5
)%
Total expenses
    
172,131
      
160,411
    
7.3
%
                       
Income before income taxes
    
84,584
      
98,102
    
(13.8
)%
                       
Income taxes
    
32,824
      
38,375
    
(14.5
)%
                       
NET INCOME
  
$
51,760
    
$
59,727
    
(13.3
)%
                       
Net internal growth rate – core commissions and fees
    
(4.1
)%
    
(1.8
)%
      
Employee compensation and benefits ratio
    
47.2
%
    
42.9
%
      
Other operating expenses ratio
    
12.2
%
    
12.3
%
      
                       
Capital expenditures
  
$
4,061
    
$
16,280
        
Total assets at March 31, 2008 and 2007
  
$
1,986,149
    
$
1,827,407
        
 
Commissions and Fees 

Commissions and fees, including profit-sharing contingent commissions, for the first quarter of 2008 increased $8.0 million, or 3.2%, over the same period in 2007. Profit-sharing contingent commissions for the first quarter of 2008 decreased $7.7 million from the first quarter of 2007, to $36.3 million. Core commissions and fees are our commissions and fees, less (i) profit-sharing contingent commissions and (ii) divested business (commissions and fees generated from offices, books of business or niches sold or terminated). Core commissions and fees revenue for the first quarter of 2008 increased $18.0 million, of which approximately $26.1 million represents core commissions and fees from agencies acquired since the first quarter of 2007. After divested business of $2.3 million, the remaining net decrease of $8.1 million represents net lost business, which reflects a (4.1%) internal growth rate for core commissions and fees.
 
20

Investment Income

Investment income for the three months ended March 31, 2008 decreased $9.6 million, or 82.7%, from the same period in 2007. This decrease is primarily due to the sale of our investment in Rock-Tenn Company for a net gain of approximately $8.8 million in the first quarter of 2007.
 
Other Income, net
 
Other income for the three months ended March 31, 2008 was $1.2 million, compared with $1.4 million in the same period in 2007. Other income consists primarily of gains and losses from the sale and disposition of assets. 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.
 
Employee Compensation and Benefits
 
Employee compensation and benefits for the first quarter of 2008 increased $10.4 million, or 9.4%, over the same period in 2007.  This increase is primarily related to the addition of new employees from acquisitions completed since April 1, 2007. Employee compensation and benefits as a percentage of total revenue increased to 47.2% for the first quarter of 2008, from 42.9 % for the first quarter of 2007. Excluding the impact of the gain on the sale of our Rock-Tenn Company stock in 2007, employee compensation and benefits as a percentage of total revenues increased to 47.2% from 44.4% in the first quarter of 2007. This increase in the expense percentage represents approximately $10.4 million in net additional costs, of which $12.0 relates to acquisitions that were stand-alone offices.  Therefore, excluding the impact of acquisitions of stand-alone offices, there was a net reduction of $1.6 million in employee compensation and benefits.
  
Non-Cash Stock-Based Compensation

Non-cash stock-based compensation for the three months ended March 31, 2008 increased approximately $0.4 million, or 29.4%, over the same period in 2007. For the entire year of 2008, we expect the total non-cash stock-based compensation expense to be approximately $8.0 million to $8.5 million, as compared with the total cost of $5.7 million for the year 2007. The increased annual estimated cost primarily relates to new grants of performance stock (PSP) and incentive stock options issued in February 2008.

Other Operating Expenses
 
Other operating expenses for the first quarter of 2008 decreased $0.7 million, or 2.3%, from the same period in 2007.  Acquisitions since April 1, 2007 that resulted in stand-alone offices resulted in approximately $3.4 million of increased other operating expenses.  Therefore, there was a net reduction in other operating expenses of approximately $4.1 million with respect to offices in existence in the first quarters of both 2008 and 2007.  Of this $4.1 million reduction, $2.1 million was the result of decreased error and omission expenses and reserves, while the remaining savings were attributable to various expense categories.
  
Amortization
 
Amortization expense for the first quarter of 2008 increased $1.6 million, or 17.0%, over the first quarter of 2007. This increase is primarily due to the amortization of additional intangible assets as the result of acquisitions completed since April 1, 2007.
  
Depreciation
 
Depreciation expense for the first quarter of 2008 increased $0.2 million, or 6.8%, over the first quarter of 2007. This increase is due primarily to the purchase of new computers, related equipment and software, and the depreciation associated with acquisitions completed since April 1, 2007.
 
Interest Expense
  
Interest expense for the first quarter of 2008 decreased $0.2 million, or 5.5%, from the same period in 2007.  This decrease is primarily due to the fact that the final quarterly payment on our tern loan was made in December 2007.
 
21
 
RESULTS OF OPERATIONS - SEGMENT INFORMATION
 
As discussed in Note 13 of the Notes to Condensed Consolidated Financial Statements, we operate in four reportable segments: the Retail, Wholesale Brokerage, National Programs and Services Divisions. On a divisional basis, increases in amortization, depreciation and interest expenses are the result of acquisitions within a given division in a particular year. Likewise, other income in each division primarily reflects net gains on sales of customer accounts and fixed assets. As such, in evaluating the operational efficiency of a division, management places emphasis on the net internal growth rate of core commissions and fees revenue, the gradual improvement of the ratio of employee compensation and benefits to total revenues, and the gradual improvement of the percentage of other operating expenses to total revenues.
 
The internal growth rates for our core commissions and fees for the three months ended March 31, 2008 and 2007, by divisional units are as follows (in thousands, except percentages):


2008
  
For the three months
ended March 31,
                                
   
2008
    
2007
    
Total Net
Change
    
Total Net
Growth %
    
Less
Acquisition
Revenues
    
Internal
Net
Growth $
    
Internal
Net
Growth %
  
Florida Retail
   $ 41,635     $ 43,891     $ (2,256 )     (5.1 )%   $ 921     $ (3,177 )     (7.2 )%
National Retail
     70,685       51,701       18,984       36.7 %     19,842       (858 )     (1.7 )%
Western Retail
     21,704       22,426       (722 )     (3.2 )%     262       (984 )     (4.4 )%
Total Retail(1)
     134,024       118,018       16,006       13.6 %     21,025       (5,019 )     (4.3 )%
                                                         
Wholesale Brokerage
     37,039       37,267       (228 )     (0.6 )%     4,979       (5,207 )     (14.0 )%
                                                         
Professional Programs
     10,385       10,438       (53 )     (0.5 )%     -       (53 )     (0.5 )%
Special Programs
     27,800       24,484       3,316       13.5 %     131       3,185       13.0 %
Total National Programs
     38,185       34,922       3,263       9.3 %     131       3,132       9.0 %
                                                         
Services
     7,933       8,954       (1,021 )     (11.4 )%     -       (1,021 )     (11.4 )%
Total Core Commissions and Fees
   $ 217,181     $ 199,161     $ 18,020       9.0 %   $ 26,135     $ (8,115 )     (4.1 )%

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Condensed Consolidated Statements of Income for the three months ended March 31, 2008 and 2007 is as follows (in thousands, except percentages):

 
For the three months
ended March 31,
 
2008
  
2007
  
Total core commissions and fees
$
217,181
   
$
199,161
  
Profit-sharing contingent commissions
    
36,347
   
    
44,057
  
Divested business
    
—
   
    
2,341
  
Total commission and fees
$
253,528
   
$
245,559
  


 
(1)
The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 13 which includes corporate and consolidation items.

22

2007
  
For the three months
ended March 31,
                                
   
2007
    
2006
    
Total Net
Change
    
Total Net
Growth %
    
Less
Acquisition
Revenues
    
Internal
Net
Growth $
    
Internal
Net
Growth %
  
Florida Retail
   $ 43,918     $ 39,175     $ 4,743       12.1 %   $ 567     $ 4,176       10.7 %
National Retail
     53,134       50,527       2,607       5.2 %     2,962       (355 )     (0.7 )%
Western Retail