Brown & Brown (BRO) 10-Q 2005 Q3 Quarterly report

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 September 30, 2005
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 0-7201

 

BROWN & BROWN, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	59-0864469
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

220 S. Ridgewood Ave., Daytona Beach, FL	32114
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:  (386) 252-9601

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No o

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 November 8, 2005 was 69,503,201.

BROWN & BROWN, INC.

INDEX

			PAGE
PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004	2
		Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	3
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4.	Controls and Procedures	23
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings	24
	Item 6.	Exhibits and Reports on Form 8-K	24
SIGNATURE			25

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 September 30,				For the nine months ended September 30,
		2005		2004		2005		2004
REVENUES
Commissions and fees	$	188,444	$	158,852	$	581,497	$	479,915
Investment income		1,786		586		4,275		1,607
Other income, net		415		943		3,178		2,366
Total revenues		190,645		160,381		588,950		483,888
EXPENSES
Employee compensation and benefits		94,009		79,449		278,493		232,000
Non-cash stock grant compensation		681		374		2,360		1,885
Other operating expenses		25,638		22,042		78,760		63,421
Amortization		8,452		5,777		24,344		16,077
Depreciation		2,538		2,238		7,432		6,661
Interest		3,638		2,245		10,891		3,699
Total expenses		134,956		112,125		402,280		323,743
Income before income taxes		55,689		48,256		186,670		160,145
Income taxes		20,906		18,170		71,836		61,558
NET INCOME	$	34,783	$	30,086	$	114,834	$	98,587
Net income per share:
Basic	$	0.50	$	0.44	$	1.66	$	1.43
Diluted	$	0.50	$	0.43	$	1.65	$	1.42
Weighted average number of shares outstanding:
Basic		69,242		69,009		69,187		68,828
Diluted		69,819		69,588		69,752		69,361
Dividends declared per share	$	0.08	$	0.07	$	0.24	$	0.21

See accompanying notes to condensed consolidated financial statements.

2

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except per share data) 

	September 30,		December 31,
	2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$	76,730	$	188,106
Restricted cash and investments		235,263		147,483
Short-term investments		2,639		3,163
Premiums, commissions and fees receivable		235,116		172,395
Other current assets		27,473		28,819
Total current assets		577,221		539,966
Fixed assets, net		38,526		33,438
Goodwill		528,296		360,843
Amortizable intangible assets, net		362,381		293,009
Investments		9,294		9,328
Other assets		10,021		12,933
Total assets	$	1,525,739	$	1,249,517
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Premiums payable to insurance companies	$	372,053	$	242,414
Premium deposits and credits due customers		36,083		32,273
Accounts payable		19,238		16,257
Accrued expenses		57,430		58,031
Current portion of long-term debt		50,065		16,135
Total current liabilities		534,869		365,110
Long-term debt		217,455		227,063
Deferred income taxes, net		29,571		24,859
Other liabilities		9,045		8,160
Shareholders’ equity:
Common stock, par value $.10 per share; authorized 280,000
shares; issued and outstanding 69,502 shares at 2005 and
69,159 at 2004		6,950		6,916
Additional paid-in capital		199,189		187,280
Retained earnings		523,879		425,662
Accumulated other comprehensive income		4,781		4,467
Total shareholders’ equity		734,799		624,325
Total liabilities and shareholders’ equity	$	1,525,739	$	1,249,517

See accompanying notes to condensed consolidated financial statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	For the nine months ended September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	114,834		$	98,587
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		24,344			16,077
Depreciation		7,432			6,661
Non-cash stock grant compensation		2,360			1,885
Deferred income taxes		4,339			8,117
Income tax benefit from exercise of stock options		—			199
Net (gain) on sales of investments, fixed assets and customer accounts		(2,831	)		(2,513	)
Changes in operating assets and liabilities, net of effect from insurance agency acquisitions and disposals:
Restricted cash and investments (increase)		(87,780	)		(31,129	)
Premiums, commissions and fees receivable (increase)		(62,721	)		(23,080	)
Other assets decrease		5,654			4,177
Premiums payable to insurance companies increase		129,523			47,186
Premium deposits and credits due customers increase		3,810			5,399
Accounts payable increase		2,935			7,167
Accrued expenses (decrease) increase		(747	)		1,290
Other liabilities (decrease)		(777	)		(5	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		140,375			140,018
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets		(9,791	)		(7,335	)
Payments for businesses acquired, net of cash acquired		(225,164	)		(192,379	)
Proceeds from sales of fixed assets and customer accounts		2,041			3,064
Purchases of investments		(192	)		—
Proceeds from sales of investments		747			834
NET CASH USED IN INVESTING ACTIVITIES		(232,359	)		(195,816	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt		—			200,000
Borrowings on revolving credit facility		50,000			50,000
Payments on revolving credit facility		(50,000	)		(50,000	)
Payments on long-term debt		(12,358	)		(14,421	)
Issuances of common stock for employee stock benefit plans		9,583			7,978
Cash dividends paid		(16,617	)		(14,470	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(19,392	)		179,087
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(111,376	)		123,289
Cash and cash equivalents at beginning of period		188,106			56,926
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	76,730		$	180,215

See accompanying notes to condensed consolidated financial statements.

4

BROWN & BROWN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - 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 (“United States”) 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 generally accepted accounting principles 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, 2004. 

Results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued revised Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. This revised statement, which requires that the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. The revised statement applies to all awards granted, modified, repurchased or cancelled on or after July 1, 2005. The Company will adopt revised SFAS No. 123 on its effective date, which is anticipated to be January 1, 2006.

Note 2 - Stock-Based Compensation and Incentive Plans

The Company applies the intrinsic value-based method of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, to account for its stock-based compensation and incentive plans. Accordingly, the Company complies with the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, which requires presentation of pro forma net income and earnings per share information pursuant to  SFAS No. 123, “Accounting for Stock-Based Compensation”.

Pursuant to the above disclosure requirements, the following table provides an expanded reconciliation for all periods presented that:  (1) adds back to reported net income the recorded expense under APB No. 25, net of related income tax effects; (2) deducts the total fair value expense under SFAS No. 123, net of related income tax effects; and (3) shows the reported and pro forma earnings per share amounts (in thousands, except per share data):

	For the three months ended September 30,						For the nine months ended September 30,
	2005			2004			2005			2004
Net income, as reported	$	34,783		$	30,086		$	114,834		$	98,587
Total stock-based employee compensation
cost included in the determination of
net income, net of related income tax effects		426			234			1,454			1,163
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related income tax effects		(840	)		(606	)		(2,678	)		(2,262	)
Net income, pro forma	$	34,369		$	29,714		$	113,610		$	97,488
Earnings per share:
Basic, as reported	$	0.50		$	0.44		$	1.66		$	1.43
Basic, pro forma	$	0.50		$	0.43		$	1.64		$	1.42
Diluted, as reported	$	0.50		$	0.43		$	1.65		$	1.42
Diluted, pro forma	$	0.49		$	0.43		$	1.63		$	1.41

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Note 3 - Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic net income per share and diluted net income per share (in thousands, except per-share data):

	For the three months ended September 30,				For the nine months ended September 30,
	2005		2004		2005		2004
Net income	$	34,783	$	30,086	$	114,834	$	98,587
Weighted average number of common shares
outstanding		69,242		69,009		69,187		68,828
Dilutive effect of stock options using the
treasury stock method		577		579		565		533
Weighted average number of shares
outstanding		69,819		69,588		69,752		69,361
Net income per share:
Basic	$	0.50	$	0.44	$	1.66	$	1.43
Diluted	$	0.50	$	0.43	$	1.65	$	1.42

Note 4 - Business Combinations

During the first three quarters of 2005, the Company acquired the assets and assumed certain liabilities of 28 general insurance agencies and several books of business (“customer accounts”). The aggregate purchase price was $246,429,000 including $207,309,000 of net cash payments, the issuance of $36,697,000 in notes payable and the assumption of $2,423,000 of liabilities. All of these acquisitions operate in the insurance intermediary business and were acquired primarily to expand the Company’s core businesses and to attract high-quality individuals to the Company. Acquisition purchase prices are typically based on a multiple of operating profit earned over a one- to three-year period after the acquisition effective date, within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price and any subsequent “earn-out” payment is allocated primarily to goodwill. All of these acquisitions have been accounted for as business combinations and are as follows (in thousands):

Name of Acquisition	Business Segment		2005 Date of Acquisition		Net Cash Paid		Notes Payable		Net Assets Acquired
American Specialty, Inc., et al.		National Programs		January 1	$	23,782	$	—	$	23,782
Braishfield Associates, Inc.		Brokerage		January 1		10,215		—		10,215
Hull & Company, Inc., et al.		Brokerage		March 1		140,044		35,000		175,044
Others		Various		Various		33,268		1,697		34,965
Total					$	207,309	$	36,697	$	244,006

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The following table summarizes the preliminary allocation of the aggregate purchase price to the fair values of the aggregate assets and liabilities acquired (in thousands):

	American Specialty			Braishfield		Hull		Others			Total
Other current assets	$	80		$	—	$	—	$	—		$	80
Fixed assets		370			25		2,500		170			3,065
Purchased customer accounts		7,410			4,320		66,343		15,167			93,240
Noncompete agreements		38			50		95		865			1,048
Goodwill		18,220			5,820		106,106		18,850			148,996
Total assets acquired		26,118			10,215		175,044		35,052			246,429
Current liabilities		—			—		—		(87	)		(87	)
Other liabilities		(2,336	)		—		—		—			(2,336	)
Total liabilities assumed		(2,336	)		—		—		(87	)		(2,423	)
Net assets acquired	$	23,782		$	10,215	$	175,044	$	34,965		$	244,006

The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years, and noncompete agreements, 4.0 years.

Goodwill of $148,996,000, all of which is expected to be deductible for tax purposes, was assigned to the Retail, National Programs and Brokerage Divisions in the amounts of $11,432,000, $18,726,000 and $118,838,000, respectively.

The results of operations for the acquisitions completed during the first three quarters of 2005 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of January 1, 2004, the Company’s results of operations would be as shown in the following table (in thousands, except per share data):

	For the three months ended September 30,				For the nine months ended September 30,
	2005		2004		2005		2004
Total revenues	$	191,765	$	185,466	$	606,074	$	563,870
Income before income taxes		56,031		56,364		192,400		186,152
Net income		34,997		35,142		118,359		114,597
Net income per share:
Basic	$	0.51	$	0.51	$	1.71	$	1.66
Diluted	$	0.50	$	0.50	$	1.70	$	1.65

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.

Additional consideration paid to sellers or consideration returned to the Company by sellers as a result of purchase price “earn-out” provisions is recorded primarily as an adjustment to goodwill when the contingencies are settled. The net additional consideration paid by the Company in 2005 as a result of such adjustments totaled $17,839,000, of which $18,778,000 was allocated to goodwill, $814,000 was recorded as a reversal of a contingent advance and $125,000 was recorded as net liabilities. Of the $17,839,000 net additional consideration paid, $17,856,000 was paid in cash and $17,000 was recorded as forgiveness of a note payable obligation. As of September 30, 2005, the maximum future contingency payments related to acquisitions totaled $171,978,000, of which $84,900,000 could be earned within one year.

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Note 5 - Goodwill and Amortizable Intangible Assets

The Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 provides for the non-amortization of goodwill.  Goodwill is now subject to at least an annual assessment for impairment by applying a fair value-based test.  Amortizable intangible assets (other than indefinite life assets) will be amortized over their useful lives and will be subject to a lower-of-cost-or-market impairment testing.

SFAS No. 142 requires the Company to compare the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill.  If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.  Fair value is estimated based on multiples of revenues, earnings before interest, income taxes, depreciation and amortization (“EBITDA”), and pre-tax income. The Company completed its most recent annual assessment as of November 30, 2004 and identified no impairment as a result of the evaluation.

The changes in goodwill, by business segment, for the nine months ended September 30, 2005 are as follows (in thousands):

	Retail			National Programs		Brokerage		Services		Total
Balance as of December 31, 2004	$	259,290		$	84,737	$	16,760	$	56	$	360,843
Goodwill of acquired businesses		23,036			25,894		118,844		—		167,774
Goodwill disposed of relating to sales
of businesses		(321	)		—		—		—		(321	)
Balance as of September 30, 2005	$	282,005		$	110,631	$	135,604	$	56	$	528,296

Amortizable intangible assets as of September 30, 2005 and December 31, 2004 consisted of the following (in thousands):

	September 30, 2005									December 31, 2004
								Weighted									Weighted
	Gross					Net		Average		Gross					Net		Average
	Carrying		Accumulated			Carrying		Life		Carrying		Accumulated			Carrying		Life
	Value		Amortization			Value		(Yrs)		Value		Amortization			Value		(Yrs)
Purchased customer accounts	$	474,415	$	(118,222	)	$	356,193		14.9	$	381,744	$	(96,342	)	$	285,402		14.8
Noncompete agreements		34,041		(27,853	)		6,188		7.0		32,996		(25,389	)		7,607		7.1
Total	$	508,456	$	(146,075	)	$	362,381			$	414,740	$	(121,731	)	$	293,009

Amortization expense for amortizable intangible assets for the years ending December 31, 2005, 2006, 2007, 2008 and 2009 are estimated to be $32.9 million, $32.8 million, $32.2 million, $31.3 million, and $30.8 million, respectively.

Note 6 - Long-Term Debt

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.  The Company has used, and anticipates continuing to use, the proceeds from the Notes for general corporate purposes, including acquisitions and repayment of existing debt. As of September 30, 2005, there was an outstanding balance of $200.0 million on the Notes.

8

In September 2003, the Company established an unsecured revolving credit facility (the “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 London Interbank Offering Rate (“LIBOR”) plus 0.625% to 1.625%, depending upon the Company’s 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 is assessed on the unused balance. The 90-day LIBOR was 4.02% as of September 30, 2005. As of September 30, 2005, there were no borrowings against the Revolving Credit Facility.

In January 2001, the Company entered into a $90.0 million unsecured seven-year term loan agreement (the “Term Loan”) 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 the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization and non-cash stock grant compensation.  The 90-day LIBOR was 4.02% as of September 30, 2005.  The Term Loan was fully funded on January 3, 2001 and as of September 30, 2005 had an outstanding balance of $28.9 million.  This Term Loan is to be repaid in equal quarterly installments of $3.2 million through December 2007.

To hedge the risk of increasing interest rates from January 2, 2002 through the then remaining six years of the Term Loan, the Company entered into an interest rate swap agreement that effectively converted the floating 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 Company recorded a liability as of September 30, 2005 for the fair value of the interest rate swap of approximately $20,000 net of income taxes of approximately $13,000 with the related change in fair value reflected as other comprehensive income. As of December 31, 2004, the Company recorded a liability for the fair value of the interest rate swap of approximately $455,000, net of income taxes of approximately $267,000. The Company has designated and assessed the derivative as a highly effective cash flow hedge.

All three of these credit agreements require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of September 30, 2005.

Acquisition and other notes payable as of September 30, 2005 were $38.6 million, which primarily represent debt incurred to former owners of certain agencies or customer accounts acquired by the Company.  These notes are payable in monthly, quarterly or annual installments through July 2014, including interest ranging from 1.51% to 8.05%.

Note 7 - Legal and Regulatory Proceedings

Policyholder Actions and Related Matters

As previously disclosed, the Company is a defendant in the putative class action lawsuits styled In Re: Insurance Brokerage Antitrust Litigation and In Re: Employee-Benefits Insurance Antitrust Litigation, which were consolidated by the Judicial Panel on Multi-District Litigation to the United States District Court, District of New Jersey, in a single jurisdiction for pre-trial purposes.

As previously disclosed, governmental entities in a number of states continue to look into issues related to the insurance industry’s compensation practices. Brown & Brown continues to receive and respond to requests for information from various governmental entities.  No state agency has charged or alleged any wrongdoing or violation of state law by Brown & Brown in connection with these inquiries.

As previously disclosed, a Special Review Committee, a committee comprised of independent members of the Board of Directors of Brown & Brown, Inc., determined that maintenance of a derivative suit was not in the best interests of Brown & Brown following an investigation in response to a December 2004 demand letter from counsel purporting to represent a current shareholder of Brown & Brown (the “Demand Letter”). The Demand Letter sought the commencement of a derivative suit by Brown & Brown against the Board of Directors and current and former officers and directors of Brown & Brown for alleged breaches of fiduciary duty related to Brown & Brown’s participation in contingent commission agreements.  The attorney who sent the Demand Letter has requested additional information regarding the Special Review Committee’s determination.

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As previously disclosed, we have contingent commission agreements with certain underwriters, including revenue-sharing commissions paid by insurance underwriters based primarily on the overall profitability of the aggregate business written with that underwriter, and/or additional factors such as retention ratios and overall volume of business that we place with the underwriter, and to a lesser extent, we have some override commission agreements, which allow for commissions to be paid by insurance underwriters in excess of the standard commission rate in specific lines of business, such as group health business.  We have not chosen to discontinue receiving contingent commissions or override commissions. 

Brown & Brown cannot currently predict the impact or resolution of these matters or reasonably estimate a range of possible loss, which could be material, and the resolution of these matters may harm Brown & Brown’s business and/or lead to a decrease in or elimination of contingent commissions and override commissions, which could have a material adverse impact on Brown & Brown’s consolidated financial condition.

Other

Brown & Brown is involved in numerous pending or threatened proceedings by or against Brown & Brown or one or more of its subsidiaries that arise incident to the nature of its business. The damages claimed in these various proceedings may be substantial, including in many instances claims for punitive or extraordinary damages. Some claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. Brown & Brown will continue to respond appropriately to claims and lawsuits, and to vigorously protect its interests.

Although the ultimate outcome of matters referenced in this section titled “Other” cannot be ascertained and liabilities in indeterminate amounts may be imposed on Brown & Brown or its subsidiaries, on the basis of present information, availability of insurance coverages 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 Brown & Brown’s consolidated financial position. However, as (i) one or more of Brown & Brown’s insurance carriers could take the position that portions of these claims are not covered by Brown & Brown’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.

Note 8 - Supplemental Disclosures of Cash Flow Information 

	For the nine months ended September 30,
	2005		2004
Cash paid during the period for (in thousands):
Interest	$	13,309	$	2,160
Income taxes	$	62,207	$	43,293

The Company’s significant non-cash investing and financing activities are as follows (in thousands):

	For the nine months ended September 30,
	2005			2004
Net unrealized holding (loss) on available-for-sale securities,
net of income tax benefit of $119 in 2005 and $293 in 2004	$	(121	)	$	(585	)
Net gain on cash-flow hedging derivative, net of income tax
effect of $254 in 2005 and $384 in 2004		435			642
Notes payable issued or assumed for purchased customer accounts		36,697			1,867
Notes received on sale of fixed assets and customer accounts		2,130			5,025
Common stock issued for acquisitions accounted for under the purchase method of accounting		—			6,244

10

Note 9 - Comprehensive Income

The components of comprehensive income, net of related income tax effects, are as follows (in thousands): 

	For the three months ended September 30,					For the nine months ended September 30,
	2005		2004			2005			2004
Net income	$	34,783	$	$30,086		$	114,834		$	98,587
Net unrealized holding (loss) gain on
available-for-sale securities		879		(428	)		(121	)		(585	)
Net gain (loss) on cash-flow hedging derivative		149		(32	)		435			642
Comprehensive income	$	35,811	$	29,626		$	115,148		$	98,644

Note 10 - Segment Information

The Company’s business is divided into four reportable segments:  the Retail Division, which provides a broad range of insurance products and services to commercial, public entity, professional and individual customers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals, delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designated for specific industries, trade groups, governmental entities and market niches; the Brokerage Division, which markets and sells excess and surplus commercial insurance and reinsurance, primarily through independent agents and brokers; and the Services Division, which provides insurance-related services including third-party administration, consulting for the workers’ compensation and employee benefit self-insurance markets, and managed healthcare services. The Company conducts all of its operations within the United States of America.

Summarized financial information concerning the Company’s reportable segments for the nine months ended September 30, 2005 and 2004 are 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 (in thousands).

2005	Retail		National Programs		Brokerage		Service		Other			Total
Total revenues	$	374,118	$	96,660	$	92,682	$	20,605	$	4,885		$	588,950
Investment income		61		273		974		—		2,967			4,275
Amortization		14,361		5,998		3,908		33		44			24,344
Depreciation		4,247		1,479		861		325		520			7,432
Interest expense		15,632		7,818		8,918		3		(21,480	)		10,891
Income before income taxes		101,623		26,049		21,608		5,395		31,995			186,670
Total assets		922,379		424,517		462,311		15,935		(299,403	)		1,525,739
Capital expenditures		4,829		2,619		1,410		290		643			9,791

2004 Retail National Programs Brokerage Service Other Total

Total revenues	$	354,565	$	78,289	$	29,483	$	20,461	$	1,090		$	483,888
Investment income		550		80		—		—		977			1,607
Amortization		11,209		4,301		423		27		117			16,077
Depreciation		4,390		1,150		367		254		500			6,661
Interest expense		16,145		6,331		752		68		(19,597	)		3,699
Income before income taxes		93,001		22,554		9,137		4,968		30,485			160,145
Total assets		835,290		347,767		122,872		12,868		(93,006	)		1,225,791
Capital expenditures		4,382		1,594		465		616		278			7,335

11

Note 11 - Subsequent Event

The Board of Directors of Brown & Brown, Inc. at its regularly scheduled meeting on October 19, 2005, voted a two-shares for one-share stock split of Brown & Brown's common stock, to be effected as a 100% common stock dividend, with additional shares to be distributed November 28, 2005 to shareholders of record on November 2, 2005.        

On October 19, 2005, Brown & Brown, Inc. entered into a material amendment (the "Amendment") to the Rights Agreement (the "Rights Agreement"), originally dated as of July 30, 1999, between Brown & Brown, Inc. and Wachovia Bank, N.A., formerly known as First Union National Bank, as rights agent, accelerating the final expiration date of the outstanding rights to purchase shares of Brown & Brown, Inc's Common Stock (the "Rights").  The Amendment accelerated the expiration date of the Rights from July 30, 2009, as initially provided under the Rights Agreement, to October 19, 2005.  The Rights Agreement terminated upon the expiration of the Rights, thereby eliminating the Rights Agreement altogether. 

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ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY’S 2004 ANNUAL REPORT ON FORM 10-K, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.

General

We are an insurance intermediary organization with origins dating from 1939 and are 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 markets. In our capacity 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 income that we receive 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 “contingent commissions” which are revenue-sharing commissions paid by insurance companies based primarily on the overall profitability of the aggregate business written with such company, and/or additional factors such as retention ratios and overall volume of business that we placed with such insurance companies during the prior year.

The Insurance Market

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 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 was somewhat offset by our substantial merger and acquisition activity and net new business production. As a result of increasing loss ratios (the comparison of incurred losses plus loss adjustment expenses against earned premium) of insurance companies through 1999, there was a general increase in premium rates commencing in the first quarter of 2000 and continuing into the first half of 2003. Starting in the second half of 2003, as insurance companies began to experience improved loss ratios, they again became more competitive on selected risks, resulting in a moderation of premium rate increases, and in some cases reductions in premium rates. This softening of insurance premium rates extended into the third quarter of 2005. As a result of the devastating hurricanes occurring from August through October of 2005 there have been some indications that the rate of decline in premium rates has started to slow, and in the Gulf Coast States, some property insurance rates have increased. The extent and sustainability of increases in insurance premium rates outside of the Gulf Coast States is still unknown, as well as other factors, may be influenced by reinsurance treaty rates charged upon renewal.

Critical Accounting Policies

The more critical accounting and reporting policies include our accounting for revenue recognition, business acquisitions and purchase price allocations, intangible assets 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 2004 Annual Report on Form 10-K on file with the Securities and Exchange Commission for details regarding our critical and significant accounting policies.

13

Results of Operations

The condensed consolidated financial information relating to the three and nine month periods ended September 30, 2005 and 2004 is as follows (in thousands, except percentages):

	For the three months ended September 30,							For the nine months ended September 30,
	2005		2004		% Change			2005		2004		% Change
REVENUES
Commissions and fees	$	185,881	$	157,866		17.7	%	$	547,088	$	449,631		21.7	%
Contingent commissions		2,563		986		159.9	%		34,409		30,284		13.6	%
Investment income		1,786		586		204.8	%		4,275		1,607		166.0	%
Other income, (loss) net		415		943		(56.0	)%		3,178		2,366		34.3	%
Total revenues		190,645		160,381		18.9	%		588,950		483,888		21.7	%
EXPENSES
Employee compensation and benefits		94,009		79,449		18.3	%		278,493		232,000		20.0	%
Non-cash stock grant compensation		681		374		82.1	%		2,360		1,885		25.2	%
Other operating expenses		25,638		22,042		16.3	%		78,760		63,421		24.2	%
Amortization		8,452		5,777		46.3	%		24,344		16,077		51.4	%
Depreciation		2,538		2,238		13.4	%		7,432		6,661		11.6	%
Interest		3,638		2,245		62.0	%		10,891		3,699		194.4	%
Total expenses		134,956		112,125		20.4	%		402,280		323,743		24.3	%
Income before income taxes		55,689		48,256		15.4	%		186,670		160,145		16.6	%
Income taxes		20,906		18,170		15.1	%		71,836		61,558		16.7	%
NET INCOME	$	34,783	$	30,086		15.6	%	$	114,834	$	98,587		16.5	%

Net Income. Net income for the third quarter of 2005 was $34.8 million, or $0.50 per diluted share, compared with net income in the third quarter of 2004 of $30.1 million, or $0.43 per diluted share, a 16.3% increase on a per-share basis.  Net income for the nine months ended September 30, 2005 was $114.8 million or $1.65 per diluted share, compared with net income for the comparable period in 2004 of $98.6 million, or $1.42 per diluted share, a 16.2% increase on a per-share basis.

Commissions & Fees.Commissions and fees, including contingent commissions, for the third quarter of 2005 increased $29.6 million, or 18.6%, over the same period in 2004. Contingent commissions for the third quarter of 2005 increased $1.6 million over the third quarter of 2004, to $2.6 million. Core commissions and fees are our commissions and fees, less (i) 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 third quarter of 2005 increased $28.6 million, of which approximately $26.6 million represents core commissions and fees from agencies acquired since the third quarter of 2004. After divested business of $0.6 million, the remaining $2.0 million represents net new business production, which reflects a 1.3% internal growth rate for core commissions and fees. Commissions and fees for the nine months ended September 30, 2005 increased $101.6 million, or 21.2%, over the same period in 2004. For the nine months ended September 30, 2005, contingent commissions increased $4.1 million over the comparable period in 2004. Core commissions and fees revenue for the first nine months of 2005 increased $102.6 million, of which approximately $92.4 million of the total increase represents core commissions and fees from agencies acquired since the comparable period in 2004. After divested business of $5.1 million, the remaining $10.2 million represents net new business production, which reflects a 2.3% internal growth rate for core commissions and fees.

Contingent commissions in the insurance industry have recently come under scrutiny. Various governmental entities are reviewing such commission arrangements, and lawsuits seeking class action status have been filed against various insurance intermediaries and companies that relate in part to such commissions. Some of the largest brokers in the world have announced that they will no longer accept contingent commissions, and certain insurance companies have said that they are going to discontinue paying contingent commissions or are reviewing the issue. We have not chosen to discontinue receiving contingent commissions. An elimination or significant decrease in the payment of contingent commissions to us could have a material adverse impact on our results of operations. See Item 1 of Part II for a discussion of the current legal proceedings concerning the insurance industry's compensation practices.

Investment Income.Investment income for the three months ended September 30, 2005 increased $1.2 million, or 204.8%, over the same period in 2004. Investment income for the nine months ended September 30, 2005 increased $2.7 million, or 166.0%, over the same period in 2004. These increases in investment income were primarily due to higher available invested cash and an increase in interest rates.

14

Other Income, Net. Other income for the three months ended September 30, 2005 decreased $0.5 million, or 56.0%, over the same period in 2004. Other income for the nine months ended September 30, 2005 increased $0.8 million, or 34.3%, over the same period in 2004. Other income consists primarily of gains and losses from the sale and disposition of assets. The majority of this gain for the nine months ended September 30, 2005 was the result of the completion of the one year earn-out from the sale of our medical services operation in Louisiana in June 2004.

Employee Compensation and Benefits. Employee compensation and benefits for the third quarter of 2005 increased $14.6 million, or 18.3%, over the same period in 2004. Employee compensation and benefits for the nine months ended September 30, 2005 increased $46.5 million, or 20.0%, over the same period in 2004. These increases are primarily related to the addition of new employees from acquisitions completed since October 1, 2004 and increased compensation that resulted from higher commissions and fees revenue. Employee compensation and benefits as a percentage of total revenue decreased to 49.3% for the third quarter of 2005, from 49.5% for the third quarter of 2004. For the nine months ended September 30, 2005, employee compensation and benefits as a percentage of total revenue decreased to 47.3%, from 47.9% for the same period in 2004. These improved ratios for the three and nine month periods was the result of the continued assimilation of the acquisitions completed in 2004 and 2005 into our standard compensation program.

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. The annual cost of this Stock Performance Plan increases only when granted shares become “awarded”, which occurs when our average stock price over a 20 trading-day period increases by increments of 20% or more over the price at the time of the original grant. Non-cash stock grant compensation expense for the three months ended September 30, 2005 increased $0.3 million, or 82.1%, over the same period in 2004. Non-cash stock grant compensation for the nine months ended September 30, 2005 increased $0.5 million, or 25.2%, over the same period in 2004. These increases are primarily the result of more shares being awarded and therefore becoming outstanding during 2005 than were outstanding during 2004.

Other Operating Expenses. Other operating expenses for the third quarter of 2005 increased $3.6 million, or 16.3%, over the same period in 2004. For the nine months ended September 30, 2005, other operating expenses increased $15.3 million, or 24.2%, over the same period in 2004. These increases are primarily the result of acquisitions completed since the fourth quarter of 2004 that had no comparable results in the same period of 2004. Other operating expenses as a percentage of revenues for the third quarter of 2005 decreased to 13.4%, compared with 13.7% for the same period in 2004. For the nine months ended September 30, 2005, other operating expenses as a percentage of revenues increased to 13.4%, compared with 13.1% for the same period in 2004. During the nine months ended September 30, 2005, there was a general increase in travel and entertainment expenses, and a significant increase in legal professional fees of approximately $1.0 million per quarter.

Amortization.Amortization expense for the third quarter of 2005 increased $2.7 million, or 46.3%, over the third quarter of 2004. For the nine months ended September 30, 2005, amortization expense increased $8.3 million, or 51.4%, over the same period in 2004. These increases are primarily due to acquisitions completed since October 1, 2004, and the change in the amortization period for purchased customer accounts to 15 years from 20 years that was implemented in November 2004.

Depreciation.Depreciation expense for the third quarter of 2005 increased $0.3 million, or 13.4%, over the third quarter of 2004. For the nine months ended September 30, 2005, depreciation expense increased $0.8 million, or 11.6%, over the same period in 2004. These increases are due to capital expenditures and fixed assets purchased in acquisitions completed since October 1, 2004.

Interest Expense.Interest expense for the third quarter of 2005 increased $1.4 million, or 62.0%, over the same period in 2004. For the nine months ended September 30, 2005, interest expense increased $7.2 million, or 194.4%, over the same period in 2004. These increases are primarily the result of additional interest expense relating to the funding of the $200.0 million of unsecured senior notes (as discussed in Note 6 of the Notes to Condensed Consolidated Financial Statements) in July and September of 2004.

15

Segment Information

            As discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements, we operate in four reportable segments: the Retail, National Programs, Brokerage and Services Divisions.   Our core commissions and fees internal growth rates for the three months ended September 30, 2005 by divisional segment are as follows (in thousands, except percentages):   

	For the three months ended September 30,				Total Net			Total Net			Less Acquisition		Internal Net
	2005		2004		Change			Growth %			Revenues		Growth %
Florida Retail	$	38,153	$	33,917	$	4,236			12.5	%	$	1,456		8.2	%
National Retail		49,174		49,177		(3	)		0.0	%		1,176		(2.4	)%
Western Retail		27,116		28,388		(1,272	)		(4.5	)%		642		(6.7	)%
Total Retail(1)		114,443		111,482		2,961			2.7	%		3,274		(0.3	)%
Professional Programs		10,682		10,964		(282	)		(2.6	)%		—		(2.6	)%
Special Programs		21,945		19,712		2,233			11.3	%		2,566		(1.7	)%
Total National Programs		32,627		30,676		1,951			6.4	%		2,566		(2.0	)%
Brokerage		31,990		8,949		23,041			257.5	%		20,717		26.0	%
Services		6,821		6,163		658			10.7	%		—		10.7	%
Total Core Commissions and Fees	$	185,881	$	157,270	$	28,611			18.2	%	$	26,557		1.3	%

(1)   The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 10 which includes corporate and consolidation items.

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 September 30, 2005 and 2004 is as follows (in thousands): 

	For the three months ended September 30,
	2005		2004
Total core commissions and fees	$	185,881	$	157,270
Contingent commissions		2,563		986
Divested business		—		596
Total commission & fees	$	188,444	$	158,852

Our core commissions and fees internal growth rates for the nine months ended September 30, 2005 by divisional segment are as following (in thousands, except percentages):

	For the nine months ended September 30,				Total Net			Total Net			Less Acquisition		Internal Net
	2005		2004		Change			Growth %			Revenues		Growth %
Florida Retail	$	116,347	$	103,720	$	12,627			12.2	%	$	4,330		8.0	%
National Retail		151,192		136,500		14,692			10.8	%		15,915		(0.9	)%
Western Retail		78,298		82,818		(4,520	)		(5.5	)%		1,612		(7.4	)%
Total Retail(1)		345,837		323,038		22,799			7.1	%		21,857		0.3	%
Professional Programs		31,025		31,368		(343	)		(1.1	)%		715		(3.4	)%
Special Programs		63,140		46,152		16,988			36.8	%		13,654		7.2	%
Total National Programs		94,165		77,520		16,645			21.5	%		14,369		2.9	%
Brokerage		87,433		25,941		61,492			237.0	%		56,189		20.4	%
Services		19,653		17,986		1,667			9.3	%		—		9.3	%
Total Core Commissions and Fees	$	547,088	$	444,485	$	102,603			23.1	%	$	92,415		2.3	%

16

(1) The Retail segment includes commissions and fees reported in the “Other” column of the Segment Information in Note 10 which includes corporate and consolidation items.

The reconciliation of the above internal growth schedule to the total Commissions and Fees included in the Consolidated Statements of Income for the nine months ended September 30, 2005 and 2004 is as follows (in thousands):

	For the nine months ended September 30,
	2005		2004
Total core commissions and fees	$	547,088	$	444,485
Contingent commissions		34,409		30,284
Divested business		—		5,146
Total commission & fees	$	581,497	$	479,915

Retail

The Retail Division provides a broad range of insurance products and services to commercial, public entity, professional and individual customers. Financial information relating to our Retail Division is as follows (in thousands, except percentages):

	For the three months ended September 30,									For the nine months ended September 30,
	2005			2004			% Change			2005			2004			% Change
REVENUES
Commissions and fees	$	114,625		$	111,995			2.3	%	$	344,450		$	326,526			5.5	%
Contingent commissions		1,350			707			90.9	%		28,152			26,130			7.7	%
Investment income		19			15			26.7	%		61			550			(88.9	)%
Other income (loss), net		166			870			(80.9	)%		1,455			1,359			7.1	%
Total revenues		116,160			113,587			2.3	%		374,118			354,565			5.5	%
EXPENSES
Employee compensation and benefits		56,687			56,611			0.1	%		175,934			170,480			3.2	%
Non-cash stock grant compensation		550			398			38.2	%		1,649			1,199			37.5	%
Other operating expenses		19,506			20,068			(2.8	)%		60,672			58,141			4.4	%
Amortization		4,822			3,980			21.2	%		14,361			11,209			28.1	%
Depreciation		1,428			1,461			(2.3	)%		4,247			4,390			(3.3	)%
Interest		5,034			5,840			(13.8	)%		15,632			16,145			(3.2	)%
Total expenses		88,027			88,358			(0.4	)%		272,495			261,564			4.2	%
Income before income taxes	$	28,133		$	25,229			11.5	%	$	101,623		$	93,001			9.3	%
Net internal growth rate - core commissions and fees		(0.3	)%		1.1	%					0.3	%		2.6	%
Employee compensation and benefits ratio		48.8	%		49.8	%					47.0	%		48.1	%
Other operating expenses ratio		16.8	%		17.7	%					16.2	%		16.4	%
Capital expenditures	$	1,097		$	1,311					$	4,829		$	4,382
Total assets at September 30, 2005 and 2004										$	922,379		$	835,290

The Retail Division’s total revenues during the three months ended September 30, 2005 increased 2.3%, or $2.6 million, to $116.2 million. Contingent commissions for the quarter increased $0.6 million over the third quarter of 2004. Of the increase in revenues, approximately $3.3 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004. Commissions and fees recorded in the third quarter of 2004 from business divested during 2005 was $0.6 million. The Retail Division’s internal growth rate for core commissions and fees was (0.3)% for the third quarter of 2005, which was primarily due to the softening and compression of insurance premium rates in virtually all parts of the country. In some regions, such as Florida, this decline in rates is being slightly offset by an increase in business exposure units, created by an improving economy. Any impact that the 2005 hurricane season has on insurance premium rates was not reflected to any significant degree in the third quarter of 2005 revenues. Income before income taxes for the three months ended September 30, 2005 increased 11.5%, or $2.9 million, to $28.1 million. This increase is primarily due to earnings from acquisitions.

17

The Retail Division’s total revenues during the nine months ended September, 2005 increased 5.5%, or $19.6 million, to $374.1 million. Contingent commissions for the nine months ended September 30, 2005, increased $2.0 million, over the same period in 2004. Of the increase in revenues, approximately $21.9 million related to the core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004. Commissions and fees recorded in the nine months ended September 30, 2004 from business divested during 2005 was $3.8 million.  The remaining increase is primarily due to net new business growth in core commissions and fees. The Retail Division’s internal growth rate for core commissions and fees was 0.3% for the nine months ended September 30, 2005. Income before income taxes for the nine months ended September 30, 2005 increased 9.3%, or $8.6 million, to $101.6 million. This increase is primarily due to earnings from acquisitions and net new business.

National Programs

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. Financial information relating to our National Programs Division is as follows (in thousands, except percentages):  

	For the three months ended September 30,									For the nine months ended September 30,
	2005			2004			% Change			2005			2004			% Change
REVENUES
Commissions and fees	$	32,627		$	30,676			6.4	%	$	94,165		$	77,520			21.5	%
Contingent commissions		364			168			116.7	%		1,998			646			209.3	%
Investment income		102			39			161.5	%		273			80			241.3	%
Other income (loss), net		57			50			14.0	%		224			43			420.9	%
Total revenues		33,150			30,933			7.2	%		96,660			78,289			23.5	%
EXPENSES
Employee compensation and benefits		13,437			12,092			11.1	%		39,894			31,800			25.5	%
Non-cash stock grant compensation		89			59			50.8	%		269			176			52.8	%
Other operating expenses		4,662			4,577			1.9	%		15,153			11,977			26.5	%
Amortization		2,002			1,569			27.6	%		5,998			4,301			39.5	%
Depreciation		511			402			27.1	%		1,479			1,150			28.6	%
Interest		2,635			2,363			11.5	%		7,818			6,331			23.5	%
Total expenses		23,336			21,062			10.8	%		70,611			55,735			26.7	%
Income before income taxes	$	9,814		$	9,871			(0.6	)%	$	26,049		$	22,554			15.5	%
Net internal growth rate - core commissions and fees		(2.0	)%		6.7	%					2.9	%		3.6	%
Employee compensation and benefits ratio		40.5	%		39.1	%					41.3	%		40.6	%
Other operating expenses ratio		14.1	%		14.8	%					15.7	%		15.3	%
Capital expenditures	$	488		$	923					$	2,619		$	1,594
Total assets at September 30, 2005 and 2004										$	424,517		$	347,767

Total revenues for National Programs for the three months ended September 30, 2005 increased 7.2%, or $2.2 million, to $33.2 million. Contingent commissions for the third quarter of 2005 increased $0.2 million over the third quarter of 2004. Of the increase in revenues, approximately $2.6 million related to core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004, offset by a decrease in net new business growth, and therefore, the National Programs Division’s internal growth rate for the core commissions and fees was (2.0)%. The Professional Programs Unit had a (2.6) % internal growth rate due primarily to lower revenues from the Lawyers program as they transition to a new insurance carrier. The Special Programs Unit decreased 1.7% due to lost business in several programs, but those losses were mostly offset by higher revenues resulting from increased premium rates in the condominium program administered by Florida Intracoastal Underwriters Limited Company (“FIU”). Income before income taxes for the three months ended September 30, 2005 decreased 0.6%, or $0.1 million, to $9.8 million, over the same period in 2004. This decrease is primarily due net lost business.

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Total revenues for National Programs for the nine months ended September 30, 2005 increased 23.5%, or $18.4 million, to $96.7 million. Contingent commissions for the nine months ended September 30, 2005 increased $1.4 million over the same period in 2004. Of the increase in revenues, approximately $14.4 million related to core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004. The remaining increase is primarily due to net new business growth. The National Programs Division’s internal growth rate for core commissions and fees for the nine-months ended September 30, 2005 was 2.9%. Although the Professional Programs Unit had a decrease of 3.4% in internal growth rate due to the continued softening of professional liability rates, it was offset by a strong 7.2% internal growth rate in our Special Programs Unit which was attributable principally to increased premium rates in the condominium program administered by FIU and net new business in our public entity business. Income before income taxes for the nine months ended September 30, 2005 increased 15.5%, or $3.5 million, to $26.0 million, over the same period in 2004. This increase is primarily due to net new business growth and earnings from acquisitions completed since the fourth quarter of 2004.

Brokerage

The Brokerage Division markets and sells excess and surplus commercial insurance and reinsurance, primarily through independent agents and brokers. Financial information relating to our Brokerage Division is as follows (in thousands, except percentages):

	For the three months ended September 30,									For the nine months ended September 30,
	2005			2004			% Change			2005			2004			% Change
REVENUES
Commissions and fees	$	31,990		$	8,921			258.6	%	$	87,433		$	25,821			238.6	%
Contingent commissions		849			83			922.9	%		4,259			3,648			16.7	%
Investment income		591			—			NMF			974			—			NMF
Other income, net		2			3			(33.3	)%		16			14			14.3	%
Total revenues		33,432			9,007			271.2	%		92,682			29,483			214.4	%
EXPENSES
Employee compensation and benefits		16,348			4,722			246.2	%		43,307			13,542			219.8	%
Non-cash stock grant compensation		41			25			64.0	%		123			75			64.0	%
Other operating expenses		5,324			1,741			205,8	%		13,957			5,187			169.1	%
Amortization		1,602			181			785.1	%		3,908			423			823.9	%
Depreciation		321			122			163.1	%		861			367			134.6	%
Interest		3,563			322			NMF	%		8,918			752			NMF	%
Total expenses		27,199			7,113			282.4	%		71,074			20,346			249.3	%
Income before income taxes	$	6,233		$	1,894			229.1	%	$	21,608		$	9,137			136.5	%
Net internal growth rate - core commissions and fees		26.0	%		6.5	%					20.4	%		11.8	%
Employee compensation and benefits ratio		48.9	%		52.4	%					46.7	%		45.9	%
Other operating expenses ratio		15.9	%		19.3	%					15.1	%		17.6	%
Capital expenditures	$	574		$	242					$	1,410		$	465
Total assets at September 30, 2005 and 2004										$	462,311		$	122,872

The Brokerage Division’s total revenues for the three months ended September 30, 2005 increased 271.2%, or $24.4 million, to $33.4 million over the same period in 2004. Contingent commissions for the third quarter of 2005 increased $0.8 million over the same quarter of 2004. Of the increase in revenues, approximately $20.7 million related to core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004. The substantial increase in revenues from acquisitions was generated primarily from Hull & Company, Inc., which was acquired on March 1, 2005 and has estimated annualized revenues of $63.0 million. Other acquisitions made in the Brokerage Division during the last year include Braishfield Associates, Inc. and ECC Insurance Brokers, LLC, both acquired on January 1, 2005 and International E&S acquired in September 2004. Also as a result of these acquisitions, amortization expense and interest expense increased significantly. The remaining increase is primarily due to net new business growth in core commissions and fees. Income before income taxes for the three months ended September 30, 2005 increased 229.1%, or $4.3 million, to $6.2 million over the same period in 2004, primarily due to earnings from acquisitions and net new business.

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The Brokerage Division’s total revenues for the nine months ended September 30, 2005 increased 214.4%, or $63.2 million, to $92.7 million over the same period in 2004. Contingent commissions for the nine months ended September 30, 2005 increased $0.6 million from the same period in 2004. Of the increase in revenues, approximately $56.2 million related to core commissions and fees from acquisitions that had no comparable revenues in the same period of 2004, as previously mentioned.  The remaining increase is primarily due to net new business growth in core commissions and fees. Income before income taxes for the nine months ended September 30, 2005 increased 136.5%, or $12.5 million, to $21.6 million over the same period in 2004, primarily due to earnings from acquisitions and net new business.

Services

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. Financial information relating to our Services Division is as follows (in thousands, except percentages):

	For the three months ended September 30,									For the nine months ended September 30,
	2005			2004			% Change			2005			2004			% Change
REVENUES
Commissions and fees	$	6,821		$	6,163			10.7	%	$	19,653		$	19,459			1.0	%
Contingent commissions		—			—			—			—			—			—
Investment income		—			—			—			—			—			—
Other income, (loss), net		(53	)		—			—			952			1,002			(5.0	)%
Total revenues	$	6,768		$	6,163			9.8	%	$	20,605		$	20,461			0.7	%
EXPENSES
Employee compensation and benefits		3,911			3,465			12.9	%		11,482			11,217			2.4	%
Non-cash stock grant compensation		32			27			18.5	%		92			82			12.2	%
Other operating expenses		1,163			1,050			10.8	%		3,275			3,845			(14.8	)%
Amortization		11			8			37.5	%		33			27			22.2	%
Depreciation		105			84			25.0	%		325			254			28.0	%
Interest		1			1			—			3			68			(95.6	)%
Total expenses		5,223			4,635			12.7	%		15,210			15,493			(1.8	)%
Income before income taxes	$	1,545		$	1,528			1.1	%	$	5,395		$	4,968			8.6	%
Net internal growth rate - core commissions and fees		10.7	%		21.9	%					9.3	%		18.2	%
Employee compensation and benefits ratio		57.8	%		56.2	%					55.7	%		54.8	%
Other operating expenses ratio		17.2	%		17.0	%					15.9	%		18.8	%
Capital expenditures	$	88		$	220					$	290		$	616
Total assets at September 30, 2005 and 2004										$	15,935		$	12,868

The Services Division’s total revenues for the three months ended September 30, 2005 increased 9.8%, or $0.6 million, to $6.8 million from the same period in 2004. Core commissions and fees, reflects an internal growth rate of 10.7% for the third quarter of 2005. Income before income taxes for the three months ended September 30, 2005 increased 1.0%, or less than $0.1 million, to $1.5 million from the same period in 2004, primarily as a result of net new business growth.

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The Services Division’s total revenues for the nine months ended September 30, 2005 increased 0.7%, or $0.1 million, to $20.6 million from the same period in 2004. On June 30, 2004, we sold our medical services operation in Louisiana. This medical services operation had estimated quarterly revenues of approximately $0.7 million and the sale of this operation resulted in lower annual revenues for this Division. Core commissions and fees, excluding the prior period revenues from the Louisiana operation, reflect an internal growth rate of 9.3% for the nine months ended September 30, 2005. Other income primarily represents the gain on the sale of the medical services operation in Louisiana, recognized partly in 2004 based on the minimum purchase price, and the subsequent earn-out gain recognized in June 2005. Income before income taxes for the nine months ended September 30, 2005 increased 8.6%, or $0.4 million, to $5.4 million from the same period in 2004, primarily as a result of the gain on this divestiture and net new business growth.

Liquidity and Capital Resources

Our cash and cash equivalents at September 30, 2005 totaled $76.7 million, a decrease of $111.4 million from the $188.1 million balance at December 31, 2004.  For the nine-month period ended September 30, 2005, $140.4 million of cash was provided from operating activities. During this period, $225.2 million was used to acquire other agencies and books of business (“customer accounts”), $9.8 million was used for additions to fixed assets, $12.4 million was used for payments on long-term debt, and $16.6 million was used for the payment of dividends.

As of September 30, 2005, our contractual cash obligations were as follows (in thousands):

				Payments Due by Period
Contractual Cash Obligations		Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long term debt	$	267,501	$	50,058	$	17,046	$	298	$	200,099
Capital lease obligations		19		7		12		—		—
Other long term liabilities		9,045		6,385		962		653		1,045
Operating leases		84,246		19,713		30,890		20,720		12,923
Maximum future acquisition contingent payments		171,978		84,900		87,069		9		—
Total contractual cash obligations	$	532,789	$	161,063	$	135,979	$	21,680	$	214,067

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.  The Company has used, and anticipates continuing to use, the proceeds from the Notes for general corporate purposes, including repayment of existing debt and acquisitions. As of September 30, 2005 there was an outstanding balance of $200.0 million on the Notes.

In September 2003, we established an unsecured revolving credit facility (the “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 London Interbank Offering Rate (“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 is assessed on the unused balance.  As of September 30, 2005, there were no borrowings against this Revolving Credit Facility.

In January 2001, we entered into a $90.0 million unsecured seven-year term loan agreement (the “Term Loan”) 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 our quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization and non-cash stock grant compensation.  The 90-day LIBOR was 4.02% as of September 30, 2005.  The Term Loan was fully funded on January 3, 2001 and as of September 30, 2005 had an outstanding balance of $28.9 million.  This Term Loan is to be repaid in equal quarterly installments of $3.2 million through December 2007.

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To hedge the risk of increasing interest rates from January 2, 2002 through the then remaining six years of the Term Loan, we entered into an interest rate swap agreement that effectively converted the floating LIBOR-based interest payments to fixed interest payments at an annual rate of 4.53%.  This agreement did not impact or change the required 0.50% to 1.00% credit risk spread portion of the Term Loan.  In accordance with SFAS No. 133, as amended, we recorded a liability as of September 30, 2005 for the fair value of the interest rate swap of approximately $20,000 net of income taxes of approximately $13,000.  We have designated and assessed the derivative as a highly effective cash flow hedge.

We (including our subsidiaries) have never incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies, or trusts.

We believe that our existing cash, cash equivalents, short-term investments portfolio, funds generated from operations, and available credit facility borrowings are sufficient to satisfy our normal short-term financial needs.

Recent Industry Developments

See Item 1 of Part II for a discussion of the current legal proceedings concerning the insurance industry’s compensation practices.

Disclosure Regarding Forward-Looking Statements

We 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 that our expectations reflected in or suggested by our forward-looking statements are reasonable, our actual results may differ materially from what we currently expect. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include:

·   material adverse changes in economic conditions in the markets we serve;

·   future regulatory actions and conditions in the states in which we conduct our business;

·   competition from others in the insurance agency and brokerage business;

·   a significant portion of business written by Brown & Brown is for customers located in Arizona, 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;

·   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

·   other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission (“SEC”) filings.

You should carefully read this report completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

We do not undertake any obligation to publicly update or revise any forward-looking statements.

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ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and equity prices. We are exposed to market risk through our investments, revolving credit line and term loan agreements.

Our invested assets are held as cash and cash equivalents, restricted cash and investments, available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit. These investments are subject to interest rate risk and equity price risk. The fair values of our cash and cash equivalents, restricted cash and investments, and certificates of deposit at September 30, 2005 and December 31, 2004 approximated their respective carrying values due to their short-term duration and therefore such market risk is not considered to be material.

We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date. However, we have no current intention to add to or dispose of any of the 559,970 common stock shares of Rock-Tenn Company, a publicly-held New York Stock Exchange-listed company, which we have owned for over 10 years. The investment in Rock-Tenn Company accounted for 71% and 68% of the total value of available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit as of September 30, 2005 and December 31, 2004, respectively. Rock-Tenn Company’s closing stock price at September 30, 2005 and December 31, 2004 was $15.10 and $15.16, respectively. Our exposure to equity price risk is primarily related to the Rock-Tenn Company investment. As of September 30, 2005, the value of the Rock-Tenn Company investment was $8,456,000.

To hedge the risk of increasing interest rates from January 2, 2002 through the then remaining six years of our seven-year $90.0 million term loan, on December 5, 2001 we entered into an interest rate swap agreement that effectively converted the floating rate LIBOR-based interest payments to fixed interest rate payments at 4.53%.  We do not otherwise enter into derivatives, swaps or other similar financial instruments for trading or speculative purposes.

At September 30, 2005, the interest rate swap agreement was as follows (in thousands, except percentages):

	Contractual/ Notional Amount		Fair Value			Weighted Average  Pay Rates			Weighted Average Received Rates
Interest rate swap agreement	$	28,929	$	(33	)		4.53	%		3.29	%

ITEM 4:       CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation (the “Evaluation”), required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1939, as amended (the “Exchange Act”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15 and 15d-15 under the Exchange Act (“Disclosure Controls”). Although we believe that our pre-existing Disclosure Controls, including our internal controls, were adequate to enable us to comply with our disclosure obligations, as a result of such Evaluation, we implemented certain minor changes, primarily to formalize, document and update the procedures already in place.  Based on the Evaluation, our CEO and CFO concluded that, subject to the limitations noted herein, our Disclosure Controls are effective in timely alerting them to material information required to be included in our periodic SEC reports.

Changes in Internal Controls

There has not been any change in our internal controls over financial reporting identified in connection with the Evaluation that occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, those controls.

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Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

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, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”).  This Item 4 of this report, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certifications, and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

In Item 3 of Part I of Brown & Brown, Inc.’s Annual Report on Form 10-K for its fiscal year ending December 31, 2004, as updated by Item I of Part II of Brown & Brown, Inc.’s Quarterly Reports on Form 10-Q for the periods ending March 31, 2005 and June 30, 2005, certain information concerning certain legal proceedings and other matters was disclosed. Such information was current as of the respective dates of such filings. Additional relevant information is further set forth in Note 7 of the Condensed Consolidated Financial Statements.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)   EXHIBITS

Exhibit 3.1	Articles of Amendment to Articles of Incorporation (adopted April 24, 2003) (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 2003), and Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 1999).
Exhibit 3.2	Bylaws (incorporated by reference to Exhibit 3b to Form 10-K for the year ended December 31, 2002).
Exhibit 4.1	Note Purchase Agreement, dated as of July 15, 2004, among the Company and the listed Purchasers of the 5.57% Series A Senior Notes due September 15, 2011 and 6.08% Series B Senior Notes due July 15, 2014 (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended June 30, 2004).
Exhibit 4.2	First Amendment to Amended and Restated Revolving and Term Loan Agreement dated and effective July 15, 2004, by and between Brown & Brown, Inc. and SunTrust Bank (incorporated by reference to Exhibit 4.2 to Form 10-Q for the quarter ended June 30, 2004).
Exhibit 4.3	Second Amendment to Revolving Loan Agreement dated and effective July 15, 2004, by and between Brown & Brown, Inc. and SunTrust Bank. (incorporated by reference to Exhibit 4.3 to Form 10-Q for the quarter ended June 30, 2004).
Exhibit 4.4	Rights Agreement, dated as of July 30, 1999, between the Company and First Union National Bank, as Rights Agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 2, 1999).
Exhibit 31.1	Section 302 Certification by the Chief Executive Officer of the Company.
Exhibit 31.2	Section 302 Certification by the Chief Financial Officer of the Company.
Exhibit 32.1	Section 1350 Certification by the Chief Executive Officer of the Company.
Exhibit 32.2	Section 1350 Certification by the Chief Financial Officer of the Company.

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(b) REPORTS ON FORM 8-K

The Company filed a current report on Form 8-K on July 18, 2005.  This current report reported Item 12, which announced that the Company issued a press release on July 18, 2005, relating to the Company’s earnings for the second quarter of fiscal year 2005.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BROWN & BROWN, INC.
Date: November 9, 2005
		Cory T. Walker
		Sr. Vice President, Chief Financial Officer and Treasurer (duly authorized officer, principal financial    officer and principal accounting officer)

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