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Research yields sound growth

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times, published June 2, 2002


When Brown & Brown buys an insurance agency, whether it's in Florida, New York or California, one of the first things to go is the company cars.

When Brown & Brown buys an insurance agency, whether it's in Florida, New York or California, one of the first things to go is the company cars.

The laid-back family atmosphere that pervades many small agencies is quickly replaced by a sales-driven culture, symbolized by a cheetah caught in mid stride on the corporate logo.

A voracious appetite for acquisitions has made Brown & Brown Inc. one of the largest insurance agencies in the nation, with 116 agencies in 30 states and 3,000 employees. But it isn't the company's increasing heft that's so impressive; it's that profits are growing even faster.

Rapidly expanding companies often stumble as they try to meld new operations with the old. But last year, Brown & Brown absorbed 26 agencies and managed to improve its profit margin and return on shareholder equity.

The key, company managers and analysts say, is making the right acquisitions at the right price, then slashing costs and giving top producers and managers incentives to make the deals a success.

"We make decisions not by how they drive our top line (revenues), but how they drive our bottom line," executive vice president Jim Henderson said.

The focus on profitability has paid off for stockholders, who have seen their shares triple in value since the privately owned Brown & Brown merged with publicly held Poe & Associates nine years ago.

The company keeps dual headquarters in Daytona Beach, where former Florida Speaker of the House J. Hyatt Brown ran the company his father founded, and in Tampa, where former Mayor William F. Poe Sr. started Poe & Associates. Brown took charge of the merged company and holds the reins as chairman, president and chief executive.

The company, then known as Poe & Brown, had net income of $8-million on revenues of $95.6-million that first year, 1993. Eight years later, Brown & Brown had net income of $53.9-million on revenues of $365-million. That's a compound annual growth rate of 18.2 percent for revenues and 26.9 percent for net income.

"We operate at a higher margin than our peer group," Henderson said. "We focus on those things that we do that are the most profitable. When we acquire new revenue, we bring that in and get it to perform at the same level as our existing offices."

This strategy makes Brown & Brown picky about acquisitions.

"They're a very difficult company to get accepted by," said John Connelly, who sold his Clearwater agency, Connelly Insurance Group, to Brown & Brown last year. Like many potential sellers, he approached Brown & Brown. He said the company spent months researching his business before agreeing to the deal.

"We verify the numbers and determine whether there are any goobers hidden away," Henderson said. "A committee has to approve every acquisition, and it has to be sponsored by the regional executive. If it's an agency that will fold into an existing location, it has to be sponsored by the head of that office." Sponsors have part of their compensation tied to the performance of the acquired agency.

The typical acquisition is a family-owned insurance agency specializing in property and casualty insurance for local businesses, generating about $3-million in revenues and $500,000 to $750,000 in operating profit. Brown & Brown will pay between one and two times annual revenues. The agency's profit margin and its growth rate affect the price.

Some agency owners want to cash out and retire, but others, Connelly included, see an alliance with Brown & Brown as a way to make more money than they could on their own. Connelly said his agency had relationships with only a dozen insurance companies. Through Brown and Brown, he has direct access to twice that many and indirect access to many others through Brown & Brown's wholesale brokers.

"The No. 1 advantage is that we will grow significantly quicker," Connelly said. "Some customers are bringing things to us that before they didn't have the confidence we'd be able to handle."

Although Connelly said his agency always was profit-minded, that's not the case with every company Brown & Brown acquires.

"Often the agency was operated to build wealth, convey wealth and fund a lifestyle," Henderson said. "You might have family members working in the agency who may be more gratuitous than functional."

He said some agencies also carry less-profitable lines of business that drag down overall profit margins and need to be jettisoned.

"Sometimes they'll have something like a small amount of mobile home insurance, an area where we have not found any constructive way to make reasonable margins," he said. "Maybe 10 years ago it was acceptable to have an entity operating at a 10 percent margin. Today you say, "Do I really want to do that? Maybe I should take the talent and have them do something else.' "

If an agency can be folded into an existing Brown & Brown office, there's an immediate boost to profits. Brown & Brown will earn about a 40 percent pretax profit margin on the additional revenues, Henderson said. Otherwise, the goal is to bring the acquired office's margins up to the 30 percent-plus that older Brown & Brown offices generate. Overall, the company's pretax profit margin was about 26 percent last year.

Often, newly acquired agencies remain separate, sometimes under the same managers, whose compensation is tied to their results. One tool Brown & Brown uses to bring the new offices into line is quarterly performance rankings.

"We provide profit and loss statements on every office to every other office," Henderson said. "We rank them in performance sequence by operating margin, by revenue per employee, by growth rate, by retention rate. They can see who's in the top 10 and who's in the bottom 10."

He said managers are encouraged to find out what the better-performing offices are doing that they are not.

Crucial to making acquisitions work is retaining the acquired agencies' top salespeople, an area in which Brown & Brown excels. Top producers are offered stock in the company worth one to 11/2 times the value of the business they do. If their business grows, so does the stock grant. The catch: They can't take the stock with them unless they stick with Brown & Brown for 15 years or until retirement age, whichever comes first. Key executives also have stock deals.

"Many independent producers jump around from ship to ship, depending on the best deal of the day," said stock analyst David Lewis at SunTrust Robinson Humphrey in Atlanta. "Brown & Brown doesn't have that problem because incentive packages keep people from leaving."

Although other insurance agencies and some banks compete with Brown & Brown for acquisitions, there also are plenty of potential sellers.

"By our estimate, there could be as many as 4,000 additional acquisition opportunities," Lewis said.

In addition to its retail insurance agencies, Brown & Brown operates several related businesses. A unit in Tampa packages insurance products for dentists, doctors, lawyers and other specialized insurance groups.

Rising insurance rates in the wake of Sept. 11 have been a bonus for Brown & Brown. The company earns its revenues from commissions and fees, so it benefits from rising premiums without incurring additional risks.

- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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