Edgar Filing: BROWN & BROWN INC

Job Number

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 June 30, 2006

	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)

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 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer 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 August 2, 2006 was 139,480,235.

BROWN & BROWN, INC.

INDEX

			PAGE NO.

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005	3
		Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
	Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	33
	Item 4.	Submission of Matters to a Vote of Security Holders	33
	Item 6.	Exhibits and Reports on Form 8-K	34

SIGNATURE			35

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 June 30,				For the six months ended June 30,
		2006		2005		2006		2005

REVENUES
Commissions and fees	$	217,427	$	192,738	$	445,342	$	393,053
Investment income		2,956		1,524		5,165		2,489
Other income, net		424		1,669		882		2,763
Total revenues		220,807		195,931		451,389		398,305

EXPENSES
Employee compensation and benefits		103,180		94,100		203,910		184,484
Non-cash stock-based compensation		1,434		788		3,764		1,679
Other operating expenses		30,134		25,980		61,103		53,122
Amortization		8,978		8,357		17,978		15,892
Depreciation		2,785		2,527		5,380		4,894
Interest		3,329		3,711		6,851		7,253
Total expenses		149,840		135,463		298,986		267,324

Income before income taxes		70,967		60,468		152,403		130,981

Income taxes		26,536		23,435		57,946		50,930

Net income	$	44,431	$	37,033	$	94,457	$	80,051

Net income per share:
Basic	$	0.32	$	0.27	$	0.68	$	0.58
Diluted	$	0.32	$	0.27	$	0.67	$	0.57

Weighted average number of shares outstanding:
Basic		139,511		138,312		139,447		138,318
Diluted		141,006		139,476		140,915		139,448

Dividends declared per share	$	0.05	$	0.04	$	0.10	$	0.08

See accompanying notes to condensed consolidated financial statements.

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED

BALANCE SHEETS

(UNAUDITED)

(in thousands, except per share data)	June 30, 2006			December 31, 2005

ASSETS
Current Assets:
Cash and cash equivalents	$	33,148	$	100,580
Restricted cash and investments		275,959		229,872
Short-term investments		2,799		2,748
Premiums, commissions and fees receivable		276,730		257,930
Other current assets		21,767		28,637
Total current assets		610,403		619,767

Fixed asset		43,730		39,398
Goodwill		646,027		549,040
Amortizable intangible assets, net		390,252		377,907
Investments		9,656		8,421
Other assets		15,163		14,127
Total assets	$	1,715,231	$	1,608,660

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Premiums payable to insurance companies	$	463,352	$	397,466
Premium deposits and credits due customers		28,884		34,027
Accounts payable		33,784		21,161
Accrued expenses		62,837		74,534
Current portion of long-term debt		17,990		55,630
Total current liabilities		606,847		582,818

Long-term debt		208,181		214,179

Deferred income taxes, net		37,531		35,489

Other liabilities		12,688		11,830

Shareholders’ Equity:
Common stock, par value $0.10 per share;
authorized 280,000 shares; issued and
outstanding 139,480 at 2006 and 139,383 at 2005		13,948		13,938
Additional paid-in capital		197,581		193,313
Retained earnings		633,159		552,647
Accumulated of other comprehensive income, net of related income tax
effect of $3,104 at 2006 and $2,606 at 2005		5,296		4,446

Total shareholders’ equity		849,984		764,344

Total liabilities and shareholders’ equity	$	1,715,231	$	1,608,660

See accompanying notes to condensed consolidated financial statements.

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

CASH FLOWS

(UNAUDITED)

	For the six months ended June 30,
(n thousands)		2006			2005

Cash flows from operating activities:
Net income	$	94,457		$	80,051
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		17,978			15,892
Depreciation		5,380			4,894
Non-cash stock-based compensation		3,764			1,679
Deferred income taxes		1,544			925
Net gain on sales of investments, fixed
assets and customer accounts		(249	)		(2,515	)
Changes in operating assets and liabilities, net of effect
from acquisitions and divestitures:
Restricted cash and investments (increase)		(46,087	)		(89,021	)
Premiums, commissions and fees receivable (increase)		(18,328	)		(44,814	)
Other assets decrease		5,998			9,183
Premiums payable to insurance companies increase		55,621			128,046
Premium deposits and credits due customers (decrease)		(5,143	)		(8,271	)
Accounts payable increase		12,481			4,441
Accrued expenses (decrease)		(12,958	)		(5,219	)
Other liabilities increase (decrease)		666			(988	)
Net cash provided by operating activities		115,124			94,283

Cash flows from investing activities:
Additions to fixed assets		(9,096	)		(7,210	)
Payments for businesses acquired, net of cash acquired		(89,014	)		(215,155	)
Proceeds from sales of fixed assets and customer accounts		612			2,005
Purchases of investments		(47	)		(190	)
Proceeds from sales of investments		12			521
Net cash used in investing activities		(97,533	)		(220,029	)
Cash flows from financing activities:
Payments on long-term debt		(71,593	)		(8,766	)
Borrowings on revolving credit facility		-			50,000
Payments on revolving credit facility		-			(50,000)	)
Issuances of common stock for employee stock benefit plans		514			410
Cash dividends paid		(13,944	)		(11,064	)
Net cash used in financing activities		(85,023	)		(19,420	)
Net decrease in cash and cash equivalents		(67,432	)		(145,166	)
Cash and cash equivalents at beginning of period		100,580			188,106
Cash and cash equivalents at end of period	$	33,148		$	42,940

See accompanying notes to condensed consolidated financial statements.

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, Brown & Brown or the “Company”) is a diversified insurance agency, brokerage, and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty area. 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 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 and personal lines 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 managed healthcare services, and Medicare set-aside services and programs.

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 (“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, 2005.

Results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

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:

(in thousands, except per share data)	For the three months ended June 30,				For the six months ended June 30,
	2006		2005		2006		2005


Net income	$	44,431	$	37,033	$	94,457	$	80,051

Weighted average number of common shares
outstanding		139,511		138,312		139,447		138,318

Dilutive effect of stock options using the
treasury stock method		1,495		1,164		1,468		1,130

Weighted average number of shares
outstanding		141,006		139,476		140,915		139,448

Net income per share:
Basic	$	0.32	$	0.27	$	0.68	$	0.58
Diluted	$	0.32	$	0.27	$	0.67	$	0.57

All share and per share amounts in the consolidated financial statements have been restated to give effect to the two-for-one common stock split effected by Brown & Brown on November 28, 2005. The stock split was effected as a stock dividend.

NOTE 4 • New Accounting Pronouncements

Stock-Based Compensation - The Company grants stock options and non-vested stock awards (previously referred to as “restricted stock”) to its employees, officers and directors. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS 123R”), for its stock-based compensation plans. Among other things, SFAS 123R requires that compensation expense for all share-based awards be recognized in the financial statements based upon the grant-date fair value of those awards.

Prior to January 1, 2006, the Company accounted for stock-based compensation using the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations, and disclosure requirements established by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transitions and Disclosures (“SFAS 148”).

Under APB No. 25, no compensation expense was recognized for either stock options issued under the Company’s stock compensation plans or for stock purchased under the Company’s 1990 Employee Stock Purchase Plan (“ESPP”). The pro forma effects on net income and earnings per share for stock options and ESPP awards were instead disclosed in a footnote to the financial statements. Compensation expense was previously recognized for awards of non-vested stock, based upon the market value of the common stock on the date of award, on a straight-line basis over the requisite service period with the effect of forfeitures recognized as they occurred.

The following table represents the pro forma information for the three and six months ended June 30, 2005 (as previously disclosed) under the Company’s stock compensation plans had compensation cost for the stock options and common stock purchased under the ESPP been determined based on the fair value at the grant-date consistent with the method prescribed by SFAS No. 123R:

(in thousands, except per share data)		Periods Ended June 30, 2005
		Three Months			Six months

Net income	As reported	$	37,033		$	80,051
Add: Total stock-based compensation included in net income, net of tax effect	As reported		483			1,028
Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of tax effect	Pro forma		(1,139	)		(2,337	)

Net income	Pro forma	$	36,377		$	78,742

Basic earnings per share:	As reported	$	0.27		$	0.58
	Pro forma	$	0.26		$	0.57
Diluted earnings per share:	As reported	$	0.27		$	0.57
	Pro forma	$	0.26		$	0.56

The Company has adopted SFAS 123R using the modified-prospective transition method. Under this transition method, compensation cost recognized in the first and second quarters of 2006 includes:

compensation cost for all share-based awards (expected to vest) granted prior to, but not yet vested as of January 1, 2006, based upon grant-date fair value estimated in accordance with the original provisions of SFAS 123; and

compensation cost for all share-based awards (expected to vest) granted during the three and six months ended June 30, 2006 based upon grant-date fair value estimated in accordance with the provisions of SFAS 123R.

Results for prior periods have not been restated.

Upon adoption of SFAS 123R, the Company continued to use the Black-Scholes valuation model for valuing all stock options and shares granted under the ESPP. Compensation for non-vested stock awards is measured at fair value on the grant-date based upon the number of shares expected to vest. Compensation cost for all awards will be recognized in earnings, net of estimated forfeitures, on a straight-line basis over the requisite service period. The cumulative effect of changing from recognizing compensation expense for non-vested stock awards as forfeitures occurred to recognizing compensation expense for non-vested awards net of estimated forfeitures was not material.

The adoption of SFAS 123R had the following effect on the Company for the three- and six- months ended June 30, 2006:

(in thousands, except per share data)	Three Month Period			Six Month Period
Non-cash stock-based compensation	$	(12	)	$	872
Reduction (increase) in:
Provision for income taxes	$	(4	)	$	336
Net income	$	(8	)	$	536
Basic earnings per share	$	–		$	–
Diluted earnings per share	$	–		$	–
Increase (decrease) in deferred tax assets	$	(4	)	$	336

In addition, prior to the adoption of SFAS 123R, the Company presented tax benefits resulting from the exercise of stock options as operating cash flows in the statement of cash flows. SFAS 123R requires that tax benefits associated with share-based payments be classified under financing activities in the statement of cash flows. Since no stock option shares were exercised that gave rise to excess tax deductions during the three or six months ended June 30, 2006, there is no effect of the adoption of SFAS 123R on the cash flow statement for the three or six months ended June 30, 2006.

See Note 5 for additional information regarding the Company’s stock-based compensation plans and the assumptions used to calculate the fair value of stock-based awards.

NOTE 5 • Employee Stock-Based Compensation

Stock Option Awards

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options on the grant-date under SFAS 123R, which is the same valuation technique previously used for pro forma disclosures under SFAS 123. The Company did not grant any options during the three or six months ended June 30, 2006, but did grant 12,000 shares during the six months ended June 30, 2005. The Company used the following weighted average assumptions for all options granted during the six months ended June 30, 2005:


	Risk-free interest rate		4.5%
	Expected life (in years)		6
	Expected volatility		35%
	Dividend yield		0.86%

The risk-free interest rate is based upon the US Treasury yield curve on the date of grant with a remaining term approximating the expected term of the option granted. The expected term of the options granted is derived from historical data; employees are divided into two groups based upon expected exercise behavior and are considered separately for valuation purposes. The expected volatility is based upon the historical volatility of the Company’s common stock over the period of time equivalent to the expected term of the options granted. The dividend yield is based upon the Company’s best estimate of future dividend yield.

A summary of stock option activity for the six-month period ended June 30, 2006 is as follows:

Stock Options	Shares Under option	Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)

Outstanding at January 1, 2006	2,016,988	$10.83
Granted	-	$ -
Exercised	35,017	$ 7.35
Forfeited	-	$ -
Expired	-	$ -
Outstanding at June 30, 2006	1,981,971	$10.89	5.4	36,335
Exercisable at June 30, 2006	1,273,263	$ 8.10	4.7	26,885

The weighted average grant-date fair value of stock options granted during the six-months ended June 30, 2005 was $8.51. The total intrinsic value of options exercised, determined as of the date of exercise, during the six months ended June 30, 2006 and 2005 was $818,000 and $850,000, respectively. Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted market price of the Company’s stock for in-the-money stock options at June 30, 2006.

Non-Vested Stock Awards (“Performance Stock Plan” or “PSP”)

The Company uses a path-depended lattice model to estimate the fair value of PSP grants on the grant-date under SFAS 123R. A summary of PSP activity for the six months ended June 30, 2006 is as follows:

Stock Options	Weighted- Average Grant Date Fair Value		Granted Shares			Awarded Shares			Shares Not Yet Awarded

Outstanding at January 1, 2006	$	5.21		6,349,298			5,622,920			726,378
Granted	$	19.73		122,845			-			122,845
Awarded	$	11.50		-			253,672			(253,672	)
Vested	$	10.89		(1,086	)		(1,086	)		-
Forfeited	$	5.32		(220,840	)		(199,770	)		(21,070	)
Outstanding at June 30, 2006	$	5.51		6,250,217			5,675,736			574,481

The weighted average grant-date fair value of PSP grants for the six months ended June 30, 2006 and 2005 was $19.73 and $14.13, respectively. The total fair value of PSP grants that vested during each of the six months ended June 30, 2006 and 2005 was $35,000 and $-0-, respectively.

Employee Stock Purchase Plan (“ESPP”)

The Company has a shareholder approved ESPP. Employees of the Company who regularly work more than 20 hours per week are eligible to participate in the plan. Participants, through payroll deductions, may subscribe to purchase Company stock up to 10% of their compensation, to a maximum of $25,000, during each annual subscription period at a cost of 85% of the lower of the stock price as of the beginning or ending of the stock subscription period. During the six months ended June 30, 2006 and 2005, 305,451 and 266,935 shares of common stock (from authorized but unissued shares), respectively, were subscribed to by employees participating in the Company’s ESPP for proceeds of approximately $5,642,000 and $4,709,000, respectively.

As of June 30, 2006, there was approximately $17.2 million of unrecognized compensation expense related to all non-vested share-based compensation arrangements granted under the Company’s stock compensation plans. That expense is expected to be recognized over a weighted-average period of 10.2 years.

NOTE 6 • Business Combinations

Acquisitions in 2006

For the six months ended June 30, 2006, Brown & Brown acquired the assets and assumed certain liabilities of 11 entities. The aggregate purchase price of these acquisitions was $101,507,000, including $87,023,000 of net cash payments, the issuance of $3,582,000 in notes payable and the assumption of $10,902,000 of liabilities. Substantially all of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract and obtain 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.

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

(in thousands) Name	Business Segment	2006 Date of Acquisition			Net Cash Paid	Notes Payable		Recorded Purchase Price
Axiom Intermediaries, LLC	Brokerage		January 1	$	60,292	$	-	$	60,292
Other	Various		Various		26,731		3,582		30,313
Total				$	87,023	$	3,582	$	90,605

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

(in thousands)	Axiom			Other			Total
Fiduciary cash	$	9,598		$	-		$	9,598
Other current assets		372			100			472
Fixed assets		435			361			796
Purchased customer accounts		14,022			16,161			30,183
Noncompete agreements		31			207			238
Goodwill		45,819			14,328			60,147
Other assets		73			-			73
Total assets acquired		70,350			31,157			101,507
Other current liabilities		(10,058	)		(652	)		(10,710	)
Other liabilities		-			(192	)		(192	)
Total liabilities assumed		(10,058	)		(844	)		(10,902	)
Net assets acquired	$	60,292		$	30,313		$	90,605

The results of operations for the acquisitions completed during 2006 have been combined with those of the Company since their respective acquisitions dates. If the acquisitions had occurred as of January 1, 2005, the Company’s results of operations would be as shown in the following table:

	For the three months				For the six months
(UNAUDITED)	ended June 30,				ended June 30,
(in thousands, except per share data)	2006		2005		2006		2005

Total revenues	$	222,314	$	203,859	$	456,896	$	414,788

Income before income taxes		71,479		63,089		154,284		136,452

Net income		44,751		38,638		95,623		83,395

Net income per share:
Basic	$	0.32	$	0.28	$	0.69	$	0.60
Diluted	$	0.32	$	0.28	$	0.68	$	0.60

Weighted average number of shares outstanding:
Basic		139,511		138,312		139,447		138,318
Diluted		141,006		139,476		140,915		139,448

These 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 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 2006 as a result of these adjustments totaled $36,921,000, of which $36,840,000 was allocated to goodwill. Of the $36,921,000 net additional consideration paid, $11,591,000 was paid in cash, $24,373,000 was issued in notes payable and $957,000 was assumed as net liabilities. As of June 30, 2006, the maximum future contingency payments related to acquisitions totaled $188,533,000.

NOTE 7 • 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, 2005 and identified no impairment as a result of the evaluation.

The changes in goodwill for the six months ended June 30, 2006 are as follows:

(in thousands)	Retail		National Programs		Brokerage		Service		Total
Balance as of January 1, 2006	$	292,212	$	119,022	$	137,750	$	56	$	549,040
Goodwill of acquired businesses		32,439		7,110		54,724		2,714		96,987
Goodwill disposed of relating to sales of businesses		-		-		-		-		-
Balance as of June 30, 2006	$	324,651	$	126,132	$	192,474	$	2,770	$	646,027

NOTE 8 • Amortizable Intangible Assets

Amortizable intangible assets at June 30, 2006 and December 31, 2005 consisted of the following:

	June 30, 2006									December 31, 2005
(in thousands)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life (years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life (years)

Purchased customer accounts	$	521,234	$	(135,509	)	$	385,725		14.9	$	498,580	$	(126,161	)	$	372,419	14.9
Noncompete agreements		25,492		(20,965	)		4,527		7.7		34,154		(28,666	)		5,488	7.0
Total	$	546,726	$	(156,474	)	$	390,252			$	532,734	$	(154,827	)	$	377,907

Amortization expense for other amortizable intangible assets for the years ending December 31, 2006, 2007, 2008, 2009 and 2010 is estimated to be $36,094,000, $35,850,000, $34,964,000, $34,496,000, and $33,839,000 respectively.

NOTE 9 • Long-Term Debt

Long-term debt at June 30, 2006 and December 31, 2005 consisted of the following:

(in thousands)	2006			2005
Unsecured Senior Notes	$	200,000		$	200,000
Acquisition notes payable		6,699			43,889
Term loan agreements		19,286			25,714
Revolving credit facility		-			-
Other notes payable		186			206
Total debt		226,171			269,809
Less current portion		(17,990	)		(55,630	)
Long-term debt	$	208,181		$	214,179

In July 2004, Brown & Brown completed a private placement of $200.0 million of unsecured senior notes (the Notes). The $200.0 million Notes are 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 June 30, 2006 and December 31, 2005 there was an outstanding balance of $200.0 million on the Notes.

In September 2003, Brown & Brown established an unsecured 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 Offered 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 5.50% and 4.53% as of June 30, 2006 and December 31, 2005, respectively. There were no borrowings against this facility at June 30, 2006 or December 31, 2005.

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 grant compensation. The 90-day LIBOR was 5.50% and 4.53% as of June 30, 2006 and December 31, 2005, respectively. The loan was fully funded on January 3, 2001 and as of June 30, 2006 had an outstanding balance of $19,286,000. This loan is to be repaid in equal quarterly installments of $3,200,000 through December 2007.

All three 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 June 30, 2006 and December 31, 2005.

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90 million term loan, Brown & Brown entered into an interest rate exchange (“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, as amended, the fair value of the interest rate swap of approximately $110,000, net of related income taxes of approximately $57,000, was recorded in other assets as of June 30, 2006, and $36,000, net of related income taxes of approximately $22,000, was recorded in other asset as of December 31, 2005; 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.

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 February 2014, including interest in the range from 4.5% to 8.05%.

NOTE 10 • Supplemental Disclosures of Cash Flow Information

	For the six months ended June 30,
(in thousands)	2006		2005
Cash paid during the period for:

Interest	$	7,720	$	6,884

Income taxes	$	52,096	$	50,986

Brown & Brown’s significant non-cash investing and financing activities are summarized as follows:

	For the six months ended June 30,
(in thousands)	2006				2005

Unrealized holding gain (loss) on available-for-sale securities, net of tax effect of $463 for 2006; net of tax benefit of $388 for 2005	$	776		$	(1,000	)
Net gain on cash-flow hedging derivative, net of tax effect of $35 for 2006, net of tax effect of $159 for 2005	$	74		$	286
Notes payable issued or assumed for purchased customer accounts	$	27,955		$	35,530
Notes received on the sale of fixed assets and customer accounts	$	(1	)	$	1,842

NOTE 11 • Comprehensive Income

The components of comprehensive income, net of related income tax effects, are as follows:

	For the three months					For the six months
	ended June 30,					ended June 30,
(in thousands)	2006		2005			2006		2005

Net income	$	44,431	$	37,033		$	94,457	$	80,051
Net unrealized holding gain (loss) on available-for-sale securities		339		(216	)		776		(1,000	)
Net gain (loss) on cash-flow hedging derivative		23		(14	)		74		286
Comprehensive income	$	44,793	$	36,803		$	95,307	$	79,337

NOTE 12 • Legal and Regulatory Proceedings

Antitrust Actions and Related Matters

As previously disclosed, Brown & Brown, Inc. is one of more than ten insurance intermediaries named together with a number of insurance companies as defendants in putative class action lawsuits purporting to be brought on behalf of policyholders. Brown & Brown, Inc. initially became a defendant in certain of those actions in October and December of 2004. In February 2005, the Judicial Panel on Multi-District Litigation consolidated these cases, together with other putative class action lawsuits in which Brown & Brown, Inc. was not named as a party, to a single jurisdiction, the United States District Court, District of New Jersey, for pre-trial purposes. One of the consolidated actions, In Re: Employee-Benefits Insurance Antitrust Litigation, concerns employee benefits insurance and the other, styled In Re: Insurance Brokerage Antitrust Litigation, involves other lines of insurance. These two consolidated actions are collectively referred to in this report as the "Antitrust Actions." The complaints refer to an action, since settled, that was filed against Marsh & McLennan Companies, Inc. (“Marsh & McLennan”), the largest insurance broker in the world, by the New York State Attorney General in October 2004, and allege various improprieties and unlawful acts by the various defendants in the pricing and placement of insurance, including alleged manipulation of the insurance market by, among other things: alleged “bid rigging” and “steering” clients to particular insurers based on considerations other than the clients’ interests; alleged entry into unlawful tying arrangements pursuant to which the placement of primary insurance contracts was conditioned upon commitments to place reinsurance through a particular broker; and alleged failure to disclose contingent commission and other allegedly improper compensation and fee arrangements. The plaintiffs in the Antitrust Actions assert a number of causes of action, including violations of the federal antitrust laws, multiple state antitrust and unfair and deceptive practices statutes, and the federal anti-racketeering (RICO) statute, as well as breach of fiduciary duty, misrepresentation, conspiracy, aiding and abetting, and unjust enrichment, and seek injunctive and declaratory relief as well as unspecified damages, including treble and punitive damages, and attorneys’ fees and costs. Brown & Brown, Inc. disputes the allegations and is vigorously defending itself in the Antitrust Actions.

Related Regulatory Proceedings

Since the New York State Attorney General filed the lawsuit referenced above against Marsh & McLennan in October 2004, 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 actively receive and 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 or departments of insurance in the following states: Arkansas (Department of Insurance), Arizona (Department of Insurance), California (Department of Insurance), Connecticut (Office of Attorney General), Florida (Office of Attorney General, Department of Financial Services, and Office of Insurance Regulation), Nevada (Department of Business & Industry, Division of Insurance), New Hampshire (Department of Insurance), New Jersey (Department of Banking and Insurance), New York (Office of Attorney General), North Carolina (Department of Insurance and Department of Justice), Oklahoma (Department of Insurance), Pennsylvania (Department of Insurance), South Carolina (Department of Insurance), Texas (Department of Insurance), Vermont (Department of Banking, Insurance, Securities & Healthcare Administration), Virginia (State Corporation Commission, Bureau of Insurance, Agent Regulation & Administration Division), Washington (Office of Insurance Commissioner) and West Virginia (Office of Attorney General). None of these governmental agencies has charged or alleged any wrongdoing or violation of law by the Company. Agencies in Arizona 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.

As previously disclosed in our public filings, offices of the Company are party to contingent commission 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 contingent commissions or override commissions.

As previously disclosed, a committee comprised of independent members of the Board of Directors of Brown & Brown, Inc. (the “Special Review Committee”) determined that maintenance of a derivative suit was not in the best interests of the Company, following an investigation in response to a December 2004 demand letter from counsel purporting to represent a current shareholder of Brown & Brown, Inc. (the “Demand Letter”). The Demand Letter sought the commencement of a derivative suit by Brown &

Brown, Inc. against the Board of Directors and current and former officers and directors of Brown & Brown, Inc. for alleged breaches of fiduciary duty related to the Company’s participation in contingent commission agreements. The Special Review Committee's conclusions were communicated to the purported shareholder's counsel and there has been limited communication since then. There can be no assurance that the purported shareholder will not further pursue his allegations or that any pursuit of any such allegations would not have a material adverse effect on the Company.

In response to the foregoing events, the Company also, on its own volition, engaged outside counsel to conduct a limited internal inquiry into certain sales and marketing practices of the Company, with special emphasis on the effects of contingent commission agreements on the placement of insurance products by the Company for its clients. The internal inquiry resulted in several recommendations being made in January 2006 regarding disclosure of compensation, premium finance charges, interface between the Company’s retail and wholesale units, fee-based compensation and direct incentives from insurance companies. The Company has been evaluating these recommendations and has adopted or is in the process of adopting these recommendations. As a result of that inquiry, and in the process of preparing responses to some of the governmental agency inquiries referenced above, management of the Company became aware of a limited number of specific, unrelated instances of questionable conduct. These matters have been addressed and resolved, or are in the process of being addressed and resolved, on a case-by-case basis, and thus far the amounts involved in resolving such matters have not been, either individually or in the aggregate, material. However, there can be no assurance that the ultimate cost and ramifications of resolving these matters will not have a material adverse effect on the Company.

Some of the other insurance intermediaries and insurance companies that have been subject to governmental investigations and/or lawsuits arising out of these matters have chosen to settle some such matters. Such settlements have involved the payment of substantial sums, as well as agreements to change business practices, including agreeing to no longer pay or accept contingent commissions. Marsh & McLennan, Aon Corporation, Arthur J. Gallagher & Co., Hilb, Rogal & Hobbs Company (“HRH”), and Willis Group Holdings Ltd. have each entered into agreements with governmental agencies, which collectively involve payments by these intermediaries to agencies and to certain of their clients totaling nearly $1 billion. With the exception of the settlement entered into by HRH, which included an agreement that HRH would discontinue acceptance of certain types of contingency compensation, these agreements provided that these insurance intermediaries would discontinue acceptance of any contingency compensation.

On March 14, 2006, the Florida Attorney General and the Florida Department of Financial Services, which, as mentioned above, have also been seeking information from the Company, filed a complaint against Marsh & McLennan on behalf of various Florida governmental entities, businesses and residents alleging that Marsh & McLennan violated Florida’s RICO and antitrust laws. The complaint alleges that Marsh & McLennan conspired with various insurance companies to rig quotes for commercial insurance, manipulate the commercial insurance markets, inflate insurance premiums, and receive undisclosed, additional compensation, all of which are alleged to have caused damage to the State of Florida, governmental entities and Florida businesses and residents. While the above Florida governmental agencies have not made demands upon the Company, which is headquartered in Florida, or filed suit against it, there can be no assurance that their inquiries, or any of those of the other various governmental authorities referenced above, will not result in demands upon the Company or suits filed against it, or that any such demands or suits or any resolution thereof would not have a material adverse effect on the Company.

The Company cannot currently predict the impact or resolution of the Antitrust Actions, the shareholder demand or the various governmental inquiries or lawsuits 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 contingent commissions 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, there are several 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, pending in the 189th Judicial District Court in Harris County, Texas, asserts 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.

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 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 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; and the Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance, and reinsurance, primarily through independent agents and brokers. Brown & Brown conducts all of its operations within the United States of America.

Summarized financial information concerning Brown & Brown’s reportable segments for the six months ended June 30, 2006 and 2005 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 six months ended June 30, 2006*
(in thousands)	Retail		National Programs		Brokerage		Services		Other			Total
Total revenues	$	270,928	$	75,579	$	86,645	$	14,719	$	3,518		$	451,389
Investment income		35		194		2,102		25		2,809			5,165
Amortization		9,661		4,326		3,871		97		23			17,978
Depreciation		2,792		1,079		943		239		327			5,380
Interest expense		9,657		5,144		8,949		111		(17,010	)		6,851
Income before income taxes		81,905		23,648		18,655		3,539		24,656			152,403
Total assets		1,067,518		498,830		608,963		29,522		(489,602	)		1,715,231
Capital expenditures		3,761		2,689		1,048		337		1,261			9,096

	*For the six months ended June 30, 2005*
(in thousands)	Retail		National Programs		Brokerage		Services		Other			Total
Total revenues	$	257,958	$	63,510	$	59,250	$	13,838	$	3,749		$	398,305
Investment income		42		171		383		-		1,893			2,489
Amortization		9,539		3,996		2,306		22		29			15,892
Depreciation		2,819		968		540		220		347			4,894
Interest expense		10,598		5,183		5,355		2		(13,885	)		7,253
Income before income taxes		73,490		16,235		15,375		3,851		22,030			130,981
Total assets		903,721		407,058		452,372		15,061		(310,776	)		1,467,436
Capital expenditures		3,732		2,131		836		202		309			7,210

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 2005 ANNUAL REPORT ON FORM 10-K, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.

GENERAL

We are a general insurance and brokerage agency that commenced business in 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. 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 are comprised of commissions paid by insurance companies and fees paid directly by customers. Commission revenues generally represent a percentage of the 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) so as to determine what premium to charge the insured. These 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 insurance 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 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. Primarily as a result of these hurricanes, including Hurricanes Katrina, Rita and Wilma, the total insured losses are estimated to be in excess of $50 billion. The full impact that the 2005 insured losses will have on the insurance premium rates charged by insurance companies for 2006 is unknown, however, there is upward pressure on at least the insurance premium rates on coastal property, primarily in the southeastern part of the United States. In other parts of the country, premium rates continue to be generally “soft”.

We also earn “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), and, over the last three years, have averaged approximately 6.0% of the previous year’s total commissions and fees revenue. Contingent commissions are included in our total commissions and fees in the Consolidated Statements of Income in the year received. The term “core commissions and fees” excludes contingent commissions and therefore represents the revenues earned directly from specific insurance policies sold, and specific fee-based services rendered.

Fee revenues are generated primarily by our Services Division, which provides insurance-related services, including third-party administration and consulting for the self-funded workers’ compensation markets and Medicare set-aside services and programs.

Investment income 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. Investment income also includes gains and losses realized from the sale of investments.

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.

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 2005 Annual Report on Form 10-K on file with the Securities and Exchange Commission for details regarding all of our critical and significant accounting policies.

All share and per share information has been restated to give effect to a two-for-one common stock split that became effective November 28, 2005. That split was effected as a stock dividend.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

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 and six month periods ended June 30, 2006 and 2005 is as follows (in thousands, except percentages):

	For the three months ended June 30,									For the six months ended June 30,
	2006			2005			% Change			2006			2005			% Change
REVENUES
Commissions and fees	$	212,823		$	188,736			12.8	%	$	407,271		$	361,207			12.8	%
Contingent commissions		4,604			4,002			15.0	%		38,071			31,846			19.5	%
Investment income		2,956			1,524			94.0	%		5,165			2,489			107.5	%
Other income, net		424			1,669			(74.6	)%		882			2,763			(68.1	)%
Total revenues		220,807			195,931			12.7	%		451,389			398,305			13.3	%

EXPENSES
Employee compensation and benefits		103,180			94,100			9.6	%		203,910			184,484			10.5	%
Non-cash stock-based compensation		1,434			788			82.0	%		3,764			1,679			124.2	%
Other operating expenses		30,134			25,980			16.0	%		61,103			53,122			15.0	%
Amortization		8,978			8,357			7.4	%		17,978			15,892			13.1	%
Depreciation		2,785			2,527			10.2	%		5,380			4,894			9.9	%
Interest		3,329			3,711			(10.3	)%		6,851			7,253			(5.5	)%
Total expenses		149,840			135,463			10.6	%		298,986			267,324			11.8	%

Income before income taxes		70,967			60,468			17.4	%		152,403			130,981			16.4	%

Income taxes		26,536			23,435			13.2	%		57,946			50,930			13.8	%

NET INCOME	$	44,431		$	37,033			20.0	%	$	94,457		$	80,051			18.0	%


Net internal growth rate - core commissions and fees		6.8	%		2.2	%					4.1	%		2.8	%
Employee compensation and benefits ratio		46.7	%		48.0	%					45.2	%		46.3	%
Other operating expenses ratio		13.6	%		13.3	%					13.5	%		13.3	%

Capital expenditures	$	4,619		$	3,741					$	9,096		$	7,210
Total assets at June 30, 2006 and 2005										$	1,715,231		$	1,467,436

Net Income

Net income for the second quarter of 2006 was $44.4 million, or $0.32 per diluted share, compared with net income in the second quarter of 2005 of $37.0 million, or $0.27 per diluted share, a 18.5% increase on a per-share basis. Net income for the six months ended June 30, 2006 was $94.5 million or $0.67 per diluted share, compared with net income for the comparable period in 2005 of $80.1 million, or $0.57 per diluted share, a 17.5 % increase on a per-share basis.

Commissions and Fees

Commissions and fees, including contingent commissions, for the second quarter of 2006 increased $24.7 million, or 12.8%, over the same period in 2005. Contingent commissions for the second quarter of 2006 increased $0.6 million over the second quarter of 2005, to $4.6 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 second quarter of 2006 increased $24.6 million, of which approximately $11.8 million represents core commissions and fees from agencies acquired since the second quarter of 2005. After divested business of $0.5 million, the remaining $12.8 million represents net new business production, which reflects a 6.8% internal growth rate for core commissions and fees. Commissions and fees for the six months ended June 30, 2006 increased $52.3 million, or 13.3%, over the same period in 2005. For the six months ended June 30, 2006, contingent commissions increased $6.2 million over the comparable period in 2005. Core commissions and fees revenue for the first six months of 2006 increased $47.0 million, of which approximately $32.1 million of the total increase represents core commissions and fees from agencies acquired since the comparable period in 2005. After divested business of $1.0 million, the remaining $14.9 million represents net new business production, which reflects a 4.1% internal growth rate for core commissions and fees.

Investment Income

Investment income for the three months ended June 30, 2006 increased $1.4 million, or 94.0%, over the same period in 2005. Investment income for the six months ended June 30, 2006 increased $2.7 million, or 107.5%, over the same period in 2005. These increases in investment income were primarily due to higher investment yield rates.

Other Income, net

Other income for the three months ended June 30, 2006 decreased $1.2 million, or 74.6%, over the same period in 2005. Other income for the six months ended June 30, 2006 decreased $1.9 million, or 68.1%, over the same period in 2005. Other income consists primarily of gains and losses from the sale and disposition of assets. The majority of the gain for the second quarter of 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 second quarter of 2006 increased $9.1 million, or 9.6%, over the same period in 2005. Employee compensation and benefits for the six months ended June 30, 2006 increased $19.4 million, or 10.5%, over the same period in 2005. These increases are primarily related to the addition of new employees from acquisitions completed since July 1, 2005 and increased compensation that resulted from higher commissions and fees revenue. Employee compensation and benefits as a percentage of total revenue decreased to 46.7% for the second quarter of 2006, from 48.0% for the second quarter of 2005. For the six months ended June 30, 2006, employee compensation and benefits as a percentage of total revenue decreased to 45.2%, from 46.3% for the same period in 2005. These improved ratios for the three and six month periods were the result of the continued assimilation of the acquisitions completed in 2005 and 2006 into our standard compensation program.

Non-Cash Stock-Based Compensation

Non-cash stock-based compensation for the three and six months ended June 30, 2006 increased approximately $0.6 million, or 82.0%, and $2.1 million, or 124.2%, respectively. As more fully described in Notes 4 and 5 of the Condensed Consolidated Financial Statements, the increase was due to the implementation of Statement of Financial Accounting Standards No. 123R, Share-Based Payment. The majority of the increased cost primarily relates to the expensing of the 15% discount granted to participants under our 1990 Employee Stock Purchase Plan.

Other Operating Expenses

Other operating expenses for the second quarter of 2006 increased $4.2 million, or 16.0%, over the same period in 2005. For the six months ended June 30, 2006, other operating expenses increased $8.0 million, or 15.0%, over the same period in 2005. These increases are primarily the result of acquisitions completed since the third quarter of 2005 that had no comparable results in the same period of 2005. Other operating expenses as a percentage of revenues for the second quarter of 2006 increased to 13.6%, compared with 13.3% for the same period in 2005. For the six months ended June 30, 2006, other operating expenses as a percentage of revenues increased to 13.5%, compared with 13.3% for the same period in 2005. The slight increase during the three months ended June 30, 2006 was due to a general increase in travel and entertainment expenses in 2006, and the fact that in the second quarter of 2005 there was a $1.0 million reversal for an accrual for the revoked Florida Communications Tax.

Amortization

Amortization expense for the second quarter of 2006 increased $0.6 million, or 7.4%, over the second quarter of 2005. For the six months ended June 30, 2006, amortization expense increased $2.1 million, or 13.1%, over the same period in 2005. These increases are primarily due to acquisitions completed since July 1, 2005.

Depreciation

Depreciation expense for the second quarter of 2006 increased $0.3 million, or 10.2 %, over the second quarter of 2005. For the six months ended June 30, 2006, depreciation expense increased $0.5 million, or 9.9%, over the same period in 2005. These increases are due to capital expenditures and fixed assets purchased in acquisitions completed since July 1, 2005.

Interest Expense

Interest expense for the second quarter of 2006 decreased $0.4 million, or 10.3%, over the same period in 2005. For the six months ended June 30, 2006, interest expense decreased $0.4 million, or 5.5%, over the same period in 2005.

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, National Programs, Brokerage and Service Divisions. On a divisional basis, increases in amortization, depreciation and interest expenses are the result of new acquisitions within that division in a particular year. Likewise, other income in each division primarily reflects net gains on sales of customer accounts and fixed assets. In evaluating the operational efficiency of a division, management places greater 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 ratio of other operating expenses to total revenues.

Our core commissions and fees internal growth rates for the three months ended June 30, 2006 by divisional units are as follows (in thousands, except percentages):

	For the three months				Total			Total			Less		Internal
	ended June 30,				Net			Net			Acquisition		Net
	2006		2005		Change			Growth %			Revenues		Growth %

Florida Retail	$	47,029	$	40,738	$	6,291			15.4	%	$	97		15.2	%
National Retail		53,025		51,134		1,891			3.7	%		3,024		(2.2	)%
Western Retail		26,423		25,513		910			3.6	%		1,495		(2.3	)%
Total Retail⁽¹⁾		126,477		117,385		9,092			7.7	%		4,616		3.8	%

Professional Programs		9,124		9,647		(523	)		(5.4	)%		-		(5.4	)%
Special Programs		26,435		20,705		5,730			27.7	%		1,706		19.4	%
Total National Programs		35,559		30,352		5,207			17.2	%		1,706		11.5	%

Brokerage		42,736		34,077		8,659			25.4	%		4,103		13.4	%

Services		8,051		6,449		1,602			24.8	%		1,348		3.9	%

Total Core Commissions and Fees	$	212,823	$	188,263	$	24,560			13.0	%	$	11,773		6.8	%

(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.

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 June 30, 2006 and 2005 is as follows (in thousands, except percentages):

	For the three months ended June 30,
	2006		2005

Total core commissions and fees	$	212,823	$	188,263
Contingent commissions		4,604		4,002
Divested business		-		473

Total commission & fees	$	217,427	$	192,738

Our core commissions and fees internal growth rates for the six months ended June 30, 2006 by divisional units are as following (in thousands, except percentages):

	For the six months				Total			Total			Less		Internal
	ended June 30,				Net			Net			Acquisition		Net
	2006		2005		Change			Growth %			Revenues		Growth %

Florida Retail	$	86,289	$	78,049	$	8,240			10.6	%	$	381		10.1	%
National Retail		104,282		100,560		3,722			3.7	%		6,099		(2.4	)%
Western Retail		51,451		50,630		821			1.6	%		2,865		(4.0	)%
Total Retail⁽¹⁾		242,022		229,239		12,783			5.6	%		9,345		1.5	%

Professional Programs		19,462		20,613		(1,151	)		(5.6	)%		-		(5.6	)%