Good morning, everyone. Welcome to the 2011 Brown & Brown Annual Shareholders Meeting. Our board is arriving. They've been attending an audit committee meeting, and a good audit committee report, as a matter of fact, I might add. Let's see if we've got all the members of the board here. I think everybody is here now. We'll call the meeting to order. I'd like to start off by introductions. I'm Hyatt Brown. I'm Chairman of the Board, and I would like to introduce our directors. Let me talk a little bit about our directors for a moment. The last couple three years have been difficult times for everyone in business, and it has been very demanding on all of the leadership team and all of the teammates throughout the U.S. and in England, all 5,400 or 5,500, or however many people we have today.
It's also been a time when our board has been even more focused, if that's possible, on all of those things that make up this wonderful company of ours, Brown & Brown. What allows us to continue to drive to the next level from the next level. I want to thank, in advance, all of the directors for the wonderful job they've done. We appreciate you very much, and we depend upon you for your support and your advice and counsel. I'd like to ask each member of the board to rise, remain standing until we introduce everyone, and then we'll give them a round of applause. First of all is Sam Bell, who is a shareholder in the firm of Pennington, Moore, Wilkinson, Bell & Dunbar in Tallahassee.
Hugh Brown, who is retired Founder and former CEO of BAMSI, which is an engineering and technical services firm. Powell Brown, who is the President and CEO of our company. Brad Currey, who is the former Chairman, retired, of Rock-Tenn, CEO and Chairman of Rock-Tenn Company, a paper manufacturer. Ted Hoepner, who is currently the Chairman of the Florida Prepaid College Board and former Vice Chairman of SunTrust Banks, Inc. Tim Main, who is the Managing Director of J.P. Morgan in New York. Toni Jennings, who is Chairman of Jack Jennings & Sons commercial construction firm, and Jennings and Jennings, an architectural millwork firm based in Orlando. Wendell Reilly, who is the Managing General Partner of Grapevine Partners. It's a private equity investment firm focused on media and communications and lives in Atlanta. John Reedman, who is Chairman of The Reedman Corporation from Rochester, New York.
Last, but certainly not least, is Chilton Varner, who is a Partner in the law firm of King & Spalding in Atlanta. Let's give them all a round of applause. Now I'd like to introduce the officers. I'd like to ask them also to stand and remain standing, and we'll give all of the officers a round of applause upon the conclusion of the introductions. Powell Brown, who's been introduced, is President and CEO. Cory Walker is Senior Vice President, Treasurer, and Chief Financial Officer. Roy Bridges, Regional President. Linda Downs, Regional President. Charlie Lydecker, Regional President. Scott Penny, Regional President and Chief Acquisition Officer. Sam Boone, Regional Executive Vice President. Ken Masters, Regional Executive Vice President. Michael Rudin, Regional Executive Vice President. Tony Strianese, Regional Executive Vice President. Nick Daroshefsky, Regional Vice President. Tony Grippa, Regional Vice President. Tommy Huval, Regional Vice President.
Rich Benson, Regional Vice President. Bob Lloyd, Vice President and General Counsel. Laurel Grammig, Vice President, Secretary, and Chief Corporate Counsel. Tom Donegan Jr., Vice President, Assistant Secretary, and Chief Acquisition Counsel, and Rich Freeborn, Vice President of Internal Operations. Let's give them a round of applause. We're also very proud of our leadership team. These folks work day, night, and Sunday, that's not just saying that lightly. It's really true. Our decentralized structure is a structure that allows and demands our leadership team to be in the offices and in the hearts and minds of all of our people throughout our 37 or 38 states, plus London.
That's very important because all of those people out there who are making this company roll forward, it's very important for them to know that we care about them and they care about us, and we're there to be of assistance and to assist them to rise to whatever level that they're capable of rising. That's what leaders do. Leaders lead. They don't necessarily manage. Manage suggests that you have to tell someone what to do. If you have to tell someone what to do, then maybe you need to get someone else. That's the difference between leadership and management. I would now like to introduce to you, the representatives of Deloitte & Touche, our accountants. First of all, Carlos Macau, who's Partner. Carlos, would you rise, please? Michael Becker, who is Senior Manager, and Zachary Phillips, who is Manager.
Give them a round of applause. Thank you. Laurel Grammig is going to serve as Secretary of the Meeting. Laurel?
Yes. I have the copy of the mailing affidavit that certifies that on March 22, 2011 the proxy statement and all related materials were mailed to the shareholders of record as of the record date, which was February 18. I also have the certified list of shareholders, certified by our transfer agent, American Stock Transfer Company, as true and correct as of the record date.
Do we have a quorum?
Yes. The number of shares of stock outstanding and entitled to vote on the record date was 142,557,243. Of this amount, 131,469,819 shares, which represents approximately 92% of the outstanding shares, are represented at this meeting.
Very good. We do have a quorum, and we're now open for business. Rather than having us read the minutes of the last meeting, the chair will entertain a motion to approve them as mailed. Is there a motion?
Moved.
Is there a second?
Second.
Moved and seconded. Without objection, show its adoption. The chair will entertain a motion for the appointment of two individuals to act as inspectors of voting, and their duties will be to decide upon the qualification of voters, to accept the votes, and to count and ascertain the number of shares voted for and against each proposal. Is there a motion?
Yes. Mr. Chairman, that Travis Archer and Jennifer Hayes be appointed inspectors of voting.
Without objection, show that adopted. We have two inspectors. We will now turn to the vote on the nominations of Board of Directors as set forth in the proxy statement. Most of you have already submitted proxies by mail or today as you came in. If you have not turned in your proxy now and you wish to vote, now's the time to vote. Is there anyone who would like to vote, who has not voted? That's good. I'm not exactly sure we know what to do if someone. Other than that, I feel better already. Somebody's going to come want to vote one of these days, and we'll have to figure out what to do. Let's see where we are now. Laurel, the inspectors have filed their oaths of office with the secretary. Do we have the results of voting?
Yes. Each of the 11 nominees for the board of directors has received at least 109,889,438 votes, sufficient in each case for election.
Very good. The new directors for the coming year are myself, Hyatt Brown, Sam Bell, Hugh Brown, Powell Brown, Bradley Currey, Ted Hoepner, Toni Jennings, Tim Main, John Reedman, Chilton Varner, and Wendell Reilly. Let's give them a round of applause. Additionally, we do have the approval and ratification of Deloitte & Touche. Would you read those votes, please?
Yes. That approval received 130,710,150 votes, sufficient for approval.
Very good. They're duly approved. This concludes the business for this meeting. One more thing.
We have two more results of voting, the approval on an advisory basis of the executive compensation of the named executive officers, which received 111,186,095 votes, sufficient for approval, and the approval on an advisory basis of one year as the interval at which an advisory vote on the compensation of the executive officers will be conducted, received 95,270,180 votes, sufficient for approval.
Very good. Thank you. This does conclude the business. I would like to introduce someone who is very important to me and has been very important to the company. She's one of our biggest cheerleaders, and her name is Cici Brown. She's someplace in the audience, my wife. Right over here. Cici. We'll now turn the rest of the meeting over to Powell Brown.
Thank you, Hyatt. I'll now call on Cory Walker for our financial presentation. Cory? What we'd like to do today is look at some slides on the results for the year 2010 and focus really on the revenue buildup and the changes from 2009, because that will tell most of the story. The really important story is how our team of 180 offices around the country are able to take the change in revenue and translate that into a margin improvement. You'll see, in every one of our divisions, that did happen. We'll end up doing a little bit of comparison to other publicly held brokers, just to kind of show you the financial strength of our internal operations in terms of generating cash flow. Lastly, we'll just look at a couple slides for the results for the first quarter of 2011.
Before that, we have a little rev note from our attorneys, a little forward-looking statement. We ended up in years 2010 at a $1.12. That's up from a $1.08 in 2009. It was a 3.7% increase. That's the end result of all the hard work last year. This is a slide of the revenue. You can see, since we were a public company from 1993, all the way through 2008, we grew every year our total revenue. In 2009, was the only time in our years as a public company, really forever, since 1939, that we actually had a drop in our revenues. We went from $977 million down to $967 million. For 2010, we actually increased that back to $5.6 million. We finished 2009 at $967 million.
We increased that by 5.6 % at 50 basis points on the total revenues, that's where we finished 2010. Let's look at what made up that $5.6 million in net increase. We started with acquisitions, added $39.2 million of new revenues that hit the general ledger during 2010. We finished the year, we made acquisitions that created annualized revenues of $71 million. It was just at $39 million hit the general ledger last year. We increased our profit-sharing contingencies and investment in other income by a total of $10.6 million. We did have a little bit of books of business sale, about $1.5 that reduced the total revenue. We had a negative internal growth of $42.7 million, and that was a negative 4.7%. You know that the last four years have been the worst period of time in the U.S.
history for insurance agencies, because the economy has come back so much, all of our clients' exposed units have hurt and have been reduced. Two-thirds of that negative internal growth really came from the backdrop of economy slowing down and the exposure units down, therefore, the total premiums were down on our commission. That was $42.7 million. Even with that, you look at the margins. Our margins from 1994 have gone up to a peak of 2006 of a 38.2%. In the last four years, 2007, 2008, and 2009, the margins have dropped, and they dropped because as the exposure unit dropped, it evaporated so much commission. You could not carve out enough expense and adjust it quick enough, and therefore our margins decreased.
However, during that four-year period, our operations and the team members we have out in the field have constantly worked every year to be a little bit better this year than they were last year. We are much more efficient today than we were four years ago. Even though we lost $42.7 million in negative internal growth last year, you see the margin in 2010 actually went up from 33.7% to 34.6%, and that is a strength of all of our 5,400 people in our organizations working very hard in making their operations very efficient. Where does that show up in terms of our major divisions? We have 4 major divisions. Our largest division is retail, and these are the margins. You can see they've come down from 2007 and 2009.
In 2010, that division ended up moving up from 31.4% to 32%, and that is with $8.3 million less revenue. Again, they're very efficient. They're much more efficient today than they were back in 2007. You look at our program division. Program divisions, the margins have moved up from 44.6% to 46.2% ending 2010, and that was $1.4 million in less total revenues in that division. If you look at our wholesale division, the same story. They've moved up from 26.2% to 29.7%, and that's essentially on flat revenues. Our last division, services, have moved up from 24.8% to 25.5%. That is with a fairly substantial acquisition, Advocator Group, which is about $24 million that came in October of last year. Those margins have moved up very strongly.
The point is that every one of our divisions have increased their margins during the year and because they've become more efficient. Let's take a look at where that compares to other publicly held brokers as a fairly reasonable comparable. Here's our margins at 34.6%. You take all the other publicly held brokers, that's Marsh & McLennan, Gallagher, and Willis. You average all of them, they're at 16% margin. Essentially, what that means from our operations, we've more than double what the average margin is. Of course, what's important about that is how does it impact our cash flow, which we'll look at in a second. Our cash flow, if you take our net income, add back amortization, depreciation, the non-cash stock grant compensation is 6.8%.
We essentially generate $230 million of cash every single year, we're able to take that cash on that and grow our operations. Out of that cash, we do pay our dividends, we do have fixed asset purchases, we do have minimal debt payments. Net free cash flow is $156 million. That's essentially 16.1% of every dollar of revenue that we take into our operations. Once again, how does that compare to other publicly held brokers? We're at 16.1%. The average of all the other publicly held brokers is 6.9%. That's a pretty huge statement because what are we doing with our cash? We are growing our operations with that cash. At 16.1% of cash from every dollar we take in, we can reinvest it.
If you look at all the other publicly held brokers, they have to sell over $2 of revenue just to acquire and build their operations, what we can do with just $1. That's a pretty large leverage. How about growing the business? How does our balance sheet look? This company has got a very strong balance sheet. We have total assets as of year-end of $652 million. Our current liabilities are $470 million. Basically, $180 million of excess current assets that we have after paying off all of our liabilities. Most of the assets that we do have are the intangible assets, goodwill. These are the books of and operations that we've acquired over the years, as well as our fixed assets. We owe only $250 million of debt to the outside world. Almost $973 million of revenues. That's all we owe.
Our only long-term liability is $174 million. This is a little bit of an unusual number, because out of that number, $147 million of that number is what's referred to as deferred income taxes. Essentially, that is money that we could owe the government, or will only owe the government, if in fact, the company is ever liquidated, which will never occur. This is because we are able to deduct our asset purchases for our federal purposes, but for GAAP purposes, we do not amortize the goodwill according to generally accepted accounting principles. It stays up on the balance sheet, and that liability is just stuck there. Essentially, the shareholders' equity is a combination of the $147 million of that out of the $2.4 billion.
At the end of the day, we're a very strong company in terms of owning $2.4 billion of assets that generate cash flows of $156 million, but EBITDA margins of almost $350 million a year. Okay. Out of that, we only owe $250 million. Another measurement in terms of the strength of a balance sheet is how much total debt do you have, dividing that by your total EBITDA margin, which is earnings before interest, taxes, and amortization. Essentially, we have 0.7% ratio, which is the $250 million of debt that we owe. As I mentioned, the EBITDA, okay, which is before interest and taxes and amortization, is nearly $350 million, and that's how we end up with a 0.7 ratio. You look at all the other public health brokers, they average 2.2 times.
They have to work two years and a couple of months in order to just pay off their debt, where we work less than a year to pay off our debt. The important point of that is that gives you an indication of how much borrowing power our company has. Generally, you can see that most banks will loan up to 2-3 times what your EBITDA is. We only have 0.7. The point is, we could borrow nearly any amount of money that we need to make other acquisitions, in addition to the strong cash flow that we have to grow the company. Between the annual cash flow that we have and the earnings and the balance sheet strength and the power of our borrowing, we have a very strong company that will continue to grow every year.
Let's take a quick look at the first quarter results. First quarter results were very good. Our total revenues finished at $262 million at the 3.9% increase. Our operating profits moved up from 35.1%-35.7%. That was a 5.8%. Our pre-tax margin was $76 million. Our earnings per share rounded to $0.32. That's up from the $0.31, which is a 3.2% increase. As I look at where the revenue changes were, we increased it by $9.9 million, which is a 3.9% increase. Here's the breakdown of that. We had acquisition revenues that hit in the first quarter of $19.4 million. We did have a drop in profit-sharing contingencies of about $3.4 million, and we had negative internal growth of $5 million. Okay. Compare that ended up only being a negative internal growth rate of 2.3%.
As you remember, for the whole year last year, we had negative internal growth of $42 million. That was averaging nearly $10 million a quarter. We only lost $5 million this quarter. There's definitely a significant change from the 4.7% annual negative internal growth to negative 2.3%. Your company is in very strong shape, and things are even better after four years of very difficult times. We are more efficient today than we ever have been. Thanks.
Thank you, Cory. I'd like to make a couple remarks, and then we'll turn it open to questions. This year is a significant year for Brown & Brown because we're going to cross the billion-dollar revenue threshold. It's taken us 72 years to get here, and to get to the next goal, which we'll talk about later, it won't take us that long. My goal today is to talk to you a little bit about what we, the senior leadership team, think about in growing Brown & Brown. We like to keep it simple. Three main points. Number one, we focus on the long-term growth of our company. How do we do that? We think about internal growth, and I'll define that in a moment. That's always done through good people.
We have 5,300+ teammates across the country and in London. Nothing happens without good people across the country, and we have a lot of them. Quality, sustainable earnings, quality acquisitions. In our definition, internal growth is defined as any office that has been part of Brown & Brown for more than 12 months. That would be the revenue growth or shrinkage goes into the internal growth number. Cory alluded to last year, our negative internal growth number was 4.7% for the year. Better than the year prior in 2009 incrementally, but still negative. It's not something that we're pleased about as a senior leadership team, but we can tell you that the biggest impact on that is shrinking insurable units. Think payrolls, think sales, think number of insured lives on a health plan.
That said, in our business, we have one organization out of 184 that is counter-cyclical. It is a wonderful business. It's based in Troy, Michigan. It's called Proctor Financial. Proctor Financial is an organization that provides insurance, force-placed insurance on banks and other financial institutions. Why do I bring them up? Let's first look at what Proctor Financial has done since they were part of Brown & Brown. When we acquired them in 2005, their total revenues were $18.6 million. As the economy started to deteriorate, there were more entities, meaning insurers, that were forced onto their insurance plans, and their business grew dramatically. $62 million, to be exact, at its peak. As the economy has started to improve, and we still believe it's fragile, but as it started to improve, the business started to level out and drop slightly.
Why would you say the business dropped slightly? One, some of their clients, financial institutions, got into trouble and were taken over by the FDIC. They go away. One. Two, some of their clients are acquired by larger organizations, so they go away. Three, we can lose business, just like we can in any other segment of our business, through competition. You combine those, and that business, by losing two or three large clients, has come down. Last year, they did about $42 million of core revenue, and at their peak, they did about $50 million or $48 million of core revenues. Why do I bring this up? I bring this up because if you take these results out of our business, it looks a little different in our internal growth numbers.
In 2009, there started to have a divergence, a divergence in the internal growth of our core businesses if you took Proctor Financial out. Up to that point, from 2005 to 2009, it had no material impact, either positively or negatively. It would just be the same internal growth number. Very important. Here's what it looks like without Proctor, starting in the beginning of 2009. One might say, "Wow, that's a choppy chart." Or one might say, in the first quarter of this year, as Cory alluded to, we had a 2.3% negative internal growth. If you take Proctor out, it's 1.1%. The results are the best that they have been since the second quarter of 2007. No one on our team is happy with internal growth that is negative. However, I would tell you that it is incrementally better.
I don't want anybody to leave the room today to say that I can draw a conclusion that since that seems to be going up, that we're going to be positive next quarter. We believe that the economy continues to be fragile, and it's conceivable that in Q2 it could go down as it did in Q2 or Q3 of 2010. I'm not saying it will. I'm saying it's conceivable. We believe that there is an upward trend, although it could go down to go up. It is more positive. This is not correct English. We call it less bad. It is important to understand that we know, and as our lead director, Brad Currey, says to all of us, "You've got to grow the core business." The answer is, we understand, and we're very focused on it.
We want you to kind of understand there's some numbers inside the numbers that this graph gives you a better sense of. That does not mean that we don't like Proctor Financial. Quite the contrary. It's been a great investment. It is a different business than the other businesses that we're in around the country. If you take that out from an internal growth standpoint, this is what it looks like. Having said that, these results don't drive results. Results are a product of high-quality people that are on a team across the country and in London. We understand that people don't work for companies. People work with and for people. We want to have the most high-quality people that we possibly can to drive this company to the next level.
It's an exciting time at Brown & Brown from that standpoint. There are lots of opportunities in a growing operation for individuals who want to step up and be counted to assume more responsibility than they could probably ever anticipate. That is an exciting thing to do when you're growing like we are. Although we are shrinking in the core business slightly, we are growing through acquisition, which we'll talk about in a moment. We also talked about sustainable, quality sustainable earnings. What does that mean? Quality sustainable earnings are buying businesses and investing in our businesses with high-quality people that will not only be great businesses today that will be great businesses two years from now and 10 years from now and 25 years from now.
The reason we think about long term is because we're focused on taking this business to the next level. We're going to talk about what that is in a moment. Sustainable earnings, if you have good people that run a good business, the economy can go up or down, but we know that that business will do well in either situation. In the down times, it might do a little not as well, but it is still a good business, and as the economy comes back, it will do even better. You've heard me talk a little bit about acquisitions. Acquisitions are a big part of our business. It is the complement to internal growth. I don't want anyone to ever think anything other than this statement about Brown & Brown. We are operators of businesses that happen to do lots of acquisitions.
That is a very important distinction, because there are organizations that are roll-ups or have short-term nature to the investment horizon. If you have a roll-up strategy or something of that nature, that, in our mind, implies short term. It might imply private equity, it might not, but it also implies a flip at some point in the future. That's not us. We buy businesses to operate them with high-quality people. We don't buy businesses in the intent to flip them or the organization to be flipped. Very important distinction. This is a busy slide. I don't know if those on the ends can see it. Basically, what I'd like to start with is we've done about 262 transactions since 2003.
That number can be a little misleading because when you buy an agency, and that agency might be in Denver, Colorado, just as an example, there could be three legal entities that we acquire, and those three would be counted in the number of transactions. If you look in the middle column, and it says the number of operations, that's the number of physical entities, if you want to call it that, whether it's in Denver, it's a standalone or a roll into one of our operations that we've acquired. We've technically really acquired 193 since 2003. If you look on that slide, there's one year that jumps out at me, which is 2009. We did $26,500,000 of acquired annualized revenues. These are not the revenues that are booked in that calendar year in our financials. That's the amount acquired.
You'd say, "Well, why did that happen?" The answer is that the economy slowed down, fewer agencies were sold, and the entire industry did fewer transactions that year by a number of probably 40%, not only on a revenue basis, but on a number of transaction basis. If you exclude that year, if you look at those numbers, we typically do some number between $45 million-$125 million of annualized acquisitions. I typically say the average is typically more between 60 and 120. We don't give guidance to Wall Street. They always want it, but we don't. The reason I bring that up is because it's all about cultural fit. It's not about geography. It's about good people that fit culturally with Brown & Brown. You might say, what is cultural fit?
I think cultural fit embodies a lot of things, but there are three really important ones. Number one, do they do what's in the best interest of their customer each and every time? Number two, do they treat their teammates in a fashion that we would want to be treated? Three, do they treat their insurance company partners in a fashion that is above board, where they tell them the truth, and in a fashion that we want to do business in a way that we do business? If the answer to any of those three is no, we have a problem. We spend lots of time talking to agencies all over the country in no geographic spread in particular. There are states that we don't currently operate in, for example, Alabama, Mississippi, Utah, Wyoming, just to name several.
We don't need to go and plant a flag in one of those states to say we are in that state. We would like to be in those states with the right people. Acquisitions, coupled with the internal growth, will take our company to the next goal. You might say, what is that? This year at our annual sales meeting in March in Orlando, we unveiled our next goal. As we crossed the billion-dollar threshold this year, we have talked about going to $2 billion, which is here on my right, your left. This commitment board is filled with signatures of teammates who are at the annual shareholders meeting who are committed to help drive this company to the next level.
We don't have a stated timeframe, but this goal will be achieved through, one, growing our business organically and supplemented by doing high-quality acquisitions, which on a roughly billion-dollar base, will be lumpy. Some years we'll do more than other years. The point is we will continue to do what is in the best interest, we believe. The senior leadership takes this responsibility very seriously to invest the assets of your company wisely to grow the business not only this year, but for years to come. Before I wrap up and take questions, I want to share something with you. I read a book recently about Vince Lombardi, and I didn't know much about Coach Lombardi at the time.
It talks about in his first season as the Green Bay Packers, that he's sitting in a meeting with the six quarterbacks, and they're going to pick three. They got to cut three. They're going to pick three. In this meeting in August in Green Bay, he said, "I will demand perfection, knowing that it cannot ultimately be achieved. Through that pursuit, we will attain excellence." We at Brown & Brown are achieving, or trying to achieve excellence to bring your company to $2 billion. With that said, I will open up to any questions that anybody has. If you'd like to either stand up or go to the microphone, it will be broadcast over the web. If you don't have any, I could come up with several.
I would call on anybody on any questions that you have about your company that we are trying to grow to the next level. Well, I'm going to pose a question and see if anyone thinks of one. People have asked us, what is the impact of the tragedy in Japan on the insurance market in the U.S., and specifically Brown & Brown? We would say, broadly speaking, the impact would be nominal. Broadly speaking. Meaning, if you go to Denver or Toledo or Syracuse or Portland, you're not going to probably see insurance rates rise with national insurance carriers. What we have said with certainty is global reinsurance rates for property and in marine will go up. What does that mean in Florida? What does that mean in Mississippi and Louisiana? What does that mean in Texas? That could be pressure on rates.
That's a code word for flattening, meaning not going down as much, or potentially rate increases, slight, based on what we know now. I would say this, that's not the biggest kind of wrench in this interesting evolution right now in the market. There isn't a catastrophic modeling program out there that anticipates the impact of large natural disasters. The technical name is called RMS 11. That anticipates what the ultimate cost would be if a large hurricane came across Florida or went into Houston or went into New Orleans again. What's happening with this new model is it's not impacting the estimate of the probable maximum loss on the coast. It's impacting the estimates inland a mile and 3 miles and 10 miles inland.
When you take this modeling program, which impacts how insurance companies potentially buy their reinsurance, couple that with reinsurance rates that are supposedly going up, one might draw the conclusion that there would be continued pressure on rates in coastal communities. We have seen a limited bit of that so far. I think ultimately there will be more to come as we get into the summer and the early fall. Long-winded answer is saying no broadly, yes, potentially in coastal areas. Any other questions or comments for the good of the order? Yes, sir.
William Johnson. I have two questions. What is the impact of Brown & Brown and quantify from the implementation of this procedure now combined with other insurance generators?
Okay. Did you say you had two questions?
Yes.
Okay. I want to make sure. The question, I don't know if you heard it was, what is the impact of healthcare reform on Brown & Brown's business? A very good question. Inside of our business, just by way of background, on the $973.5 million of revenue last year, roughly 60% of that business is retail. That's where we come out to see you, the owner of the business, to talk to you about your insurance as the owner of a nursing home, contractor, wholesale beer distributor, whatever it is that you own. That's 60% of our business. Inside that segment, $172 million of that revenue is called employee benefits. Okay? In that, two-thirds of that amount, roughly $120 million, is health insurance. Okay? In that health insurance number, slightly more than half would be defined as large group.
Large group defined in the healthcare world is over 50 insured lives. Less than half is under 50 insured lives. Over 50 lives is more than 50%, roughly. That's the background. Countrywide, as it relates to health insurance reform as we know it right now, I want to make a couple observations and then exactly answer your question as posed. Healthcare reform, as you know, has not done anything to address the cost of health insurance as it relates to the delivery mechanism, whether it's the cost of the doctor, the hospital, or the insurance charge to them for their malpractice coverage. Hasn't addressed any of that. It's focused on how do you ensure that everyone has insurance up front. Has no cost containment on rates per se, loosely speaking. What are we seeing in our business? Well, what it has done is several things.
Health insurance, we believe we can say with certainty, is complex, it's utilized, and it's expensive. If you take those three things in mind, we believe it's very unlikely that the need for an agent or broker or health insurance salesperson goes away. We think that's very unlikely. Now, there is a discussion about some insurance companies, one or two national carriers in particular, that are saying to us, on your groups over 100 insured lives, you have to get a signed document from the client of the compensation you're receiving. Let's call that a fee as opposed to a commission. That does not mean it's a negative. It just means we're going to get paid a little differently by certain insurance companies. Number one. Number two, there's discussion about exchanges. Exchanges technically have to be implemented in states by 2014.
Currently, there's really only one state that has an exchange. It's in Massachusetts. In Massachusetts, the exchange has not worked very well, both financially and/or on the delivery of the healthcare system in and of itself. That said, we believe that the healthcare reform has created a lot of concern on behalf of our clients and our prospects. It's created a lot of opportunities for us to go and see our prospects and talk to them about what's going to happen and help position them to manage their cost of risk going forward as it relates to their health insurance costs. Finally, what I would say is we believe that it will get more confusing. We believe that the current legislation is not the end there, which will be the ultimate one that will be enforced for a long time. We think it will be changed, not repealed.
That's modified slightly. We think that we could be paid differently, meaning on fees as opposed to commissions on certain segments of our business. Finally, there are certain areas of our business that we might be paid a little less on the health insurance. That does not mean that we might not be paid differently on another line of coverage we're not being now, but we don't know. So I know I've just hit you with a lot of information, which is basically saying we don't know the ultimate outcome. We think it's a great business. We have a number of wonderful healthcare professionals on our team at Brown & Brown, and we believe that it is still a great business and we're investing in it, but we're watching it cautiously. You also had another question.
The other question I was going to ask is, if you wave us ahead of it, absorb it, I should say the word, without saying this means any of the factual allegations, if someone were to come up and say, "So we will be the state or in the state that is being filed against." Do you ensure that you're not going to get impacted with their main business? To the extent that you already said-
Sure. Right. I'll take that. Let me address. First off, I'd like to say broadly that we have a position in our company that we don't comment on ongoing litigation, which I know that you'll appreciate. Having said that, I'd like to make sure that everybody understands that as teammates of Brown & Brown, we all have agreements that have restrictive covenants in those agreements. We expect teammates to abide by those restrictive covenants. If those covenants are violated, we pursue them to the full extent of the law. That's a very broad statement based on just a random question.
I want everybody to understand that we are very focused on growing our business, and when we do have to engage the services of our fine legal counsel, that we feel very comfortable in what they will be doing in enforcing our contracts as it relates to our restrictive covenants.
Please take the message that you're assured and are named defendant in that lawsuit.
Yes.
Whatever problems could arise from that particular situation will be addressed by
Yes, sir.
That's my question.
Thank you very much. Yes, sir.
Maybe Sam might have to help you on this one. Where are we at? The legislators are still up there with this concern. Where are we at with Citizens and-
Yeah, let's talk about Citizens. Everybody, what's the deal with Citizens, is the question, and is it brighter, dimmer, no impact? Citizens, as we know, is effectively an organization which was intended to address the needs of homeowners in the state of Florida that couldn't buy insurance from other markets, the market of last resort. That, in turn, grew and expanded under a little sliver in the legislation that said commercial residential, that allowed them to write condominiums, apartments, and certain assisted living facilities. Broadly stated, the ability to pay in the event of a large loss versus the potential exposure inside of Citizens is a huge gulf. Our Governor has been making statements about making changes in Citizens. Before I turn it over to our esteemed Director, I'd just like to make a couple observations. One, Citizens rates went up last year roughly 10%.
The stated goal is to allow those rates to float up until and at which point they are deemed adequate. We have been told and led to believe that they are about 50% too low. That's the first part. The second thing is, as it relates to Governor Scott has recently come out and said he would like to eliminate Citizens. I don't know what his definition of eliminate means. In my mind, that means it would go away. However, some people have different definitions. Eliminate might mean make it go back to what it was originally intended to be, which would be the market of last resort, which would depopulate a large segment of Citizens. It is, as you know, a very sticky wicket in terms of a political issue.
However, he's raised an issue, which is a business issue, I believe, as opposed to a public policy issue. The business issue that he's driving is in the event of a $40 billion storm ripping across Florida somewhere, meaning causing $40 billion of damage, that entity does not have the financial wherewithal to respond in any way, shape, or form, which in turn would affect all the fine citizens in this room in the state of Florida, because we would all be assessed on our insurance policies that we buy for many years to come. That's how I would address it. Sam, is there something that you'd like to say relative to?
Well, I would say, first of all, that no one is safe as long as the legislature is in session. They're still in session. There has been legislation that's been considered in Tallahassee this year that would have allowed Citizens to raise their rates to something close to actuarial levels, which they're not now. There's been, in those bills, consideration of prohibiting Citizens from selling insurance to coastal properties like the one we're in. That legislation is still pending, and I don't know what the outcome will be. I thought that it would move more quickly than it has, but it's still there, and they're still in session. Two more weeks, and then I think there will be, I'm almost certain, a special session dealing with maybe that issue.
Another big one that has some indirect impact on us is Medicaid reform, which would put a statewide capitated system in place for Medicaid. Who knows? We got two weeks to find out.
I'd like to thank everyone for coming this morning. Thank you for the confidence you place in your company and ours. It's a pleasure to work at Brown & Brown. We hope you have a wonderful day.