Brown & Brown Inc (BRO) 2002 Q1 法說會逐字稿

My name is Laura, and I will be your conference today.

At this time, I would like to welcome everyone to the Brown & Brown, first quarter 2002 earnings release conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then one, on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key.

Before we proceed, we would like to inform you that certain information that will be discussed, during this call, including answers given in response to your questions, may relate to future results and events, or otherwise be forward-looking in nature, and reflect our current views, with respect to future events, including financial performance. And, that such statements are intended to fall within the Safe Harbor provisions of the security laws.

Actual results, or events in the future, are subject to a number of risks and uncertainties, and may differ materially from those currently anticipated, or desired, or referenced in any forward-looking statements made, as a result of a number of factors, including those risks and uncertainties that may have been, or will be identified from time to time, in the Company's report, filed with the Securities & Exchange Commission.

Additional discussion of these and other factors, affecting the Company's business and prospects, are contained in the Company's filings with the Securities & Exchange Commission.

Listeners are cautioned that any such forward-looking statements are not guarantees of future performance, and that actual results and events may differ from those indicated in this call. Such differences may be material.

Thank you.

I would now like to introduce Mr. Hyatt Brown, Chairman, President and CEO of Brown & Brown Insurance. Mr. Brown, you may begin your conference.

Thanks, Laura, and good morning to everyone.

I am sure that by now you've read the press release, and you recognize that we did have a very good first quarter. As a matter of fact, I think that it may have been, from a historical , the strongest first quarter in our history.

Our internal growth rate was up from 11.6, to about thirteen-and-a-half percent, and we were strong across all of our operating sectors. The market continues to be firming. I'll talk a lot about that, and about individual offices and individual divisions, of our Company, after Cory gives you a rundown on the numbers.

So, Cory, it's all yours.

OK.

As I'd said, we did have a terrific first quarter, in year 2002. Our earnings per share were 31 cents, a nice 55 percent, over the 20 cents we earned in the first quarter of 2001. These increased earnings really were the result of strong revenue growth, complimented by a slower growth in our expenses.

Well, lets first take a look at what our revenues were. And, our total revenues were up 24.2 percent, to $111 million, of which $110.8 million was from commissions and fees.

In the press release we gave is a table -- the last page depicts the commissions and fee's total growth rate, versus what the internal growth rate is. And, that's exclusive of the contingency revenue sharing program that we get from the carriers, and revenues from divestitures of businesses that were either, you know, sold or disposed of. We refer to this as core commissions and fees.

So, the core commissions and fees, for the first quarter of 2001, last year, was $77.2 million. And, it grew a total of 28.6 percent, to the core revenues -- commissions and fees -- in the first quarter of this year, of $99.4 million.

Now, excluded from the 2001 core commissions and fees, we're approximately a million one forty nine of revenue, relating to divestitures, and these related to businesses that we sold, since the first quarter. And, since the revenues -- since these revenues are not reflected into 2002 first-quarter numbers, we pulled them out of the 2001 balances. These relate to the used auto dealer program, a farm program out of Ocala, and the non-standard auto business of our Tucson office, and the equipment dealer program, out of Phoenix, which we sold during the year.

Relating to the 2002 core commission's column, it excludes approximately $57,000 worth of revenues, related to the Tucson office that got booked in January that was pulled out. So, that was to keep it from an apples-and-apples basis. And, out of both of those columns we exclude contingencies, which in 2001 were approximately nine million one fifty-one, and the current year was about $9.9 million. So, that gives pretty much the reconciliation, on the base.

One unique thing that we did, to make a more comparative same-store sales comparison, is in the first quarter of 2002, out of the Florida retail group, there is a million four hundred and seventy-five thousand dollars worth of commissions that were paid, from a Florida-based worker's comp carrier, that changed its agency commission payment policy, from paying agents on a monthly basis, to paying us on an up-front annual basis, as each policy renewals.

We, as well as the other agents, certainly like receiving that cash up front, and love companies that allow us to earn more investment income. However, for the purpose of calculating internal growth, we didn't want this temporary acceleration and timing of the cash and revenues, to be misconstrued as increases in premium rates, or a new business. So, therefore we removed that million one forty-seven, out of that Florida retail numbers, for this quarter.

Now, in future quarters, to make the comparison and internal growth reasonable, we'll probably add back about a half-a-million dollars each, of the next three quarters, you know, to show a true internal growth.

So, with that reconciliation of the total revenue -- the core commissions and fees -- lets look at the total. The total growth ended up being 28.6 percent, and that amounted to $22.1 million. Of that $22.1 million, 11.6 million of that related to the revenues of businesses that we acquired, since the first quarter of last year. The remaining $10.5 million came from organic-generated growth, which reflects that 13.5-percent internal growth rate, which as Hyatt mentioned, was up from the 11.6-percent internal growth rate, we had in the fourth quarter of 2001.

Sixty percent of that internal growth dollars came from our retail segment, where the increase -- you know, premium-pricing environment helped, as well as the net new business that we did have in the first quarter, compared to the -- not a hit that we had, in the previous quarter of last year.

National programs followed second, with $2 million of total internal growth, with over a third of that coming from the Professional Programs Division that, you know, really reflects a long-awaited increase in some of the professional malpractice insurance rates, primarily from the lawyers and the medical division.

Our special division, which consists of our special niche programs, covering condominiums, through our FIU subsidiary, and the manufacturing wholesale programs from our commercial programs division, and two new 2001 acquisitions, dealing with partial insurance, through our partial insurance plan, in St. Louis, Missouri, and our special services programs, through our financial services subsidiary, in Pennsylvania.

That group, as a total, had a net internal growth, after taking out the acquisition revenues, from those previous two that I mentioned, was about $1.2 million. And, that really was almost exclusively relating to the condominium program at FIU.

If you look at all four segments of our business -- retail -- national programs -- services and brokerage -- this is really the first time I can remember that all four of our segments have double-digit growth rates, you know, ranging from 10 percent on the total retail, to over 81 percent on our brokerage division.

Now, Hyatt's going to talk about each of those divisions, but as you can see from that schedule, let me just quickly summarize what the net internal growth rates were.

On Florida retail it was 11.2 percent. National retail was 7.9 percent -- western retail was 11.1 percent -- professional program at 21 percent -- special programs at 24.6 percent -- and the brokerage division, as I'd mentioned, a very impressive 81.9 percent. And, our third-party administrative services segment was 10.2 percent.

Just looking at some of the other revenues that we had, on our investment income, it was down to $355,000, from a million two, the previous year. And, that solely because of the less cash that we had to invest, in the first quarter of this year, because of all the acquisitions we did during 2001, and that was obviously until the mid March, when we got our cash in from our follow-on stock offering, and now we have a little bit more money to invest.

The other revenue line item shows a loss of $146,000. That was primarily relating to a loss on that business that we sold in Tucson, relating to the non-standard auto program.

Turning to expenses -- that while our total revenues grew by 24.2 percent, our total expenses only increased by 14.3 percent, thereby drove our margins on income, before income taxes and interest, to 30.4 percent.

Our largest expense category is the employer compensation and benefit line, which dropped to 49.9 percent of revenues, from 52.4 percent in the first quarter of 2001 -- the 2001-quarter. This improvement really reflects the rapid integration of the 26 acquisitions that we completed in 2001, into the Brown & Brown system. And, really this is the first full quarter that all these acquisitions operated under our system, without the previous pooling entities' effect, of the time period, when they weren't in our system, which affected the numbers in 2001.

So, the 49.9 percent is relatively what our expected percentage should go, on a go-forward basis, excluding what the impact of the contingence on that is. So, we expected it to be around 50 to 50.5 percent, on a go-forward basis. And, the 49.9 percent is a according to our game plan.

Now, similar to the compensation line item, our other line item -- line item -- is other operating expenses. And, that only increased by one and a half million dollars, or 11 percent, from our 2001 gap numbers. This smaller increase is reflective of the operational efficiencies that are occurring from the integration of our previous acquisitions, as well as our continued , where we continue to improve on our expenses, even in the old Brown & Brown offices.

Looking at the amortization expense, it actually declined a $153,000. But, keep in mind that goodwill is no longer being amortized, and in the 2001 numbers there is $825,000 of expense, in that three million four of amortization, in the first quarter 2001, that has not been expense in the current year.

Our interest expense is lower by about $513,000, and that's due to the lower interest rate, as well as the lower debt balance, from what we had originally, from the $90-million loan, the first quarter of last year.

As you may recall, we did enter into an interest-rate swap in January of 2002 that effectively locked us into a fixed rate, of 4.53, before our credit-risk spread, which generally runs about 50-bases points. This rate obviously is lower than the six -- the six-and-a-half percent interest rate that we were paying during the first quarter of 2001.

So, with all that tied in, our net income, for the first quarter, after income tax expense of 38.5 percent, ended up being $20,162,000, up from the 12.9-million dollars in 2001, hence that nice 56.6-percent increase.

One last item that I really want to talk about is our earnings, in terms of our cash flow. Our non-cash expenses of amortization, depreciation and non-cash stock-grant compensation, for the first quarter of 2002, was approximately $5.8 million, which equates to about 8.8 cents per share. This 8.8 cents per share of additional cash flow, when added to our normal gap earnings of 31 cents, gives us almost 40 cents of cash flow earnings per share.

I think that the cash flow earnings per share is becoming a more important metric, you know, when comparing the results of -- our results with other publicly held brokers, given the potential, you know, variations that we may see, relating to the accounting and the allocation of the acquisition and goodwill. So, I just want to point that out -- that's its 40 cents per share, for the first quarter of this year.

So, with that, I'll turn it back over to Hyatt.

OK. Thanks, Cory, good report.

To give you all a -- sort of a potpourri of what's happening out in , so to speak, the retail business continues to be about the same as it was in the third and fourth quarter of last year, which means that we're saying eight to 15-percent rate increases, across what I would call vanilla business.

When you look in individual states it varies by line, and it varies by company, just as it did in previous quarters. Now, when you get into the more exotic lines, then we're talking about substantial increases. And, that would include risks, certain worker's comp risks, and then these price increases would be 40 to maybe 75 or 100 percent. In some cases, people are trying to scale back on coverages, but that, so far, hasn't been particularly -- we have not been impacted by a reduction in coverage.

Professional programs is growing. Now, the only area that's still flattish is dental. And, dental was, you know, right on the cuff of growing, for the quarter. We are effective -- I believe it is six-one, maybe five-one -- we're increasing rates -- rate increase on the dental plan, of about 17 percent, across the board. And, that means in some states it's more, obviously in some states it's less.

Special programs doing well. A brokerage is going gangbusters, and shows no signs of reducing that increase and surge. One of the things that is happening -- of course, in property area -- is that there seems to be some constraint on capacity. And, the capacity really is Florida and East Coast wind and quake in California. TTA Services to continues to motor along, according to the game plan.

Where we continue to be very pleased with our margin expansion. The 30.4-percent pretax margin that Cory talked about, is -- you back and look at historic numbers. The historic number, for the first quarter of last year, was 26.7-percent pretax. Now, you have to add to that number about one-and-a-half percent, for the fact that we're not amortizing goodwill, so you get to 28.2. So, the real difference is the difference between 30.4 and 28.2, so that's 2.2 percent, about an eight-percent increase in margin. We're very pleased with that.

We think that that's going to continue. If you look -- and we always are very focused on looking at what we call old core B&B. And, that means offices that have been our system for more than two years. And, so if we focus on operating profit, which is a very clean way of looking at comparison, the old Brown & Brown core operating profit, for last year, first quarter, was 25 percent, and that's without contingents, and it has nothing to do with amortization.

The core operating profit, for the first quarter of this year, was 30 percent. So, that's obviously a substantial increase -- about a 20-percent increase. We're very pleased with that.

The merger and acquisition activity continues to go along according to our game plan, which is three and a cloud of dust. We have done, through the first of April, about $14 million annualized commissions. A couple of those were $6 million each, and then the other four or five were smaller , which we like quite a bit.

We have a very full pipeline. There is some creaking and groaning out among some of the retail people that we're looking at, because of either A, a constriction of their market, or B, a market that they have a lot of business with that's all of a sudden got a B -- and less than A minus rating, like Legion, for instance, and like , for another instance.

So, there's some stress out there that wasn't there, you know, 90 -- 120 days ago. So, we continue to grind along, and we're very optimistic about a number of very good opportunities for bringing new high-quality people into our organization.

I guess the question that might be lingering around, in the minds of some of the folks on the conference call, is that in as much as we've had a better than expected first quarter, what does that mean for the year? Well, it means that we might do a little better for the year. One quarter does not a year make.

I think that the analysts are expecting us to make about a dollar and fifteen cents annually. And, you know, that's probably a little bit low, but we're not being real aggressive at the moment, and the reason is because we're naturally conservative.

But, the second reason is, is that the fourth quarter of last year was a little more robust than we'd expected, and so we don't know whether that was aberrational, or whether that's, you know, a continuance. We don't know of anything that would force the quarter down, or preclude it from being a good quarter, but we just like to be a little on the conservative side.

So, all in all, the summation is this -- business as usual -- three (R's) in a cloud of dust item -- no change in the game plan -- and we're moving on.

So, now, Laura would like to open the floor for questions from anyone.

At this time, I would like to remind everyone, in order to ask a question please press the star, then one, on your telephone keypad. If you are using a speakerphone, please pick up the handset before asking your question. One moment while we compile the queue.

Your first question comes from the line of , from J.P. Morgan.

Good morning Hyatt and Cory.

Hi, Hugh.

Hi, Hugh.

How are you?

Good.

.

Good. Hey, quick couple of questions -- just things I wanted to hit on.

The contingents were a lot stronger than I thought they were going to be, in the quarter, on the revenue side. And, can you talk to that a little bit? Is that just the combination of the M&A that's comes in? But, what's happening in the contingent world, in general? That's my first question.

Well, I think they were up about eight or nine percent, Hugh, which is very nice. We're very pleased with that.

We have gotten some contingents that we didn't expect, and we have a chunk sort of lingering out there that we're kind of trying to figure out, at the moment. You know, one of the things that we have to do, very sagaciously, is check the calculations. And, the calculations are not simple to check, because they -- one of the components has to do with the reserving of the various companies. So ...

Right. That's why I'm surprised they were up so much.

Well, you know, our business has traditionally been very profitable. And the vanilla business continues to be profitable. So, I'm really not too surprised about it. I'm pleased, but you know, eight percent isn't that much.

I know what you're thinking is -- they've had all these bad loss ratios, therefore contingents should be down. And, that's not what we're seeing, as regards to Brown & Brown.

I think you're deviating from the peer group there, which is good.

Yeah, well, Hugh, you know, the other thing is, ours is based on, you know, loss ratios on our book of business, and since didn't have, you know, the wind blow down here, in hurricane form, you know that helped out quite a bit.

So, you know, last year we had about $17 million of total contingents. And, as we had mentioned on our road show that after that we still feel comfortable that we ought to be about that same level. warren: OK.

.

There is one other factor, though, Hugh, and it's this -- is that none of our contingent contracts today, or in the past, have been based on rolling books of business, meaning that you're going to get contingent if you roll a book of business, and then once you roll the book of business you don't get contingent, or you don't get nearly as much.

So, ours have been pure contingents, based on loss ratios, not based on book roll.

OK. OK. Cory, in the other income line, just the adjustment that we saw there, that the -- the loss of 146 ...

Right.

... what is that?

That, Hugh -- primarily is the loss on a sale of a business in Tucson that -- the non-standard auto business that, you know, we probably shouldn't have gotten into.

OK.

So, whatever we sold it for, less the -- you know the goodwill and stuff that we had on the books there -- that had a loss of 141.

OK. So, that's more of an extraordinary event, not just an ongoing kind of things .

No, that's right. Yeah, that was a -- that line item really captures either gains on sales of book to businesses or, you know, a sale of a fixed asset -- some unusual item like that.

Right. So, actually we're thinking about putting that into the category of education, but we wouldn't think you all would accept that.

All right. Last question for you Cory. On the -- just wanted to see, do you have a couple of the balance sheet numbers grab?

Yeah, I do. Total assets will be right at $692 million. Our total debt will be $90 million two twenty-two.

Ninety -- so you paid quite a bit down here in the quarter?

Right. Right. Exactly.

And the intangible?

Our intangible line is 266 million.

OK.

And, our total stockholder's equity is now $345 million ...

OK.

... which kind of helped on our following offering, or the 150.

OK. Well, I'm going to let other people jump in. You know, great quarter guys, and it's a -- you know, I think everything that you talked about on the road you're more than delivering on, so this is phenomenal. Thanks a lot.

Thank you.

You next question comes from the line of , of Legg Mason.

Yes, good morning gentlemen. Congratulations on a good quarter.

I had three quick questions. The first was on the expense control side of it, you had very good control in the quarter. Do you think you can maintain that going forward, and if so sort of what's the target?

And, related to that, have you noticed a change in the compensation that you have to pass along to your producers? And, then the third question is whether there's been any change in the acquisition premiums that you're seeing out in the markets?

OK. Well, no change in acquisition premiums.

OK.

There's no change in what we're paying producers. And, we expect the expenses to continue to be at this level, or lower, because our expense control is at the profit center manager's pocketbook level. And, so each dollar of savings that a local profit center is able to accrue, eight cents goes into the pot, for the profit center managers. So, that's a fairly good kind of a stimulus.

OK. Thank you very much.

You next question comes from the lines of , of Asset Management.

Hi. Good morning.

Hi, .

Hi, Hyatt.

I have just two questions, clarifying what you said. But, first is how much -- how many acquisitions were done in the quarter and how much revenue?

Seven acquisitions, and approximately 14 million. And, that's an annualized number, now, and most of that was done on 4/1.

Yeah. Well, I wanted to ask you what -- where does , and , and all that fit in?

OK, those are four ones.

OK. So, is that in the seven million, or not?

That's in the 14 million.

Fourteen million -- OK.

Yes, that's correct -- seven acquisitions -- fourteen million.

OK, great. I got that. OK.

And, Hyatt, I was a little -- I understand you're saying the margins probably going to go up. But, could you just kind of clarify that? You did the comparison for first quarter, this year. Last year I guess pretax is up about two percent.

Yep.

And, do you expect that kind of gain for the rest of the year, or ...

Well, we're expecting our pretax, for the year, to be between 28 and 30 percent.

OK.

And, so it would depend -- if a large acquisition comes in, then that kind of will -- that will affect it.

Sure.

It won't affect all of Brown & Brown, but it'll affect the overall numbers.

Sure.

So, what we're -- we feel that we are not close to the upper limits of our ability to hit a pretax number. And, so -- but, it is not something that happens overnight. It's every quarter -- every quarter -- every quarter -- every quarter. So, the 30-percent pretax that would be the upper limit of this coming year is not an upper limit.

Right -- forever -- right, I understand. OK. Thank you very much.

OK, .

Your next question comes from the line of , of Incorporated.

Hi, good morning, and congrats on the quarter.

Thanks, .

Hyatt, you said that expenses are going lower. I'm wondering if you mean on absolute basis, or is it percentage of revenue?

Percentage of revenue.

So, thirteen four is the high?

Well, I'm not looking at the same number you are.

OK. Are you looking at the -- are you actually contingence?

Well, no. Well, , I think the numbers that he was just throwing out was -- included the contingent numbers ...

Yeah.

... as reported in the first quarters, of both '01 and '02.

Right.

OK.

So, you know, for instance in -- on the numbers that are in the historical on the gap financial statements -- on the income statement you're looking at -- total expenses ended up being about 75.5 percent of total revenues. But, that -- you know, that has all the pooled number in there.

And, what Hyatt was referring to is the historical numbers, if you actually go back to our first quarter released last year, total expenses were only 73.3 percent of total revenues. And, the reason why there's that slight differential is because those poolings -- you know, they had more expenses normally, than the percentage of revenue that we had.

And, so that's why, when he said historical, he was looking at 73.3 on a historical basis. Does that -- is that what you we're asking?

So, so the total expenses being you said the 75% number?

Right and the current year it dropped from 75.7% on a restated pooled basis to what the current quarter shows as 59.6%.

O.K., so that that's the high.

Well, yeah I mean that should be a normal run basis somewhere in that number. Now, that is you know the first quarter usually has the most contingencies. So when you have the contingencies in there those expenses or percentages of revenues drop slightly as percentage. But you know, but we're in the ballpark.

But the first quarter , expenses in the first quarter are really the most , this current year first quarter is really the most reflective of what our normal cost structure is. Because you don't have anymore poolings that kind of mess it up and pretty much all the twenty-six acquisitions we've made are fully integrated.

And the 1.5 million was that for the worker's comp was that for calendar year of '02?

Yeah, yeah what that is this. The company is a Florida based company and they have been paying in the past to worker's comp commission on a monthly basis and what they did was they just decided to annualize them so in February and March we got checks for the what would be the annual commission for those accounts January February and March. And normally we would have gotten only the monthly checks you see.

Got it.

So that's what that is.

I you said there's been no changes in pricing in terms of the M&A environment.

Right.

Have you seen any changes at all in terms of number of bidders or size of deals if you look verses the end of last year?

I really don't think so so I mean there may be a little more stress in of agencies that are in the one to, let's say, five or six or seven million dollars in revenue. In from the state where they are, but there may be a little more stress there but it's not there's no big cascade that's coming at us.

Are there other top twenty brokers out there that you guys are looking at or top thirty?

Don't know that I could answer that question.

O.K. And I saw that brokerage was up 82%.

Right.

Provide some color there please.

Yeah. Yeah we wish we had a lot more brokerage that brokerage, Nick and that one of the reasons that we were so interested in the and we have some other things under consideration in that area. But what's happening is that the flow of business away from the standard carriers when a standard carrier an account then there is generally no other standard carrier that will pick it up and it's flowing over into the E&S and for instance contractors are being buffeted very, very substantially in the are of general liability because of the construction defects problems.

And so all of that, well I shouldn't say a huge amount of that is going into the E&S business and we're now even having some difficulty in finding enough capacity in some states on contractors on E&S business, but its contractors, its umbrellas, its D&O, its E&O, its habitational property, its wind exposed property and so it's really really just pouring in that those increases have to do with a shift in the flow of business away from, part of those increases, from the national company.

But, Sir if you had to isolate the actual rate increase there what do you think that that would get ?

If I had and so what you're saying is if you'd had a standard company and the rate was a dollar and it switched over to the non-standard market not admitted market what would the rate be and I'd say it's a dollar and a half.

O.K. Great. Thank you. Congratulations on the quarter.

Thanks, Nick.

You're next question from the line of Adam of Cochran .

Good morning everyone.

How are you?

Good. You had mentioned the impact of both and . is obviously becoming a big issue in the market. Do you think we're at the early stage of the impact on your markets from particularly?

Well, we hadn't had much business with Legion got a little here a little there. Some buses and a few black cars and things like that, but not very much so, but we are seeing people who have substantial books of business with Legion. And so I don't know exactly what all that means.

I'd be hesitant to even to make a suggestion, Adam. As regards to we do have some business. Some of it we moved very quickly and the rest we're in the process of moving.

situation isn't the dire straits that Legion is in. has a pretty solid parent so that's kind of not the same situation.

Thank you.

Your next question comes from the line of Nick of Sandler .

Good morning. Just two questions. The non-cash stock in the quarter would that be the run do you expect for the full year ?

And second, the insurance unit that you had started the last year, where is that being booked in?

O.K. You want to answer that for us?

Yes, well on the, Nick, on the non-cash compensation stock the seven seventy-seven is a reasonable quarterly run rate. We should be at run that would run out to about 3.1 million dollars for the whole year and that's reasonable, but keep in mind that what we've got is at we have one level left of our the way it works when our stock hit the average of thirty-five dollars a share we're through with the most recent serious of grants.

At that point in time we will probably re-load all of our producers and leaders in the organization with a new set of grants. That has not been contemplated you know, in there because what happens is that we expense that as each hits the stock price goes up twenty percent.

So, when we do re-load if we hit the thirty-five dollars, you'll see this number increase in the second half of the year. O.K.?

O.K.

So, for right now until we hit, until we re-load that is a good number for the rest of the four quarters.

O.K. where's the brokerage from?

And the brokerage is all up in commissions and fees.

No, I'm talking about the re-insurance brokerage. Where do you putting that? Where does that fall?

Right.

Where does it fall in...

Oh, as a segment. That is in the brokerage segment.

Great.

O.K.?

O.K. Thank you.

O.K.

Your next question comes from the line of David Lewis of Sun Trust.

Good morning. Congratulations on a fabulous quarter.

Thanks, David.

Couple of things most questions have been asked, but if you take the 13.5 percent of revenue internal revenue group we have in a quarter. How would you "guess-timate" you'd break that down between new business and pricing impact? Is it you know eight, nine percent for pricing for new business?

Because I know you've been able to pick up some of the crumbs from some of the larger players that haven't been as efficient out there in the renewal process.

Yeah we have and but I don't know the answer to your question.

We just don't, our, we're just not sophisticated enough to figure that out.

Can you guess maybe on a net basis? You're seeing four five percent new business growth?

I think it's probably a little more than that. Our top gun, now this measures retail and it is a major brokerage, but we're not sure that we got the brokerage exactly nailed the way we want it. But, the top gun numbers show that we are writing more new business relatively speaking -- relative to the size of the company, than ever before.

So, that's not only in terms of commission dollars but it is also in terms of number of quote hits. And a hit is an account that has more than twenty-five hundred commissions in the first year, annualize. The average, the average commission annualized on the new accounts that we're writing is about twelve thousand eight hundred, twelve thousand five hundred dollars.

So, that's moved up in the last three years from about ninety-five hundred. So, I don't know whether that answers your question or not, David.

Yeah, that's helpful. Going back to the contingent commissions, a lot of people in the industry are talking about kind of of contingence and I know that your part of business benefited from lack of weather.

And if it's up eight percent, that eight percent excludes the change in the schedule payment from the Florida workers comp organization, correct?

That is correct. That - you know you're talking about F.C.C.I. that doesn't have anything to do with contingence. See, that's just regular commission. The million and a half dollars that we took out when we computed the thirteen and a half percent, that was a million four hundred ninety or eighty thousand dollars of payment of commissions from F.C.C.I.

O.K. Wasn't a related contingence.

No. No and the other thing is that we don't know I don't think we have this exactly nailed down. I don't know whether of the contingence that we have actually received and put and included in income, I'm not sure whether there would be a greater or lesser percentage of those that are Florida based or not.

Do you know, Cory?

I think it's up all over.

I think you know if I had to guess and David we haven't had a chance to look at this yet, I think because what we've done is taken each of our regions, and you know our regions. Some of each three regions have part of Florida. And we found that we're basically up in every region that we have with one exception. And that went flat.

So I think I believe that what you're running into -- I don't know this -- is where you're talking with other folks they may have had book that they got extra contingent commissions because of the book . We don't have none of that. Ours are based just on loss ratios. So that might be what you're running into

That may be.

Now if we look at the contingent pay sometimes it'll flow from March to April or you know the April payment coming back a little quicker in March. Any "guess-timate" on you know flows between the first and second quarters any on the first than normal? Or ?

I think it's going to be consistent of last year. What happens is some of them drag their feet on getting the money to us. Some of them just don't pay it until May, June or July and of course we have one of them paying until December. But we also have some and this is not the same every year with every , when we get a contingent check in we look pretty "dog-gone" closely at it and if it is if we have a question, in other words, we think they haven't paid us enough, then we will go back and open up a negotiation to get inside of their books.

And sometimes that can take sixty to ninety days to get that nailed down. Three years ago we found a check that came in and it just didn't exactly pass the "smell" test and we got into it in great detail and found out that there was a rounding . And the rounding which we've corrected.

And the company admitted it and did it. Actually ended up paying us another three hundred and twenty thousand dollars. So, that means that sometimes when a check comes in, we're not sure if it's right or not, we're going to hold that and not say you know, we accept this until we've gotten it nailed down to our own satisfaction.

At which point you don't book until you cash it.

Yup, right.

O.K. And just to refresh my memory on the contingence, does any of that flow to producer compensation or does it go straight to the bottom line?

Straight to the bottom line. But it's not exactly straight. We multiply the contingence by eighty-five and it just goes into the calculation of the profit center bonus. And so there's really no expenses relating to it, but the profit center gets a bonus off of that and that can be as much as eight to twelve percent.

O.K.

So we do have a four percent overhead charge.

Yeah and then there's a four percent overhead charge on all of that. That corporate takes.

O.K. And final question, do you feel a hit on this but on the acquisition side I know when doing the transaction what are the opportunities in the future might be with banks should have operations outside of their footprint. Are you seeing anymore activity on the bank side of the business?

Well, no, we're seeing some banks you know making offers on agencies and we're seeing others that don't seem to be as interested. But, no it seems to be about the same. It's sort of a low rumble.

And as far as the overall acquisition prospects at there you say it's still pretty steady? You see no increase in flow or decrease?

No, it's the price line is fuller this year than it was last year. But you know, again, we're very, very careful about our due diligence on them. So, we're gonna do all the good ones that we can bring in and make work and so I would say that are prospect are certainly as good as last year.

Now, when you say that, you're talking more about the number of opportunities versus total revenue opportunities? Because that...

That is correct. That is correct. Because we look at each one of them on an individual basis. And as you know the sweet spot is one to ten million dollars in revenue. Or . And then the next would be a large merger like the merger and that one as you know has turned out very well.

And you indicated I think in the press release that many of these middle market brokers are approaching you. So I assume that means this is not on a auction a basis. You're getting kind of the first look and talk with the owners.

Yeah, and this is the way it's occurred over a long period of time. A lot of these folks don't want it known that they're even thinking about selling the agency. Until they get down to here's what the price of the here's what the operational model would be.

And then if they like it, then they'll tell the employees. So, they don't like it on the street. So, we're finding that people are coming to us on an individual basis, or they may go to a consultant and ask the consultant to come to us with them representing the seller.

Because they feel the consultant can assist them with some technical and professional expertise. So we're but we're not saying that the kind of auction process that you're talking about where you have everything that's coming to us has got three or four people.

You know, David, the way our system works is that we're highly decentralized. And as a as the Brown & Brown name and footprint expands in other parts of the country people become, other agents become aware of our name and likes the fact that we're decentralized.

And that they can use our capital and continue to grow. So, we always encourage other agents to you know call us up and talk through it because even if we don't ultimately do a deal they end up learning a lot of information about how we've been successfully been able to run our operations.

Good. And as far as the pricing, no big changes in pricing for acquisitions the current period versus say a year ago?

Nope. Same old, same old.

Good. Thanks and congratulations on a fabulous quarter.

O.K. David. Thank you.

You're next question comes from the line of Steven Gabios of

Good morning, gentlemen.

Hey, Steve. How are you?

Just great. Thank you. Can you talk to us about two things? First you had mentioned that you thought twenty-eight to thirty margin you know which is reasonable for this year is not the upper end. Beyond that, what do you think the upper end is? And second question is, giving what you've seen in the market environment what do you think you're organic growth to look like?

O.K. Number one we don't know what the upper end is. The one thing we know is there is no ceiling that we can find at the moment. Answer to question number two is that we think that the rest of the year is going to look like the first quarter.

Now, we we're hoping, and our goal is to get the fifteen percent for the whole year internal growth. So, we have I think a reasonable chance of getting there. But again, it's not done until it's done. But we seem to be seeing a little stronger growth than we did in the tail end of last year. So, to get to fifteen percent it needs to get a little better.

O.K. Thanks .

O.K. Steve.

Your next question comes from the line of Hugh Warren of J.P. Morgan.

Hey, , just wanna follow up with two quick questions. The M&A that was done in the first quarter of '02 we had a couple that were knocked right out on April. So I'm showing a total of everything that would go on the calendar there about what about two million dollars?

Right.

O.K. O.K. just want to make sure everything else is . Are you willing to release the top gun numbers for the first quarter?

Don't think so.

O.K. All right. It was worth a shot.

O.K.

all right.

. There are no further questions at this time. Are there any closing remarks?

No. I think we've had a good quarter. We expect the rest of the year to be a good year and now we just need to go and deliver it. So, thank you all for being on the conference call and we'll talk to you when we talk to you. Thank you.

Thank you for participating in today's Brown & Brown conference call . This call will be available for replaying beginning at 11:30 a.m. eastern time today to 11:59 p.m. eastern on April 15th. The conference number for the replay is 3713259. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you, you may now disconnect.