Brown & Brown Inc (BRO) 2002 Q2 法說會逐字稿

Good morning, my name is LaTisha and I will be your conference facilitator today. At this time I would like to welcome everyone to the Brown and Brown second quarter 2002 earnings release conference call. All lines have been placed on mute to prevent any background noise, as 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, number one on your telephone key pad. 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 events or otherwise be forward looking in nature and reflect on our current views with respect to future event, including financial performance and that such statements are intended to fall within the safe harbor provisions of the security laws. Actual results are 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 inaudible that will be identified from time to time in the company's report filed with the securities and 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 and exchange commission. Let's note or caution that any such forward-looking statements are not guaranteed the future performances and that actual votes and event may differ from those indicated in this call. Such differences may be material. Thank you, I would now like to introduce Mr. Hyatt, chairman, president and CEO of Brown and Brown insurance. Mr. Brown you may again your conference.

Thank you, LaTisha. Welcome everyone. Before we get into the operating report on our divisions and what's going on generally in the insurance business, I would like to call on Cory Walker, chief financial officer, who will talk specifically about the numbers for the quarter.

Second quarter 2002 was a very good quarter for us and it pretty much went according to our budget and what we expected. However, we did get a little bit more profit sharing in our contingency revenue in our expected and that helped helped Gus give us another penny or two on our earnings, earnings per share was 31 cents per share which is up 55% from the 20 twice we earned in the second quarter of 2001. Given that Brown and Brown is a sales and service organization, this increase in the earnings per share is driven by the increase in total revenues. For the quarter the total revenues increased 27.8% to 114.9 million dollars, that ups from the 89.9 million dollars we recorded in the second quarter of 2001. As you know, 99% of our total revenues are generated from our commissions and fees, which for the quarter totaled 114.3 million dollars. Included in our press release that we sent out last night, it is a table that summarizes our total growth rates and internal growth rates from our commissions and fees. And this schedule excludes any of the profit sharing contingency revenues or any of the revenues from the few offices or programs that we sold or discontinued since last year.

We refer to these adjusted revenues as core commissions and fees. For reconciliation purposes, to reconcile the total commissions and fees per the schedule to line item in the income statement, the biggest difference there is our profit sharing contingency income which for the second quarter of 2002 we had 8.2 million dollars of contingency income versus 3.1 million dollars received in the second quarter of 2001. That's a 5.1 million dollars increase in contingencies. Additionally, there are 754 thousand dollars of revenues in the 2001 numbers that were generated from the offices and programs that were sold or discontinued. There was also a small amount of $80,000 that relates to those same programs that did trickle into the second quarter 2002, so we pulled those out of the 2002 numbers also.

The last item that is a reconciling item back to the income statement is an adjustment relating to some accelerated workers' compensation that we received from one of our carriers during the first quarter of this year. As you may recall we received about a million and-a-half dollars from the commissions from this carrier in the first quarter which we normally would have gotten more equally over the entire year. Last quarter we adjusted this one and-a-half million dollars out of that internal growth general so it doesn't inappropriately reflect a higher growth rate than was actually generated. Because we pulled it out of the first quarter we've added one-third of it, about a million and-a-half, more specific 492 thousand dollars was added back into the second quarter revenues so we can keep a try apples apples comparison. That same number will be added back in the third and fourth quarter calculations also. If you take those reconciliations they will agree back to the income statements on the commissions and fee line. If you look at the internal growth schedule the total commissions and fees for the quarter increased 26.6% or 22.4 million dollars of new commissions and fees. Of that total 13.1 million dollars of revenues were generated from businesses that we did acquire since the second quarter of last year. The remaining 9.3 million dollars of revenue was, therefore, internally generated, organic growth and this number reflects an 11.1% internal growth rate. The important point of these growth rates is that everyone of our business segments contributed with a positive internal growth rate. 76% of the total internal growth dollars did come from three of our business segments and that is Florida retail, special national programs and the brokerage segment. Hyatt is going to talk about the activity in each of those segments a little bit later.

As a summary, the growth rate by each segment are as follows. The Florida retail led the retail segments growth with 14.4% internal growth rate. National retail and western retail had a three and-a-half and a 4.9% growth respectively. Professional programs which had no acquisition activity had an internal growth rate of 8.3%. The national programs continue to grow at a 27.9% rate, brokerage which really led the company with another strong growth rate of 55.3%. And then our third party administration group had a real respectively 6.7% growth rate. Looking quickly at the other two line items on the income statement relative to revenue, investment income was down slightly which is really primarily due to the low interest rate environment, even though we have more investment cash this quarter than we did the same quarter last year. Other income and loss line item which we actually had a small loss of 302,000 for this quarter and that really relates to some disposal of fixed assets and intangible assets of those few operations we did dispose of. If you look at our total kind of looking down income statement to the expenses, you know, while our total revenues did grow by 27.8% total, our primary expenses of compensation, employee benefits and the other operating expenses combined only increased 18.3%. These expenses as a total of the total revenues were also slightly lower in percentage than it was the previous quarter of last year. And that's really has to do with a little bit more contingency revenue that we got and that reduced that percentages.

The other - the next line item is amortization expense. For the quarter we had spent three and-a-half million dollars which was down only 654,000 from the 4.2 million dollars that we expended in the second quarter of 2001. Included in last year's quarterly amortization expense was 910,000 of amortization relating to good will which is no longer expensed in the current year. That was reduced or that reduction was actually offset about by 264,000 of additional amortization expense of intangible assets we acquired this year. I think it is important to note that the $910,000 of eliminated good will expense really accounts for less than 1% of our increase in our earnings over the 2001 period this year. Just as a frame of reference, we currently allocate less than 50% of our acquisitions purchase price to good will. However, since there may be differences in how other companies allocate their acquisition costs, we have tried to give the readers our financial statements, the specific details on the faith of our income statement of the noncash expenses like the amortization expenses so they can calculate their own cash earnings per share and, you know, I personally believe that the cash earnings per share is really the reliable comparison measure to use. But I will talk a little bit later about what I think the cash earnings per share is of Brown and Brown.

The other expense line items of depreciation expense, interest expense and intense for noncash compensation stock grants in aggregate we're not significantly different from the prior year quarter. As a result of the expenses our income before income taxes and minority interest for the second quarter was 35.7 million dollars. Or about 68.1% higher than the 21.2 million dollars that we earned in last year's quarter. The operating margin for the current quarter was 31.1% which is up from 23.6% margin reflected in 2001. Now, you know, the prior year margin is lower by about two percentage points due to the negative impact of poolings that were actually completed during the second quarter of last year. So that's the real margin improvement is instead from 23.6 is really from around 25.7 to the 31.1 which is about 5.6 percentage points. Now, of that total probably two and-a-half percentage points really came about as a result of the increased profit sharing contingency that we got, the 5.1 million dollars previously mentioned. Majority of that revenue does drop to the bottom line. But the remaining improvement in those margins really came about, you know, from the continued effect of integration of our recent acquisitions and the effects of the premium price increases that are on the bottom line and really just the general efficient improvements and operating efficiencies that everyone in our company strive for everyday.

After our income taxes of 38 and-a-half% and the deduction of our minority interest, net income for the second quarter ended up 29.4 million dollars, that's up from the 12.4 million dollars we recorded last year's quarter. That's a very nice 72.3% increase. Now, we take a moment just to look at our earnings in terms of our cash. Noncash expenses of amortization, depreciation and that noncash compensation stock grant for the second quarter of 2002 was right at about $6 million of earnings. That equates to about eight and-a-half cents per share per quarter. This eight and-a-half cents per share cash flow when added to our normal gap earnings of 31 and-a-half cents gives us almost 40 cents cash earnings share per contract. It is about 45.6 higher than last year. As I mentioned before, we highlight specifically with the noncash on our income statements and the gap earnings per share really cannot be used as a comparison measure among companies in our industry. We just want to make sure the financial statement readers do have the right information to calculate and make other own appropriate comparison. As I mentioned I believe cash earnings per share evaluation is one of the most effective comparison metrics available so we'll continue to try to highlight that in our conference calls for you.

Since the results of our first quarter numbers were very similar to the second quarter really are six month year-to-date results are nearly did you believe the results we just talked about, for the first months ended June 30th, 2002, we had total revenues of 225.9 million dollars which is up 26% over the 2001 period. Net income was 41.6 million dollars and that is 64.3% more than the 25.3 million dollars we earned in the first six months of 2001. So, therefore, our net income per share for 2002, six-month period was 62 cents versus the 40 cents we earned last year-to-date. So with that financial overview I will turn it back over to Hyatt.

Thanks for the good report. We're very pleased with this quarter and we continue to steam along to talk a little bit about the various business segments and what's going on in the industry. We might want to start with Florida retail. For those of you who have the press release I think that's first on the list. You can see the internal growth rate is about 14.4%. Florida continues to have one piece of our revenues, which is about 30% of the revenues that is flat. That's the workers' compensation. Workers' compensation is - there is a rate increase that was approved, I think the average rate increase is 2.9% and that has created some anxiety among a number of risk barriers. It is my understanding that at least one of the largest risk barriers to stop writing new business. Things will get a little more interesting. Again, property continues to be a bit of a problem in Florida and we feel that in the last quarter of this year, probably November 1, December 1, that not just in Florida but in other areas of the U.S. where there is business that either has substantial property values that could be distressed for one reason or another or have a bad loss ratio, we think that the capacity is going to be very, very skinny in order to renew these accounts. So if this year happens to mirror image the 1984 last quarter, then there will be some accounts that will go wanting. National retail, you notice, is about three and-a-half percent growth. That's an interesting issue there. And to some extent it will slop over into western retail but not to the same extent. In national retail we have a higher percentage of our smaller commercial accounts. Smaller commercial, would be $10,000, $12,000, $15,000 in premium to 30 to $50,000. Those accounts are considered by some risk barriers as being boring and, therefore, it is, you know, 30% or we don't renew the account. So we're finding that those - that business is to some extent being moved to regional carriers. Where it is already with regional carriers we're finding that it is not unusual to have no price increase or maybe 4 or 5% price increase for the same number of exposure units. Western retail continues to move along nicely. We do have assimilation of a number of offices there and there's always a little bit of fallout when that occurs in terms of accounts that maybe don't fit our game plan. But we're very pleased with the way western retail is going also. Professional programs, the fastest growing piece of that is our lawyers program. It is doing quite well. We are getting some rate increases now in certain states on dental, but if you take the entire book of dental business, it is still flattened down a little bit. In our special programs, which would be RMATFI, which is municipal, primarily municipal, small municipal and school boards, etc., as well as our condo program, those continue to be very nicely. Brokerage which is primarily E and S brokerage, it is not all. It includes the inaudible which is an old fashioned NGA and they are, you know, showing about a 55 percent increase. And it doesn't show any signs of abatement. PPA services I think the first quarter was up about 10%, 6.7% this quarter, so this might have something to do with bookings or something. I think they are probably going to do eight to 10 or 11% on a go forward basis, a very stable growth area for us. So in total it is about 11% internal growth. We do see substantial impact on placement relative to the regional pricing. Really what's happening is is that it is almost a way of business to not get the renewal price approval from the carrier until the day before the renewal date. So this does place some additional pressure on us and, of course, lots of minor heart at that time tax, etc.

Our margins continue to move up according to our game plan. I believe that our pretax margin was about 31.3% this quarter and that's really up about 3% when you sort of normalize what we were same quarter last year, so we're pleased with that. New business growth continues to go on very well in all segments. Relative to acquisitions. Since the first of April we have announced about 20 million of annualized commissions or revenue in mergers or acquisitions within our system. And I'm pleased to tell you that we've gotten in this quarter some very, very good people that have joined our organization and we're very pleased. The pipeline continues to be substantial. We expected at the first of the year that - for the calendar year that our acquisitions would approximate $30 million of revenue that would come in during the year. We're still on line to do that. The outlook for the industry, that's something that I get questions about all the time, and it's not just questions from analysts and investors, it is questions from people in our sales meetings that are wondering, you know, what is the market going to do for the next quarter and the next year? Bottom line is that based on our best estimate, we think that in both property and casualty and in employee benefits, that prices are going to continue to escalate at about the rate that we're seeing today. Now, again, everyone likes to use some sort of a broad brush average. There is no broad brush average. But what we are saying eight to 15% on the average across a broad book of business. Again, it could vary by carrier and vary by geography. We do think that the fourth quarter this year is going to present some very substantial challenges for placement of accounts that would be distressed.

So with those comments, LaTisha, we'll be pleased to help up for questions.

At this time I would like to remind everyone in order to ask a question, please press star, then number one on your telephone key pad. We'll pause for just a moment to compile the Q and A roster. First question comes from Hugh Warren with J. P. Morgan.

Hi, good morning. Just want to run through a couple of things. Cory, on the income statement, with the noncash come from the stock side, did that reload, did you reset in the quarter?

No. We have not reloaded yet. Typically the last traunch of the last load we had was at $35 and then Wall Street hasn't been favorable to us. We won't reload until our stock gets back to at 35.

It is 35 for 20 days?

When we reload it just has to be at the 35. To traunch has to be 20-day average of that. So this number of $785,000 is a normal charge given everything we've done so far and once we reload and we hit the new traunch level it will then be expensed on top of that.

That was my first question I had.

Key to that we kind of talk about and we talked to other people that a lot of company use stock options which are not expensed in their income statement and the shareholder effect of that is fairly minimal using the treasury stock method. Our plan here, which is the primary plan, you know, it gets fully expensed in the income statement plus every time the stock goes up 20% and the shares become awarded, they become added to our shares outstanding at 100% when it hits that. So it is kind of a double whammy on the income statement and that's one of the reasons why I consider that important. I want to say separately we're comparing our results to other companies' results list the only thing I would add to add for your cash earnings calculations to be consistent the only thing we're not going to add back is the depreciation?

Right. I agree with that. That's no problem.

Then the other question I would like to ask is a little bit more detail, I guess, on the western retail, Hyatt, with organic growth. I was a little bit surprised on the western side that it pulled back that much. How much of it is just pure trimming of the pita accounts or how much of it is taking longer time to close business because guys coming in at the last hour with these quotes and you are running around

It is all of those things. You know we error our computer system is not sophisticated enough to pinpoint those questions specifically. But bottom line is is that California is kind of a wild and crazy place and there is a lot going on there. There is some pressure on commission percentages and all of that sort of stuff. So what we think, though, is is that as regards western retail we think that the later in the year and into next year that probably we can grow a little more rapidly because we'll be having some of the things that we're having to make changes on, some of those will be done and behind us. So I would look forward to having western retail to grow more rapidly than the 4.9%.

Last question. Let everybody jump in here. If I look at the overall organic growth rate of 11.1%, we were thinking in the 12 range. Do you think this 11% range for the market conditions with where we are and with some of those changes going on is reasonable for the rest of the year or is there kind of any other anomalies in there they should be discounting or ignoring?

It is really difficult to answer. We think that if you will remember last year, each quarter was kind up a little, down a little, up a little, down a little, and we kind of see the continuation of that trend. So 11, 12% looks to be in line based on everything that we see.

The other thing to keep in mind too is that the second quarter we had internal growth rate of 13 and-a-half percent whereas the first quarter of last year was only nine. So this grew if the 13 and-a-half on top of a previous nine, then what we do was we grew 11% now on top of a 13. Dollar amounts are still strong but the percentage is kind of tweaked down a little bit as you start to grow on higher growth that's already occurred. So my only point is the percentages aren't always absolute in comparison.

On the Florida retail side, I mean you talked about the workers comp in Florida and we saw modest rate increases of less than 3%.

Those didn't go into effect until July 1.

It doesn't seem like it will help you a lot. The 14% growth in Florida was stronger than most people were kind of expecting. Is that units that you are seeing down there?

We don't know.

It is dollars.

I appreciate it, guys.

Your next question comes from Matthew Russell with Legg Mason. Congratulations on a great quarter. Two different questions. First of all, we've been assuming more normal contingencies going forward, should we see the compensation benefits move closer to sort of that 50% in commission and fees numbers going forward?

That's about where we believe it is going to be, 50%, maybe maybe 50.3, 49.9 or something like that.

So this quarter was really sort of an a knowledge my because of the 8.1 million in contingencies?

That's correct.

Turning to acquisition environment, have you all noticed that the brokerage you all are looking at are getting a little more greedy in terms of the multiples they are looking at with commercial banks, being active or is it just that folks are sort of taking a step back? That's the reason we haven't heard a whole lot on the acquisition front?

No, we're seeing about like we've always seen. We find generally speaking, that for merger partners, if they are looking to go forward and continue and want to grow and be part of a winning team and are challenged by that, then they are not as interested in banks as someone who really is looking to cash out and in a year be gone or two years be gone. So we've always seen that high quality agencies want to get, when they sell or merge, they want to get the maximum price they can get, which is understandable. One of the things that we have done and we've done this for years, the first time we did this was 1987 or '88, many of our acquisitions. As you know, we're doing cash as set acquisitions for the most part. Many of our acquisitions are done on the basis of a six times multiple of the operating profit over the next year or the average of the next two years. And we have a very carefully considered and reviewed pro forma and all of the expenses for all of the people, etc., are market expenses so that the six times gives them the opportunity to benefit from rising rate environment. And it also benefits and they are going to be watching the expenses very carefully since you can take a dollar of expense that wasn't used and multiply it times six. That's $6. So we're not saying that there's any difference in what people are wanting to do or asking for in the merger and acquisition area, we're seeing a lot of people who are talking about it and possibly taking a little longer than maybe in the past and it appears that one of the reasons for that is the fact that inner being beaten around the head and shoulders on their renewal, so they don't have as much time to think about it and get into it, so, therefore, their attention is diverted. We've seen that in a couple of cases.

If capacity continues to be constrained out there, do you think that would make it more attractive for companies to join you all or less?

It would make it more attractive. You know, to the extent that we can bring additional markets to an office, which we've been pretty effective at doing that, to the extent that we can do that, then obviously it gives them a little upswing. There are basically if you look at the national companies, there are certain national companies that are looking to expand their presence in certain geographic regions and the Midwest would be one, as an example, where loss ratios have been very good. Those are also areas where we have very good relationships with regional companies who are also interested in expanding their relationship, particularly where they find an office that is in a growth mode. So we do have an advantage there to offer to people who join up with us.

Okay. Thank you very much. I will pop out and let somebody else ask questions

Next question comes from Nick Biskin with Stevens.

Good morning. Couple of questions. First, Cory, can you look at that internal growth rate and Hyatt described it as going kind of up and down between 11 and 13 change levels. Some of your competitors I know it is not apples to apples comparison in many cases, you are seeing a more gradual increase, do you have any idea why you guys have been a little lumpy?

I think maybe one of the reasons is that we may look at our internal growth rate a little bit different. You want to describe how we do that.

Big thing we do exclude contingencies obviously and I'm not sure that all of the other brokers exclude that. If you don't exclude that, I mean we're over 14% internal growth rate. But I'm not so sure, Nick, though the original premise that it's kind of lumpy because actually if you go back all the way to the first quarter of 2000, it went - the total went from a 5%, 6.4, 8.7, 9, first quarter of 2001 we did another 9%, that was on top of a 5% growth previous year's quarter and then it went to 13 and-a-half, 12, 11 and we peaked a little bit in the first quarter of 1/1 renewals were pretty heavy at 13 and-a-half. I don't really consider that lumpy. The key thing is these growth rates we're getting right now are on top of high growth rates in the previous quarters that we're comparing it to.

I was thinking more looking at the last five quarters and isolate it. But I see where you are coming from. Now -

The only lumpiness that maybe you see maybe national retail and western retail, but as Hyatt mentioned a lot of that deals with those two areas of where the greatest amount of dollar acquisitions are and any time that you have an acquisition, you always get rid of certain pita accounts that we talk about, and there's always some loss business anyway. So if there's any lumpiness I would say that probably is where it would be isolated.

If you backed out the contingents of 8.2, you have an EBIDTA of 3.7% if you include them, if you exclude them it is 32 and-a-half%. What is an EBIDTA margin number going forward for the remainder of the year?

I think it will be 34 to 35%.

So somewhere right in between there?

Right. Nick, I'm sorry to back up to the question that one other point I wanted to make is that, and I think he was describing how we do it. When we do our internal growth rate, I take out whatever we had last year say as a set amount and then if we acquire something, we're only taking out the current year revenues that we get from that agency because that's the numbers that we control. Now, from a theoretical standpoint we're hurting ourselves in that case because I will give you a perfect example. We had an acwestition that was up at in the western region. And when we brought them in, you know, they were expected to do on average maybe six, $700,000 a quarter. Well, coming right out of the chute in the first quarter we just blew the pants off of new business and they wrote like a million two of revenue. I pulled out a million two of revenue because that million two wasn't in last year really but they are 600 thousand dollars of actually new generated business. So you know, most things we do here at this company we're fairly conservative in the way we report things. So I think it is important to realize that I'm not so sure other people are doing it like we do. But since I pull out the numbers and I know that I can get a handle on and not have to worry about the acquisitions, general ledger reported the previous year, if that makes sense

It does. At least the ones I followed it was the same ones. Last question. If you look at the brokerage segment, can you guys continue to knock the cover off of there?

Yes.

How much of that is rate and how much is still in market share, higher level risk and share?

If you look at FIU, the increase there it is at 15 to 20% rate increase. Looking at the E and S pieces of that grouping, there's a lot of increased market share but the prices are going up also. You know, the renewal persistency in E and S business and and it varies a little bit by location, but it is somewhere in the neighborhood of 65% as opposed to maybe 70% as opposed to in real persistency in retail of 92 to 96%. So there's a difference there. But we're writing a tremendous amount of new business. We've opened an office in Charlotte, that's Peachtree Special Risk, we've opened that office and that office is growing. And we're in the process of getting ready to open one in another particular geographic location because we're getting so much business from that geographic area. So that - and you see part of this, Nick, is because accounts are moving from standard markets back to nonadmitted markets when they move from nonadmitted to standard three,, four, five years ago.

That makes logical sense. Congratulations on the quarter.

You next come comes from Adam Clauter.

Could you talk about what was driving the strong contingency commissions and what kind of trends could we see in the future coming from contingents?

It is interesting that you ask that question. When contingencies are going up and the loss ratios are going the other direction. Since 1990 since we've been tracking the contingent income carefully, we have each year with the exception of 1993, which would be reflective of 1992's loss ratios, each year our contingent as a percentage of eligible premium have moved up a little bit. And it is inaudible we're writing a very profitable business. Therefore, companies are very interested in expanding their relationships with us. So the business that is producing this, these loss ratios is the middle market business. And we think that in the absence of a big hurricane in Florida that they will continue to move on. And we have found that the loss ratios on that kind of business have outperformed the larger accounts each and every year.

One thing I do want to caution. Last year in the fourth quarter we did get a couple of special contingencies that came in and I think we had about $4 million of contingencies that quarter. You know, as kind of looking out the next two quarters, I would think that we would probably do well if we averaged, you know, a million to million and-a-half in each of those next two quarters so just keep in mind that the fourth quarter last year earnings did have kind of a nice little bump that, you know, will not be here this quarter, this fourth quarter of 2002.

Also as rates continue to climb among your clients and in your markets, are your clients continuing to buy less insurance by raising deductibles and other means?

Almost every client is looking at all of those alternatives, Adam. Yes, some are and some aren't. It just depends on the circumstances. The smaller packages, it is basically same coverage. If it's a larger account, however, then many times if the price increase on the large account and I'm thinking now of habitational as being one of the most distressed, if the price increase is 60%, then you may also be force the client to make a much larger property deductible. So there is that sort of thing. In certain areas we find that the economy is having a little bit of an impact. We're not a big writer of bonds, I'm talking about contract bonds as a piece of our business. I think we have maybe in the neighborhood of maybe $6 million in commissions, maybe $7 million in commissions in contract bonds annually, maybe as high as eight. We're noticing in the offices where we're writing knows bonds, that the bond revenue is off 20 to 30% for the first six months of the year. And it is because we're not writing bonds and the reason we're not writing as many bonds is because contractors don't have the business to bond. So there are some niches and glitches in there.

Thank you.

Your next question comes from David Lewis with Suntrust, Robinson, Humphreys.

Actually it is Elizabeth Nichols for David. Good morning. I have a big picture question on pricing. We're here that reinsurance renewal rates were even firmer on July 1st than they were on January 1st which we believe would bode well for Brown and Brown's commission rates that would further harden across-the-board. Can you provide any color on this?

I wish we could, Elizabeth. We're aware that reinsurance continues to tighten. This is a lag sometimes between when the reinsurance rates go up and when it actually gets into the front side of the business. But we certainly don't see that this continuing tightening of reinsurance as being negative to our growth rate on renewal.

Okay. Thank you.

Your next question comes from Nick Mosis with Headburn, O'Neal.

Cory, first question for you. Second quarter pretax margin was 31.2%. I'm just curious with project to B 40 are we using a different definition?

Well, the definition for operating profit for the B 40 is before interest and amortization, so it is.

I just wanted to make sure I had the definition straight.

And it is a change from our project 28. Project 28 was really the income before income taxes and minority interest. And we expect to be there this year, which was our goal and so it is a change in scale.

With regard to kind of the project B 40 definition I got it to be 35% for the second quarter, is that about right?

That's right.

Second question for Hyatt's view. If my notes are correct from the last conference call just on comments, we thought maybe dental rates might be going. I thought you said we could see some mid 15 type increases because it's been underperforming and in the opening remarks I think you said that dental has been flattened down. Are my notes last quarter correct?

Your notes are correct and we have seen increases in certain states. But then in other states we've seen continued decrease. So it's a strange area. And the loss ratios in the dental book have been reasonably good. And there is a lot of competition to our program in other areas. It does vary by state, though.

And just to clarify, I guess your comments, Hyatt, with regard to the fourth quarter in I think you said in certain distressed accounts as far as it will be difficult to place. I just wanted to make sure I understood. Difficult to place meaning it can't be placed or more that the rates will be just exorbitant?

In 1984 there were accounts that could not find certain coverages, umbrellas, an example. Property in some cases that would be anywhere at an affordable price. And we think there's a possibility that that will occur again. Generally what happened on those accounts is they didn't go exactly there but in the umbrella case it might have taken, you might have had 10% of the coverage that they had previously and in property the same kind of thing.

So the net effect of that, would that be an adverse impact on the revenues or commissions for you for that period or I guess I'm just trying to get a better handle on it?

What it really does is because as a piece of our business, since we're more middle market, we don't have a lot of that kind of business. We do have some. And so, therefore, what we're - it is an opportunity for us. If we have the ability to place the business, and I will give you an example of what I'm talking about. In the last 90 days there have been five home builders in Florida, two of which we had, three of which we did not have, that their pricing went crazy or there were certain coverages that were not available. We happen to have a program that would allow us to quote these coverages but there is a warranty coverage that has to be purchased along with it in order to buy the general liability and the umbrellas, et cetera, so we kept two accounts at higher commission, total higher commission that we didn't have and we got three accounts away from other brokers. Now, if we had not had the program we wouldn't have gotten those three and I'm not sure what would have happened on the existing accounts. So if we have the ability to quickly provide coverages that maybe someone else hasn't had, is unable to provide, then it is a great opportunity for us. Of course, in smaller agencies if they have a limited market, which most do and all of a sudden their pet account is in deep trouble that's a great opportunity for us if we have the market. Until we get there we don't know if we'll have that market.

Great.

Again at this time I would like to remind everyone in order to ask questions please press star and number one on your telephone key pad. You have a question from Hugh Warrens with J. P. Morgan.

I wanted to follow-up on the debt side. You paid down some debt in the quarter?

That's correct.

From the long-term use on proceeds side, it was four and-a-half million. What was the thought behind that, just trimming back?

We have a standard quarterly payment on the big piece of debt that we have of about 3.2 million dollars. And then we have standard structured monthly and quarterly payments to some of the acquisition candidates or acquisition principals that we assumed that deet. So all of the debt payments were all just standards structured quarterly payments.

What kind of yield are you getting on the cash right now?

Not very good. You know, right now on the AAA bond we're getting, you know we're getting in the one-to-one and-a-half percent range.

I don't know if there was a change in the way on the debt payout.

Next question comes from Steve Raffeel from IND.

When you were talking about contingencies, did you say that the third and fourth quarter would be one to one and-a-half or one-to-one and-a-half above or below last year?

Of course, we don't really know what the contingents are because we don't find those out until we actually get the check. But based on what we know right now, I would think that we would get about a million, to a milian dollars of contingency income in each of the next two quarters. Now, that's comparing to about a million and-a-half last year in the third quarter and over $4 million in the fourth quarter of 2001.

Thank you.

On a go forward basis it will be less this year.

Thank you very much.

Your next question comes from John Keith with Ferris Stieger Watts.

You indicated that you were about two-thirds of the way through your guidance for purchase acquisitions in 2002. What is the likelihood of a significantly larger transaction than we've seen in the past?

Let's go back just so we make sure we're on the same page. The $20 million of acquisitions that we announced during, from 4/1 forward is an annualized number and so when I said that we expected to have $30 million dollars, for that they are that is actual revenues that would be recorded from acquisitions that we do during the year. So it is two different things. So, you know, obviously if we acquire someone on, let's say, 10/1 there's only one quarter of their revenue that comes into this year and then into next year. So just to make sure we understand that. Second thing is that there are larger opportunities around and we have been contacted in a couple of cases and we've looked and have decided maybe it would not be in our best interest. So we have a very structured approach to doing mergers and acquisitions. The optimum in terms of the least amount of risk and having the continual, consistent earnings increase, the optimum would be to do a large number of one to $10 million acquisitions. That's a slower process and there's a lot of stress on the front side of the process because we make dog-gone sure when we do an acquisition, that everybody understands on day one what it is going to be like, what the expectations are in terms of P and L, what the compensation levels will be, how the people will be compensated, et cetera, et cetera, so that is the key to Brown and Brown's success. If you look over a long period of time we did a merger with Pohl and Associates in 1993 when we had 35 million dollars in revenue and they had 50 million dollars in revenue. And it worked out very well. We also did an acquisition of the Reedman Corporation a couple of years ago. They had about 53 or $4 million in revenue, that worked out very well. In the case of the Reedman there was a disadvantage for most which would not be a disadvantage to us in that was they were spread throughout a large geographic area of the United States. Therefore, smaller offices. But the advantage is they were a vanilla operation meaning that middle market doing the same thing we do. They do not have a CPA, E and S business, they had a little bit of program business but that was it. In the larger acquisitions there's always a melding of stuff. Some of that is very good, some of it isn't. We're not saying that we're backing away from larger ones, we certainly aren't. We would expect over a period of time that one will occur, the opportunity will occur that we would complete one of those. But it has got to be on our terms and conditions and we don't feel any undue stress to go out and acquire something just to pump up the top line.

Thank you.

At this time there are no further questions. Do you have any closing remarks?

No. Only to say that we're very pleased with the quarter. We're pleased with the outlook for the rest of the year. This is a very good time in the insurance business and we're looking forward to having the third and fourth quarter come in on-line. So thank you all very much for your time and interest. Good-bye. Med thank you for participating in today's Brown and Brown second quarter 2002 earnings conference call.