Brown & Brown Inc (BRO) 2003 Q1 法說會逐字稿

Good morning and welcome to the Brown & Brown Inc. first quarter 2003 financial results conference call. Today's call is being recorded.

Before we proceed, we would like to inform you that certain of the information that will be discussed during this call including answers in response to your questions may relate to future results and events or otherwise be forward looking in nature and reflect our current reviews with respect to future events including financial performance and that such statements are intended to fall within the Safe Harbor provisions of the securities 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 have been or 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 filing with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and actual results and events may differ from those indicated in this call. Such differences may be material.

With that said, Mr. Brown, I will turn the call over to you.

Thank you, Rachel and good morning everyone and I am going to call upon. We have in the room, Jim Henderson, our present Chief Operating Officer and Cory Walker, our Chief Financial Officer, and I am going to ask Cory to discuss the numbers please.

Ok, thanks, Hyatt. We did have a very big quarter, thanks in part to an 83% increase in the contingency commissions that we received in the first quarter. Our earnings for this quarter were 44 cents, up from the 31 cents we earned in the first quarter of 2002 and that's a 41.9% increase.

From our revenue perspective, commissions and fees for the quarter increased 30.2% to $144.3 million, up from the 110.8 we earned in the first quarter of '02. Included in our press release is our, is the table that shows the total growth rates and the total internal growth rates from commissions and fees. As you know, this schedule excludes the contingent commissions, the revenues from offices and books of businesses or programs that we sold or terminated since the second quarter of last year.

In there, we also have the adjustment that we made last year relating to the one-time up-front annual commission that we received from one of the Florida workers comp carriers in order to make an apples-to-apples comparison, and I will mention that in a second on the reconciliation.

We have completed, this year, another schedule attached to that which reconciles that total internal growth schedule to the total commissions and fees that are included in the statement of income. As you can see, the only reconciling item for the 2003 quarter is the contingent commissions of $18.2 million, which when added to the core commissions and fees per the other schedule would equal $144.3 million recorded on the statement of income.

One of the highlights of the quarters I mentioned was the substantial increase we had in contingent commissions during the quarter, which was up over the 9.9 million that we received in the first quarter '02. ( inaudible ) looking at major stopping right there and just talking about the contingents, we had that significant increase from 9.9 to 18.2 million dollars. Part of it was due to the fact that we had more probable and higher volume business with our insurance company partners, but also was in part to a little bit of a quicker timing of receiving some of the contingent commissions from certain carriers which last year we didn't receive their commissions until the second quarter.

So the next question and I'm sure somebody is going to ask is, what does that really mean for contingent commissions for the second, third, or fourth quarters of this year? Well, last year in the second quarter, we received about $8.2 million in contingent commissions. Our best estimate right now of what we might receive in the second quarter of this year will be between $7 million and $8 million, so it should be relatively consistent.

In the third quarter of last year, we received about $1.6 million. Now our best guess on that quarter for this year is that we'll probably only end up at 700, you know, maybe a million dollars of contingents if we get lucky. And then of course, in the fourth quarter of '02 last year, we received $3.5 million of contingents and it was mainly because there was no major hurricanes that hit Florida last year, so if we are, again, fortunate not to have a major hurricane in Florida during 2003, you know, we could receive, you know, somewhere around the same amount, $3 million in the fourth quarter.

So if our -- if the forward-looking estimates of these contingencies come to fruition, we could have as much as $30 million of total contingent commissions for the year 2003, which is only -- I say only, which is a nice 28% increase over the $23.3 million of total contingent million of total contingent commissions we received in all of 2002, so hopefully that will put the contingents in perspective for the whole year.

Now, just continuing on with just the reconciliation that I have on that press release, you can see the first item underneath the contingents which is that adjustment that we had last year for $1.475 on the up-front annual commissions from one of the Florida workers comp carriers and then right below that is the $57,000 of commissions that we received for some business that we sold in '01 that had dribbled into the '02 quarter. Now, all those adjustments we just referred to, that will agree to the schedule that we gave last year on the first quarter.

The new adjustment for this year is taking out the diverted business in 2002, which was -- has an aggregate revenue of $2.4 million of commissions and fees, and these relate to the offices and the books of businesses and the niches that we sold or terminated during the 2002 to where we have the numbers in the first quarter of last year, but since we sold it subsequent to that, there is nothing comparable in the current period.

Those divestitures really summarize down to PEO (ph) business that we shut down out of our Houston office. We have not -- we do not have a replacement carrier for our medical malpractice, and that's about $366,000 relating to that net differential, and then we had several books of business in four offices that we sold during the year, which we mentioned before and they are Pensacola, Florida, Duluth and Jackson, Michigan, and Ruston, Louisiana. So with all those reconciled items, that will now agree to your commissions and fee line on the statement of income.

But going back and looking at what does the internal growth rate look like, and we had total increase in total commissions and fees, core commissions and fees of 30.1%, or $29 million. Of that $29 million, $19.3 million related to acquisitions. So if you exclude those acquisitions, we had a fairly nice internal growth rate of 10.2%. Now, Hyatt will talk about each of the activities of each of those business segments later, so I'll let it suffice to say that all the segments really contributed in terms of equal dollars to our internal growth.

Moving on to the other revenue line items which aren't significant is that we had investment income is about what we expected and then we did not have any significant activities in the quarter on other income or losses, that's generally related to sales or books of businesses or fixed assets.

Looking at the expense side of the income statement, while our total revenues grew by 30.4%, our primary expense of compensation and employee benefits increased only 23.2%. As a percentage of total revenues, compensation employee benefits for the first quarter of 2003 was 47.1%, which is down from the 4.9% in the '02 quarter.

One of the -- the fact that we received $8.3 million of additional contingency income, in contingency income you really only have profit center bonus, expense, and other expenses relating to that, and that, alone, increase in contingent commission probably reduced that percentage, 47.1%, and that accounted for about a 2 percentage point improvement. The other, say, 80 basis points improvement is really just chalked up to continued efficiencies of our folks.

The other expenses line item of $19.4 million remained at a constant of about 13.4% of total revenues, the same as the previous year. And then the other line items of amortization depreciation is really just the relating to the acquisition activity toward the end of last year and in the first quarter this year.

Interest expense, it continues to drop and it's dropping simply because of our paydown of our outstanding debt, the majority of the debt has a standard interest cost of 5.03% which is really unchanged for the major part of the debt.

Let's bring this down to our income before income taxes of $49 million, which with the pre-tax income of 33.9%, an improvement over the 30.4% in the first quarter of last year. You'll notice that we -- that our income taxes is slightly below 38%, we're using 38% of ( inaudible ) tax rate during the year and we are accruing somewhere to the forth quarter, we are going to contribute another million dollars for the whole year to that -- to the kids scholarship fund in Florida which gives 100% tax credit and you'll see the effective tax rate to be just shy of 38%, and that's really just backing out a quarterly contribution of about $250,000 a quarter there.

The next line item is minority interests, which I want to highlight in the fact that there is no minority interest in the first quarter of this year and reflects the fact that we did buy the remaining 25% interest in our FIU (ph) subsidiary as of the beginning of the year, so, we will not have any more minority interest deducted from our income statement any longer since we own 100% of FIU now. And that brings down our net income of $30.5 million, which was the nice increase of 51.5% over last year's net income in the first quarter of $22.2 million, so I would say a pretty good quarter overall.

And with that financial overview, I will turn it back to Hyatt.

Thanks, Cory. We're very pleased with our quarter. In reviewing the major points, first of all, I would like to comment about the contingency commissions. As I think everyone on the call knows, we have a very broad base of vanilla, middle market business which is spread across a large number of risk carriers (ph) and not concentrated in one, two or three large national companies. As a matter of fact, we probably do more business with regional companies than any of our peer group.

We have a very broad spread of this business which is quite profitable and one of the things that we kind of have overlooked is that in as much as those rates have been going up for a couple of years, the profit levels and it's always been a profitable book, have risen and particularly since they're not subject to any asbestos or environmental exposure, therefore, we are getting more contingent commissions than we would expect, and we think that trend probably will continue. In other words, minus a big hurricane in Florida, next year could be even better.

We also have a very big positive across our system as a result of this highly profitable book of business with a broad base of carriers and it gives us big leverage with those carriers on new and real business which because of the turmoil in the marketplace, because of rising prices, because of the problems on any renewal accounts where there is a questionable loss ratio, we do have leverage which is very beneficial for our clients.

The internal growth rate for the whole company was 10.2% and the Florida retail area, it was 9.2 versus the last quarter of last year of 12.9. That's the first time that I think we've had a reduction of that size in Florida retail and a long time. And it's a result of several reasons. First of all, it appears that we are getting fairly flat renewal exposure units. Secondly, certain classes of business and this would be certain contractors, certain classes of contractors are their renewals on payrolls, fleets and so on and so forth is down maybe 10 or 15%.

By the same token, if they're involved in home building, they're not down, they're flat or in some cases, a little low. There is a slowing rate environment in Florida, but the wildcard is workers compensation, which is about maybe 25% of our revenue, retail revenue in Florida and here's what's happening. The starting in January, many companies and now it's all companies have sought to restrict their writing. Some have, are not writing any new workers comp, others are writing workers comp on a very selected basis, and others have sought to right any new accounts that have more that a hundred thousand dollars in annualized premium. This is because of the loss ratios are rising rapidly and of course, now we have the legislature in session.

The legislature is seeking to do some kind of reform that would be of assist to the loss ratios. At the same token, on 401, a 13% rate increase, that's an average rate increase went into effect, and so there is a rumor going around that if the legislature does anything meaningful, that there will be a rate decrease.

So, whatever the 13% is, it could go down, and as a matter of fact, in the history of workers comp reform in Florida, every time that I've ever seen something done that had any meaning to it at all, there was a sort of arbitrary 10% reduction in rates that was mandated, so where that's going to end up, I don't know.

In the mean time, though, that is restricting our ability to go out and write some new accounts that we would have written, so there is turmoil in the marketplace to the extent that workers comp is not going to get solved probably for the rest of this year.

If you then look at national retail, our internal growth rate was 5.7% as opposed to 2% during the last quarter of last year, so we're very pleased there, particularly in view of the fact that probably the greatest braking, b-r-a-k-i-n-g maybe on rates, is occurring in the middle markets because of the large number of regional companies operating in the middle part of the United States.

Out in the west, which is Colorado West, we had internal growth rate of 8.2%, and as opposed to 7.5 for the last quarter so the West continues to grow and grow nicely. As a matter of fact, there is a big competition going on because the Far West thinks that they ought to be able to grow more rapidly than Florida retail, and so it would be interesting to see if they can accomplish that objective.

Professional programs, we're up 3.9%. A couple of things there that are very pleasing. Number one, for the first time in eight or nine years, dental, our dental program is actually trending up, and we've gotten some new business and we've gotten some rate increases. The new business is coming about because of a couple of the companies that were in that space have vacated the space.

Additionally, not included in the internal growth rate, though, but include in the overall growth rate is Calsurance (ph), and that's a large program underwriter in the Los Angeles area, and for the first quarter, they came in right on budget and both top line and bottom line, so we're very pleased with that.

Special programs up almost 20%. That's led by FIU, our condominium program for AAA high-rise construction units on the coastline in Florida, and PMSI (ph), which is our specialty underwriter for small and middle sized municipalities, cities, counties, school boards, et cetera.

Brokerage is up 48% and the last quarter of the year, it was up 74.7, so you can see there is a softening there and really, the flattening on that business is coming on accounts that are basically larger, and a larger accounts in the ENS ( ph) area would be a couple hundred thousand dollars in premium and up, and we are seeing flats and sometimes a little down, in that area.

The middle market, which is where a lot of our business is, they're still experiencing 10 to 50% rate increases, and there is still business moving from the standard market over to the non-standard market.

TPA continues to steam along at about a plus 8.6%.

So in summary, I would say that rate ( inaudible ) moderation on largest accounts is occurring. Middle market last year, 10 to 20% increases, this year, 7 to 11. The regional companies are, as I mentioned, a brake on price increases. If the business is wind exposed or habitational and/or a bad loss ratio, then in some cases, the insurance may not be available. In other cases, it's going to be substantial increases.

Umbrellas, DNO (ph), of course, are all still continue to escalate, you know, 20 to a couple of hundred percent, and we're probably going to see some very substantial work comp increases in California, probably July or August because the state fund which writes about 60% of the business, workers comp business in California is going to make some radical changes.

So that's kind of a potpourri of where we are operationally. So now I will call on Jim Henderson to talk a little bit about our mergers and acquisitions. Jim?

Thank you, Hyatt, and good morning and a special good morning to those in California that is, in fact, it's not even six o'clock yet and joining us. Great to have you with us. The first quarter marked, again, a very successful quarter with respect to acquisitions.

We completed some seven transactions. The annualized or the go-forward revenue of that --those acquisitions is some 23.7 million. In addition to the agencies that are mentioned in the news release, there's a sports Agency that we acquired, part of our Atlanta operation which is the Essex Operation, it sports and entertainment.

There was a combination in the Santa Barbara area, the Wilt Thatch and Perry Agency was incorporated and merged into the office of the Montgomery Agency we acquired this year. An operation Acumen Reeve (ph), which is another piece in the reinsurance arena, an underwriting facility we acquired, Rogers and Associates in Tampa and, the Public Risk Underwriters, which is, was in fact a component of Seville & Associates of Atlanta, Georgia.

With respect to the pipeline, it continues to be very active. It is characterized by agencies in the one to ten million in size. We continue some dialogue with larger agencies, but really whether or not that will happen this year or not, we really cannot tell at this point. We certainly feel very good about the activity. We see no diminishment in the numbers, and in fact, we see an improvement in the quality of agencies that we afforded an opportunity to acquire, and the quality has to do with the improved earnings of those agencies and the ability to bring those agencies in day one at an earnings expectation of our level.

In the area of competition for agencies, we really are experiencing no new level of competition. Banks continue to be active as they have been and we also have seen at least two bank groups in fact that have disposed their agencies within the past six months. We did not acquire those, and we certainly -- there is no really definitive difference in the activity level.

With respect to the purchase model, we continue with the models that we adopted some 18 years ago plus. It is six times the go forward earnings of the operation. We continue that model and we have not had to modify that in order to either create activity or attract a different level of acquisition.

We continue to focus on S Corps (ph) and LLC's, ( inaudible ) certainly we have done some C Corp acquisitions, but the S and the LLC's provide unique tax benefits that really enhance the performance of the transaction.

We continue to use cash to acquire agencies. Certainly, we are -- our balance sheet is in good shape. The cash balance on hand, we are forecasting the full year of '03 of some 105 million in free cash flow that we'll use also for acquisition activity and if necessary, we're certainly poised to look at borrowing, if necessary, to expedite acquisitions.

There's no specific geographic focus. It really is people and opportunity basis nor is it a significant niche with respect to either retail or wholesale programs, it has to do with the quality and sustainability earnings over a long period of time and to incorporate the activity into our culture and to our earnings.

So in summary, we're very pleased, we really -- we're on forecast or little perhaps a little better than those outside the company expected us to do in the first quarter. We'll continue to see continued improvement in activity, and to that end, as a matter of fact, this year, we have asked one of our very talented members of our management team, John Connolly in Clearwater. John will be moving over to an assignment to in fact Scott acquisitions on a full-time basis starting in '03, so I think that will give us really another weapon with respect to going out and looking at even a greater array of agencies in the years to come. So, that arena goes very well, very pleased and we'll look forward to reporting that to you in subsequent quarters.

Okay, Jim. Thank you very much. One thing I would like to mention before we turn it over for question and answer, Jim mentioned the acquisition of Acumen Reeve up in the Philadelphia, actually in the New Jersey area, and he mentioned it was an underwriting facility. I want to make sure before anyone gets nervous in service, there is no risk bearing on the part of Brown & Brown from the standpoint of the underwriting. The underwriting is on behalf of a risk bearer, so just to make sure everyone understands that. So, now, Rachel, are you there?

Yes, sir.

I think we can open it up to Q&A.

Great. The question and answer whether be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order you signal us and take as many questions as time permits. Once again, please press star one on your touch tone telephones to ask your question. We'll pause for a moment to give everyone an opportunity to signal for questions.

And we'll take our first question from David Lewis with SunTrust Robinson Humphrey.

Good morning. Congratulations on a fabulous quarter.

Thanks, David.

You gave us the breakdown on internal growth from the different areas. I guess the question I'm going to ask is maybe similar details that we kind of look for the outlook moving forward. I assume you would anticipate (inaudible ) Florida retail to maybe pick up a little bit more on internal growth as we move through the year, is that accurate?

Yes, we sure hope that and we would expect that. The situation relative to the workers compensation is not something that we haven't seen before. We saw this occur in the late '60s, early '70s, but to a much greater negative extent, and of course, what happens is when this sort of thing occurs in the marketplace and someone moves in to fill the void and then in the late '60s and early '70s, it was, frankly, self-insured funds which were joined and several liability, and those funds are still in business, although, almost all of them have converted to be insurance companies. We do have a game plan for the workers comp area and we're in the process of implementing it now, and so we would expect that the Florida retail would continue to turn in very good numbers. As to what they're going to do for the rest of the year, gosh, I don't know, not until it's turned in.

Did you actually see the workers comp commissions decline in the quarter?

No. No. What's happening is that when workers comp is a lead line to go out and get new business, and so what's happening is that because we're having less and less of a market to go out and compete on new accounts, it's diminishing our new business in Florida and our new business in Florida was down so the way you combat that is get somebody who will do it, "A," and "B," take another line like maybe if it's wind exposed, maybe that's the attack, or maybe if it's GL and that has problems, we take that attack. So it varies by each individual risks that we look at.

Can you give us any guidance on the other areas, national, western, professional, special and brokerage?

Meaning how, what the outlook is, David?

Yes, where would you look relative the quarters, what kind of progress through the year?

Well, I think we're sort of headed in the same direction we always been headed, and that is our growth rate is going to continue to be about like it is. I think, you know, at the beginning of the year, we gave you an indication we thought that internal growth would be 9 to 11, and we still kind of think pretty good. Now, as we get later into the year, you could have a slowing down of the rate increase. The one area that we do see it happening, already happening is in the largest accounts in the ENS (ph) area. There's no question about those are flat and in some cases down, but, again, back to the vanilla middle market which is where our strength is. Those are going to continue to move up, but they will not be moving up as rapidly as they have in the past. Now, in some of the particular special niches, maybe the professional liability area, some of those loss ratios have not been good in other -- with other companies, meaning brokers and risk bearers, so we could be picking up more business there, but until it's done, it's not done.

Well, since you said the large ENS accounts are kind of flattening out, I assume the biggest impact there would be on the brokerage side?

That's correct.

And would you continue to anticipate that drift off that 48% growth rate you had in the first quarter.

I don't know that. I don't really know. It's possible, but what we're finding is, is, that the growth rates in the middle market ENS, you know, still continues to be very strong and there's two pieces to that, the part that is in the standard market and now it's moving in the non-standard and that's a new account to us, and then the renewal pricing continues to go up, so it's possible that the brokerage could slip off some, but we're not sure.

Okay. Great. Thanks very much.

Our next question comes from Barry McCarver with Stephens Incorporated.

Good morning, everyone and congrats on the quarter.

Thanks, Barry.

Hyatt or Cory, just to follow along on the outlook from the last question, given that the first quarter was so strong can you talk a little bit about EPS guidance for the second quarter and maybe for the full year?

Well, I'd rather just do it for the whole year. I think first call has out there at $1.55, $1.56, and the only thing its really has changed probably from that guidance is that we had a little bit stronger contingency situation, so I tried to lay out, you know, what our best guess was on that, so other than that, that's the only kind of an incremental increase I'd have for the year because everything else is going along the lines of what we initially thought. So that's really the only incremental change so far.

Okay, and then a question for Jim. You talked a lot about acquisitions, of course, but you didn't really comment on some of the size of the acquisitions that are out there. Can you just kind of break out, just talk kind of on the pipeline for brokers with revenue of, say, you know, 1 to 15 million, how many there are and then the larger ones above that, what it looks like.

Well, I think the element about what I characterized, the pipeline is consisting really of 1 to 10 million in size and I think they're trying to release the numbers of that really would be wouldn't necessarily be helpful to you nor can help you interpret that because there is probably, we talked to three, and I say talk meaning that we're getting into negotiations with three, really to probably do one transaction, and there may be double that number on the front end of it that's always people you're kind of just you're meeting and like prospecting for account rights, so I don't know that there's numbers there, I can really provide to you that would be, you know, especially meaningful to you, other than the fact that it contains the flow as it has in the past.

We are stepping up additional resource in the arena in the case of John Connolly too so that we can look at more opportunities in the pipeline and in fact, handle the volume of smaller ones so we can, in fact, do more of those to sustain the growth. And, the fact that there is opportunities that we're just not getting to talk to because of the time element it takes.

So we're very pleased with the agencies that we do have an opportunity with. There's a number of agencies that are definitely there doing a timing game. They're trying to wait and see is it the best time for them to sell today, next week, next year, what's happening with the market, and we'll wade through that and certainly sort out those that can meet the earnings expectations so I think maybe the best point to leave you is that we --activity is kind of as it has been and there's no real large acquisition sitting on the horizon that we feel that we can in any way say that we have definite feelings about getting into that transaction. There's a number that we continue to talk to, but we really don't see that happening in this next quarter and they will at some point.

I think, Barry, to piggyback on what Jim is saying, an example of sometimes the time lag in the Montgomery Agency in Santa Barbara, California, the first time that I met with them along with Ken Kirk, our Regional Executive Vice President, was over two and a half years ago, and over that period of time, there was continued discussion not just with us but with others and finally narrowed it down to us and then it was done. Now, that was done January 1. Now, on February 1 or thereabouts, another Agency was acquired in Santa Barbara and folded in. So, all of a sudden, the 12.5 million excluding contingents of the Montgomery Agency becomes 14, $15 million and there may be others, so, all of a sudden, we're the biggest bear in the woods in that geographic area which is rather enclavish (ph) if you have been seen Santa Barbara.

Second example of that same thing is the rolling in Atlanta of the Essex Sports operation which rolls into an existing office and then the third would be the Rogers acquisition down in Clearwater that rolls into our Clearwater. Fold-ins obviously have great synergies, so those from the standpoint of being able to handle them and the margins that are immediately obtained, those are very pleasing.

Ok, thanks guys.

And next we'll hear from Hugo Warns with J.P. Morgan.

Good morning, everybody.

Hi, Hugh. Good morning.

How is everybody doing?

Good.

Quick couple of questions. We can knock out a number of questions quickly. Cory, on the balance sheet, the debt paydown, was that just a normal principal payment that you made in the quarter?

Right. Those are just normal payments of, you know, there's really namely two parts, the big Sun Trust note that we have and then we had -- and that's a normal payout of about, you know, $3.3 million a quarter and then the rest of it is various little --various other debt that we primarily assumed on the Reedman (ph) acquisition from the prior acquisitions they have.

Now is the interest rate still floats on that, or did you lock that in?

On the SunTrust its still floating. That's the big one I was referring to, and the standard rate is 5.03. That's part of the swap agreement.

Perfect. And then, yes, this question is going to drive you guys crazy. If I look at contingents, right, I'm trying to get a sense for of the 18 million --get ready to yell at me, what percentage of is core and what percentage of this is approximately M&A for the year? I'm trying to get apples to apples. Are you willing to do that?

Well, I'm not sure we know exactly, but I think it's about $2 million on the M&A. Cory, is that about right?

That's about right.

Ok, cool. I think that's one of the key things we're trying to understand. I think what everybody is going to try to extrapolate off your call is trying to understand where the profitability of the underlying books of businesses may be for the underwriters. Across the board, you have seen the profitability improve off of your already above average levels it sounds.

Yes. As a matter of fact, we were in the home office of one of the national carriers three weeks ago, and frankly, on a pretty good chunk of premium, $120 million, we had an exceptional loss ratio, and of course, as a matter of fact, I think, they sort of begrudgingly admitted that our book of business was the most profitable that they had of their larger agents or brokers, so what's happening is that we go -- as you know, we do not have any single one company that is sort of our company, we really don't have one that we're really, really have a huge amount of revenue with, and so that broad spread means that as we continue to segment the business and as we continue to grow this middle market, I think that the opportunities for increased contingent commissions are really quite rosy, particularly since these kind of accounts aren't exposed to the A&E reserving.

Sure. Have they gotten away from all volume contingent to this point, Hyatt?

Well, every one of them is different, Hugh, and really generally what it is, its growth and profitability, and we have some, some -- we've negotiated some extra goodies and which are based on growth and profitability.

Sure. The FIU transaction, when you bought in the 25%, did that officially close on the 17th of January? So was this a full quarter of FIU running 100% as a ( inaudible ) property?

It was the full year. I mean it was right at the beginning of the year, so it's a full quarter.

January 1.

Okay, just wanted to double check on that. And then, okay, so, that's going to be driving up our margins this year just because you're pulling the rest of the 25%.

Right, now, well, --

Not operating.

It's not going to change anything on the pre-tax, Hugh, because remember, everything even last year, the revenues and all the expenses of FIU were in there at 100%, and then what you do is you come down and pull out the 25%, you know, below the pre-tax line.

Okay.

So you know, the top side on the pre-tax and above is consistent so any change you see relative to the FIU there is just on pure growth and operating results.

Ok, perfect.

We don't have to split out the 25% to somebody else ( inaudible ).

Okay, and then the investment income, Cory, you said was kind of in line with your expectations but a fairly dramatic drop-off from last year and from current trends. I mean is this 330, say 350 or 300, was that a good run rate, or was there something unusual there?

No, you know, that's directly related to how much cash we essentially have in the bank.

Right.

And as you make acquisitions that will continue to drop off. You know, we dropped from, you know, $91 million in cash, you know, down to $50 million in free cash flow, and we still get our interest on your restricted cash that is cash being ready to be paid to the bank, so -

That is like 30 and then you were down like 40, so I'm surprised that the magnitude was so different.

We did pay out $58 million in cash relative to acquisitions during the quarter.

Last question, I promise. The Medmal (ph) program, you mentioned at the beginning we were estimating $500,000 hit for the quarter. You threw out a number that was 366.

Same program. That's just the net -- that's the net change from first quarter of last year to first quarter this year.

Right.

We cannot -- all we're doing is getting -- right now, we're only getting additional commissions on business that had already been renewed really last year and we're on an eight-pay plan. We're not renewing any new accounts or riding any new accounts.

So that total of 2.5 million of which that book was last year, you're still comfortable with something less than 500,000 you're keeping and I guess you're...

When you get through the whole year, we'll have, you know, more than $500,000 in it only because of the trickling in effect of the billing aspect of that program. But there's no new business or renewal business on any new particular month.

Is that something where you're just going to try to find a replacement carrier or just saying, we don't want to be in this line anymore?

No. We're very aggressively looking at a replacement carrier. The Medmal market is so screwed up at the moment that it's very difficult now. Frankly, that's a great opportunity, and we recognize that so we're going to put the pedal to the metal and find a solution and if we can, then it will be very good.

Well, great. Once again, you just continue to amaze us out here so we appreciate it. And good luck next quarter.

Ok, thank you.

Next we'll hear from Nick Pirsos (ph ) with Sandler O'Neill and Partners.

Good morning. I have got two workers comp questions. The first, ( inaudible ) will do California. Hyatt, I think you said that you're expecting radical change out there.

Yes.

Can you tell us what you think will occur and likely implication for Brown?

A, and now this is very forward looking, I think they're probably going to bump the rates 40% and they already told us they are he going to reduce the commissions from something like 8 or 9 to 5.5 and on certain accounts and these -- it's my understanding, you know, there's a lot of turmoil out there, so what's flying around may not be what hits, but on accounts coming out of PEO's, and as you know, lots of PEO's are not doing well at all, on accounts come out of PEO's, they're not going to pay any commission for the first year, and the reason is because when it comes out of PEO, we have no way of knowing what the loss ratio is. So that's what the California deal is.

And now, as to how much workers comp we have in California, not much. So it's not going to have much of an impact on us, although if you're in our, let's say, Nevada office, you know, they say, gosh, it's going to have an impact on us, that office has $5.5 million of revenue and of that $5.5 million of revenue, I would guess that probably in the neighborhood of $750,000 is workers comp. Not all of that is with the state fund, and if the state fund does raise the rates 40%, I believe that juncture then commercial markets will move back in because there will be, I think, profits to be had. So when that occurs, then, of course, and we have other markets to place it with, then, of course, that opens up a greater opportunity, so it could be a slight negative to us for a period of time and what is not meaningful because we have a total revenue base now and this is on a 12 months for '03. We have about $55 million in revenue in California. It's the second largest state. However, of that, almost 30 million is programattic business that has no workers comp at all, and so that leaves you let's say another 25 million, and it's not a huge state for us yet.

Great. That was very helpful, and then I guess turning to Florida, I guess, similar to workers comp color. Just trying to help reconcile the 13% increase that was, I don't know, requested if that is the right way to term it, and yet your comments suggested that you would expect a decline at of what eventually comes out.

Ok, well, it's even more contortive than that, Nick. There is a rate increase that went into effect on April 1, and the average rate increase is approximately 13%, so you know, if it's health care, it's more than that, and let's say other classes, it's not as much. So depending on where your mix of business, it may have a greater or less impact.

The second thing is that rate increase is unusual in that it was effective for all business renewed, new and renewal on January 1 forward, so as of 4/1 on a policy that renewed on January 1 at a rate level of X, based on the new rates, their rates that they're going to be charged on a go-forward basis would be those new increase rates. Now, what's happening is the legislature is in session, there's a tremendous amount of pressure from a lot of different places to change some of the statutory limitations on workers comp and if that occurs then every time that's occurred in the past, and I'm familiar with about three times that it's occurred, there's been an automatic 10% reduction. So having said that, you know, rates go up 13 and then you back them off 10% of that, so what have you got? Well, maybe 3 or 4%. So is that going to happen? I don't know. The best information that we have right now is that a meaningful work comp reform will not happen in the regular session of legislature which ends in 30 days or so and if it's going to occur, it would have to be a special session called by the governor which we understand he is very interested in doing that, but whether or not it occurs or not, I don't know.

That was very helpful, and just as a follow-on, I think one of the reforms being discussed in Florida is for the state to create a state workers comp mutual insurer. I don't know if you've read in that or have any thoughts on that and what the implications could be?

I really don't know. I know that's been surfaced, but whether or not that's real or not, I don't know. The state is grappling with a whole bunch of problems relative to funding, you know, the other financial needs of the state like health care and education so the workers comp is way down on the line.

Ok, great. Thank you. That was helpful.

As a reminder, if would you like to ask a question, press star one at this time. We'll take our next question from Langen McAlenney's Steve Lave (ph).

Good morning everyone. Steve Lave at Langen McAlenney.

How you are?

Well, thank you. I was curious or I was hoping could you share commentary or your thought process, Hyatt, as it pertains at what point in time do these better loss ratios in the plain vanilla market business that we speak of start translating into lower prices on renewals?

Well, that's a damn good question, and I don't know the answer to it. ( Laughter ) It's sometime in the future.

Steve, I just obviously, a stab at that is that as soon as you can convince, you know, some virgin capital to go to a PNC risk bearer, it may bring pressure on that, but there doesn't seem to be a lot of people lining up to do that at this time. The 2001 class in Bermuda it looks like it's being put to work very quickly, and yet there doesn't appear to be a class of 2003 lined up to get into the risk-bearing business, so without that new capital, I suspect that it can continue to peg away at increases, you know, until that capital would change that.

Okay. Well, thank you.

Ok.

Next we'll hear from David MacVean (ph) with DSM Capital.

Yes, hi, good morning. I was wondering if you might be able to break down the incremental impact to pre-tax from acquisitions done in this quarter, and then kind of talk about, you know, how that compares to what is normally done on average.

All right. Don, if you look at just the acquisitions that we made during the first quarter, they essentially came out of the chute at a 26.8% operating profit number, and that's what are the controllable costs of a profit center manager. That is essentially before interest and amortization. The pre- -- if you take that plus our cost of capital, --well, I mean, that's the best number to use. On the pre-tax, you know, they may flow through before the eliminations of our cost of capital, you know, somewhere in the 12% pre-tax number, end of 12%, but the operating profit number is the one we gauge our purchase price off and how we evaluate the profit center bonuses.

I see. Ok and then, I guess than from the top-line standpoint, how does that come to your average quarter?

Well, let me, you know, the number that I gave you, you know, that 26.8, that's what we use as our core because that's without contingencies. Throw in contingents, that's probably 30.3.

Right.

Now, if you take all the old Brown & Brown offices that were here in, say, two thousand, those offices on a blended basis have a core operating profit of probably about 32.1%, and you know, and then you know, over 35 when you throw in contingencies, the, you know, the 2001 acquisitions that we did outside of Reedman, you know, they generate an operating profit of probably about 29%, so you can see that our acquisitions do, in fact, as a group come out of the chute and get closer to our margins on the old Brown & Brown very quickly, and it's really based on the discipline that we have on the acquisition front and you know, the up-front expectations of what we have before the sellers that come and join us as partners.

Okay.

So, hopefully, that gives you a flavor for the returns.

That's helpful, and now have you offered guidance in terms of your total expectations for acquisitions in '03?

Actually, we don't give guidance on that, but apparently the street says we're going to do 60 or 70 million dollars of acquisitions. Now that's not all flowed in. That's just during the year.

Right. Excuse me.

There will be annualized new business but not necessarily flowing in in '03.

Great. Thank you.

Ok.

And as a final reminder, if you would like to ask a question or make a comment, press star one at this time. And we do have one final question from Steven Gabels (ph) with Dreyfuss (ph).

Good morning, gentlemen. I may be getting senile, but if I recall correctly, three months ago you were giving us a thought of go-forward core commission growth, organic commission growth of 10 to 12 and now you're saying 9 to 11. Is that you actively telling us it's going to be a little lower, or am I going crazy?

No, Steve, you're having early Alzheimer's. It was 9 to 11 when we talked in January.

Sorry for the mess-up.

Not a problem.

It appears we have no further questions at this time. Mr. Brown, I will turn the call back over to you for additional or closing remarks.

Okay, well thank you very much, Rachel, and thank you all for participating in the call. We're very pleased of the results and now we got to go do it again for the second quarter and so we'll be talking to you again in July. Thank you, very much. We're adjourned.

That concludes this conference. Thank you for your participation.