Brown & Brown Inc (BRO) 2003 Q2 法說會逐字稿

Please stand by. Good day everyone and welcome to the Brown & Brown Second Quarter 2003 Results Conference Call. Just as a reminder, today's teleconference is being recorded. 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 for 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 these risks and uncertainties that have been or will be identified from time to time in the company's reports 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.

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 conference. Such differences may be material. With that said, Mr. Brown, I would now like to turn this conference over to you.

Thank you very much Phil, and good morning to every one. We have here in the room our Chief Financial Officer, Cory Walker and Jim Henderson, our President and Chief Operating Officer. And I'm going to now turn it over to Cory to talk about the financials.

Thanks Hyatt. We actually had a very good quarter despite the fact that we had a little bit lower than expected internal growth rate, but we also once again methodically slightly increased our margins as we continue to focus on reaching our intermediate goals of B40. Our earnings per share for the quarter was 41 cents, up 32.3% from the 31 cents we had in the second quarter of 2002. For the quarter, our total revenues increased 20% to $137.9m which was up from the $114.9m we had in second quarter last year. As always included in our press release we have a internal gross schedule that shows the total growth rates and the internal growth rates from commissions and fees which excludes the profit sharing contingency revenues that we got for the quarter and any revenues from offices or books of business or programs or niches that were sold by the company or discontinued or terminated since the third quarter of last year, and we refer to these adjusted revenues as core commissions and fees. As required by the SEC, we have included a complete reconciliation of that internal gross schedule to the total commissions and fees line item included in this consolidated statements of income. As you can see the only reconciling item for the 2003 quarter is the contingency commissions of $10.2m, which when added to the core commissions and fee total, will agree to the $137.3m of total commissions and fees on the statement of income. For the 2002 quarter, there was $8.2m of contingency commission, and $3.6m of revenues that related to the businesses from those offices and programs sold or discontinued. The final reconciliation items for that second quarter of 2002 was the neutralizing adjustment that we -- that related to the accelerated workers' comp commissions where we received all the commissions upfront from one of our carriers in the first quarter 2002.

By using those reconciling items, you'll be able to agree right back to the statement of income. But looking at the details of the internal gross schedule, our total commissions, core commissions and fees for the quarter increased 23.4% or $24.1m of new commissions and fees. Of that total, $17.9m for that revenue were generated from the businesses that we acquired since last year. The remaining $6.2m of revenue was therefore that internally generated organic growth, which reflects that 6% internal growth rate. The important point in these growth rates is that everyone of our businesses contributed with positive internal growth rates. 65% of the internal growth dollars reflected there came from our retail segment. About 15% of the growth dollars came from each of the program segments and the broker segment. With the remaining dollar amounts coming from the TPA segment. I will talk little bit about each of the activity of each those segment in a minute, but just summarizing what those growth rates are for the retail -- led the retail growth with an 8% internal growth rate, national retail and western retail had a 2.4 and 3.9% growth rate respectively. The combined retail segment, which makes up almost 75% of our total revenues had a combined growth rate of 5%. Just to keep that in perspective though, the internal growth rates for the combined retailed segment over the last four quarters range from about 7.6-9.4%.

Now the professional programs grew at 1.4% and again over the last four quarters the growth rates for these segments were a little bit lumpy and it ranged from the low of 0.2-9.1%. This segment also contains the CalSurance operation which was our largest acquisition last year at $24m in revenue. Now the CalSurance wouldn’t be contributing to the internal growth rate until their 1-year acquisition anniversary is up November this year.

Special programs continue to grow at a double-digit rate at 11.5%. The brokerage division led the company with a 16.1% growth rate, but had the largest drop in the internal growth rates relative to the previous four quarters where they grew on average around 50% growth rates. And then last segment is the third-party administration services group, which is our lowest margin business, but only accounts for about 6% of our total revenues had a 5.2% growth rates.

If you look at expenses, while our total revenues grew at 20%, our total expenses only grew at 17.8%. And they are relatively consistent but out of the six different line items that we have on the income statement all of them had lower -- were lower than last year as a percentage of revenues with the exception of amortization expense, which was slightly higher just due to the acquisition, and I think that's important from an expense side to show our continued focus on being more efficient.

Our income before income tax and minority interest for the second quarter of 2003 was $44.5m or 24.8% higher than the $35m we had in the second quarter of last year. The margin on this pretax earnings was for the current quarter 32.3% which is up from the 31.1% from last year. After taking in account for income taxes which is really at 38% less the state income tax credit of about $250,000 our net income for the second quarter of this year was $27.9m up from the $21.4m in last year's second quarter, and that's a very nice 30.5% earnings per share or total net income growth.

If you look at the six months ended June 30th, 2003, we had total revenues of $282.6m, which is up 25.1% over the 2002 six month period. Our six month pretax margin or the income before income tax and minority interest for 2003 was up to 33.1% and that is an increase over the 30.7% in the six months ended 2002. The net income for the entire year is also up 40.7% and ended the June 30th period at $58.5m up from the 41.6m. So all in all, it was a very good quarter and a very good six months that we are very pleased with that I will turn it back over to Hyatt.

Thanks Cory. We are very pleased with the results, and we are very pleased with the contingents continuing to increase. There is a couple of good things about it; number one, we get dollars in the part, and the second thing is that it’s a surefire indicator of the fact that our book of business is even more profitable which gives us some additional input risk [variables] when we need it on difficult accounts. Looking across the various operating divisions, the -- and I will try to give you some flavor and then we will be glad to answer questions about any of the specifics. We -- in the Florida Retail, the market pricing is moderating. The worker's comp is becoming more difficult to place and something that we haven't seen in a while is that some markets, meaning some insurance companies, closed down after the first week or two, or two and half weeks of a month. And what that means is that they won't write any more business that month because they are rationing the amount of business that they write. I think everyone knows that there was a change in the law down here in worker's comp in Florida, and basically what happened was there was a more stringent definition of total disability and a more stringent definition of partial permanent disability. And there were some limitations on legal fees. The estimate by the actuaries was that that would reduce loss cost maybe 12-14%, however there was no mandate of rate reduction, so the 10%, 11%, 12% rate increase that was going forward. The last time we talked, it's continuing to go forward now. Having said that, the companies have been asked to come back and make filings by the end of the year to take into consideration the changes in law, [and so I don't] know exactly what that means.

We kind of look at the Florida marketplace as what would -- could be called blended. And what that means -- is that one some prices, they continue to go up particularly on certain umbrellas, on certain wind exposed properties, and then by the same token on certain wind exposed properties that had been in the E&S market, those rates are coming down on renewal. So it's kind of all over the place. In National Retail, it's somewhat similar except that we do find that the economy in upstate New York and in the Midwest is having an effect on this. The -- in Ohio, Indiana, if we have manufacturing accounts, those exposure units are down on renewal, and there are return premiums on audits that are coming in. The [vanilla] middle market in the Midwest looks just like that the renewals are coming in and have been coming in the last 60 days, pretty flat with the expiring unless there has been a bad loss ratio. If you look in the Western Retail, the economy seems to be pretty good out there except in couple of -- maybe one area in California. The Calcomp is still in turmoil, and there is downward pressure there on commission percentages.

And we are seeing in Western Retail, as we are seeing in other areas of the state of United States where we operate; we are seeing that when we are writing new business, it is coming in at less than expiring. Now that’s -- again that’s vanilla stuff, it's not the tough stuff. Tough stuff, kind of, falls into a different category. The area where we see the largest change is in the E&S brokerage, and that was as Cory mentioned to you, the internal growth rate was down to about 16%. There is a couple of things that makes that a little bit difficult to look at, and the reason is that there are couple of profit centers in the brokerage division; one is called Haltheon underwriters and another one is -- that is really standard market MGAs. The other one is Attenborough [Oklahoma,] Graham-Rogers, and those have been flat and down a little bit on their renewals for most of the quarter. So, we do see the E&S rise in prices. [...] at the rate. And I know that everyone would like to have some sort of a very objective by the line kind of comparison as to what is going on. And it is very, very difficult to do. So, I am going to try to characterize the various moving parts and where they seem to be going. As I mentioned, we do see rate moderation in the vanilla middle market depending on where you are, it is still 5-15% unless there is competition and it's pretty flattish. One thing that we are seeing more is that consumers, businesses, individuals, etc are buying less coverage. As the prices have gone up, people have been interested in keeping the total outlay of insurance dollars at about the same until lapse. Therefore that means that maybe we don't buy the umbrella this year or maybe we may buy umbrella at less limits, and maybe you know we are not going to invest an additional inventory, therefore we don't need the additional [insurance and etc.] So, that is having the impact.

Employee benefits; now we have 10-11% of our total revenues as employee benefits. Up until the beginning of this year, those rates were 25-50 or 75% for a couple of years and didn't seem to show any signs of moderation; however -- and this is true across all the states in which we operate, we are announcing 5-15% rate increase. And of course, there is -- there -- again those individuals, those businesses were shopping in many cases for less coverage. There is pressure on commission push backs. We're -- that's not new. But there seems to be more pressure. One of the national carriers just sent out [an admissive] saying that as of January 1, they are basically going to cut the commissions on worker's compensation to about half of the current commission percentage. And that would be sort of from 9-10% down to about 5%. And if it is unsupported, then that means they are only going to offer 2%. Well, what that means is in an unsupported comp, it will go someplace else, and there will be some movement on books of business, I would imagine, because of the pressure to maintain the same commission percentages.

We also find, and this is something that's kind of hard to put your finger on, we did an analysis of about half a dozen of retail offices relative to APs versus RPs. Now let me talk to you for a moment about what that is, AP is additional premium, RP is returned premium. Worker's comp, general liability, and certain other lines are based on an estimate of exposure units since the beginning of the year and then there is an audit that’s done at the end of the year. So, those audit additional or return premiums come in 3, 4, 5, 6, 7, 8 months after the expiration of the coverage. And so in the six offices that we looked at, the net of the additional premiums, and taking away the return premiums, was that there was a net decrease in revenue versus a year ago same quarter. So, that has something to do also with the economy. So, we were frankly surprised at internal growth rate only being 6%. And so it is because it is very difficult to estimate based on all the moving parts. And so looking into the next quarter, our best estimate is that the internal growth rate could be 4-8%. Again, lots of changes, lots of things that are changing that are difficult for us to estimate at this time.

Another issue that I wanted mentioned is that in our 10Q back in April, where we indicated that we were involved in some litigation in Texas as disclosed. We are currently in mediation as directed by the court and as I make out everyone recognizes mediation is strictly confidential and our policy is not to comment on pending litigation. So at this juncture, I would like to turn it over to Jim Henderson who will talk a little bit about our acquisitions.

Thank you Hyatt and good morning. Provide you with a little recap of our acquisition activity for the year today. For the first 6 months of this year, we have completed 10 transactions. The revenue from – the annualized revenues from both 10 transactions is about $26m. If you compare that to 2002, the first 6 months of 2002, we completed some 19.9m in acquisitions. It was 11 transactions involved in 2002 versus the 10 of this year. The $26m revenue, I mentioned that does not include the transactions involving the purchase of the 25% interest in the FIU facility from Trenwick and certainly we are very pleased with the margins and with ability to bring closure on 100% of our facility. The acquisition timing is one. If you monitor it on a quarterly basis it is lumpy. There is no way you can really time this so that there is an even flow throughout the year. In terms of this year, we are very pleased with those we've done and as certainly the activity at hand.

We continue to be a cash acquire of assets and doing so obviously you need to have your balance sheet in position to stage and to acquire. In that regard, we are very positive about our balance sheet of those not that familiar. If you look at the current cash level, cash remaining from our following offering. If you look at the cash flows that we anticipate this year of some 100m plus and frankly a very low debt ratio, we are very well poised to continue to use cash as a tool to fund acquisitions if and when they really fit and make sense for the company.

This past the -- really the first quarter we talked to one of our senior people, John Conley. John has been a long time operator of an agency and Clearwate. He came with us few years ago and in the second quarter this year we asked John to move over into a full-time position to help us in fact scout agencies and tell the Brown & Brown story and John is very uniquely qualified to -- I think to handle this task and increase the activity with respect to acquisitions. J. Adams continues in that capacity and so that really in fact doubles the number of people out there telling the story to a greater number of agencies. Touching on the acquisition activity with the current market.

If in fact we are looking at a flattening or a changing market with respect to pricing in organic growth, it's a time that we get even certainly that more cautious, but we want to look ahead as to look at sustainable earnings in the targets that we evaluate to be quite certain that the earnings that we anticipate will be there given the changing age of the market. With respect to this we have continued to strengthen our due diligent team and with today really as teams, I think these people are the best in class that goes out every acquisition we get involved in. We get applauded from those we deal with in terms of the professional manner in which they conduct themselves and the information they are [growing do] to help us to make decisions to move forward. The -- we continue with our same formula as the six times it's a forward-looking actual performance that process is not changed. This past -- certainly the tax changes that came into play, I just want to mention those, no great revelation but I -- we view that as certainly from neutral to a positive with respect to acquisition activity because there is some sunset provisions in a tax law that may in fact want to encourage individuals to execute transactions in the near term as opposed to long term.

The -- and last I want to mention, with respect to the market changes this is the time that we really -- to be even more cautious about acquisitions and there are numbers, the number that come to us we really want to go through those to make sure that the key word here is sustainable earnings. And to make sure that the teams of individuals that we talked to, the companies, the people there is, I said, we frankly spend a lot more time on the people side of a transaction than we do on the financial side making sure that the people and the people line up that we're willing to walk forward to the other and I think deliver performance that obviously our shareholders would expect.

So I guess -- in closing on acquisitions we're very pleased the way the activity, the pipeline looks really as positive as ever, and I perhaps with this change in market, we believe that based -- perhaps even a greater activity for those have been kind of sitting on the fence taking advantage of an upswing and in fact if the future looks a little slightly different for them, especially where they have less carriers coming into play where in fact some of their pet relationships may no be there tomorrow. This really opens the door for us in a big way to going in and be a partner with the agencies. So again very pleased and we look forward to continued really a level of activity in acquisition side.

Thanks Jim, and I just a piggyback a little bit on Jim's comments, we do seem to see that in the agencies that are $1-2m to $6-7m in revenue that there is less market capacity for them, either because, lets say if they represented Camarillo, the camper is no longer there or they represent standard companies who have decided to limit the number of agencies that they have and therefore they no longer represent A, B, or C company which limits their ability to place new roof and to find market for renewal risk that for some reason or the other have to be moved. So all of that always well for us but the same token we have make sure that we can bring to the table some help so that they will be able overcome some of those problems. And we've been able to do that pretty well, so all in all we're quite rosy about the outlook for the rest of the year and at that juncture Phil we'll turn it over to you to open up for questions.

Thank you Mr. Brown. To ask a question you press "" followed by the digit "1" on your touchtone telephone. If you are joining us with a speaker phone please release your mute function so your signal may reach our equipment. Once again that would be "" "1" to ask a question. And we'll pause for just a moment to assemble our roster. And our first question will come from David Lewis with the SunTrust Robinson Humphrey.

Good Morning.

Hi, David.

Can you give us -- obviously you've got your whole focus probably on the internal growth side, you kind of talked about and gave us a lot of detail of vanilla middle market of 5-15%. If we kind of dig into that can you may be break that out from commercial liabilities versus property, just what I've heard is property clearly slowing down in many case being quoted below, so that's part of the impact, is that incorporated in that 5-15 or is that more of a commercial side?

Actually where the property is written by separate company, the price pressure has been greater. In other words, there have been increases there, if it is a package and the property, the GL, the auto, the inland marine all are in one package, it doesn't seem to be quite as intense. But we are saying some things, David, where, a property line might've been pulled out of a package and written in an E&S company and moved --now its moving back to the standard line. Therefore A reduction in the price although in that case may be the commission might be close to the same because we'd be getting lets say 15 or 12% versus 7 or 8%.

Okay, and if I recall correctly if you go back, kind of over a 10 year history with varying cycles and trends there, haven’t you to actually been able to grow your internal growth some where in the 5-7% range?

I think on an average that -- probably I don't have any numbers in front of me but that sounds pretty good. I know that the lowest internal growth that we had was back in the heat of the soft market. I think that was 95, 96, 97. I think we grew 1.5-2% internally a couple of those years.

And final question if you could, the 6% internal growth and it was difficult to might be guesstimate but could you say that half of that's coming from pricing, half of those coming from new business or can you give us any direction there?

We just -- I really don't have that information available. Our systems just don’t track that. David, I'm sorry.

Okay. Great, thanks very much.

Next we have from Greg Levine with Citigroup.

The question was asked but I am just trying to think through the little bit on the -- when you develop the forecast of 9-11% that you also reiterated in April.

Yeah.

Just conceptually how much of it was expected to come from rate versus everything else such unit count, attrition, place-making abilities, exposure?

Well, I don't know that we can really quantify that. One thing though that we had anticipated and I not sure that the anticipation was correct. We think that the risk bearers are still substantially under reserve in a couple areas, workers' comp being one. And with the asbestos additional reserves and etc, we felt that there was going to be a little more steel in it and the resolve and that's not necessarily the case. Now, I will see this in the regional companies where we do an awful lot of business. Those prices never really escalated the way that many of the prices. They were always 10-15% for a year or two and now many of those companies as you know are not publicly own. They are mutual companies or private ones and so now what they're looking at is flattish on renewals and being aggressive on new businesses. And so when we are saying new business being written at less than expiring as we are then that's signaled the change.

Okay. And since you last updated us in April, you mentioned the number of pressure points that are affecting revenue but since then do any of those items deflect or differed the achievement of the margin extension story?

No. I think one thing Greg, you have to look back at our numbers even when the prices where going down 10-15% a year, we increased our margins every year. And one of the things that is interesting about our culture is that we focus on a number of areas obviously getting new business and keeping renewals. At the same time, we will look at account from the basis of profitability and as accounts become apparent that are not profitable we either have to make them profitable or we have to have them go some place else. By the same token, the percentage of the slices of business within an office also contribute to the margin expansion and what I am thinking there is and I'll give you a couple of examples. The two highest margins pieces of a retail shop and retailers are about 75% of our business -- two highest margin pieces are personal items and employee benefits and we have personal items that the averages 36-38% margin and the ones at the top end will be at the 45-50%. So what we have is we have half of our personalized departments operating below the average and so as you start -- as you get those people to become more efficient and understand how to use systems better and understand how to use online advantages with carriers then they become much more profitable.

So all of the sudden someone's was operating at 28 or 38 or 36 or 40. By the same token the employee benefits area is the second most profitable. If you look at it on an average, it would only be in the neighborhood of 28-30%. That would be the average of our departments across all of our profit centers and so however, if you then look at those offices where there have been employee benefits departments for a longtime or you look at offices like out Naples benefit or our Harford, Connecticut office or Joliet, Illinois, where they are either 100% employee benefits or they are a majority employee benefit. You will see that those margins are in the 40s -- 42-43%. So all of this is a constant focus on getting new business, keeping renewals, and operating internally as efficiently as possible. Now, you know in a sales organization, which insurance brokerage is a sales organization generally people speaking sales people are not as focused on efficiency as they are getting the business and that's what they should be.

One of the things that makes us different is that many of our heads of offices who are very good sales people also have financial backgrounds. They are CPAs or they have been involved -- they have a finance degree from college, and our systems constantly focuses on efficiency and higher margins. As an example we are getting on Friday night, we start our regional executive committee meetings, and we have -- they are split around the United States; one in the Daytona, one in Tampa, one in Pittsburg, one in Houston, one in Phoenix, and we bring all of our profits and managers together. And again it a show and tell, and not only do we break out based on the operating profit margins of the individual offices, but mainly break it out on the basis of departments and whose departments are operating at the top level. So that's a long way around Greg of telling you how the constant march continues to march and I don't know of the top of my head what our operating profit margin was this quarter, but last year for the whole year it was somewhere between 34 and 35%, and I think it has moved up a little bit this year so far.

Okay. I appreciate the color there and just finally, when you went through the companies, the small business buying less coverage, is that justified meaning the terms and conditions imposed and loss litigation, your plant safety measures with the expected losses are they going down? Do you think the small businesses are absorbing more the working layer?

Well, I can understand based on what you just said and the way you articulate it, you are talking like a risk manager of a fairly substantial firm, manufacturing or otherwise. I am talking about someone who has 50 or 60 or 70 employees or 20 employees, and they have a $110,000 to spend on their insurance and they are not going to spend any more than that. And so they are not looking at exactly -- they are not looking at their insurance exactly the way you are looking at because those people generally have very low if any deductibles, number one, and so if they decide that they have had a $5m umbrella and they are only going to now look at taking a $1m umbrella or no umbrella because their underlying limits are $1m with just liability for no deductible and they never had a claim of more than $10,000. They are going to be willing to absorb that particular risk which they don't think is much of a risk anyway and take that money and buy a new machine with it or instead of having down earnings the quarter maybe additional $5,000 or $10,000 or $15,000 perhaps to get to the same level. So it is different than the larger risk that you are talking about. So this is not unusual in the middle market. It seems to us and no one has really articulated that, but it seems to us that there is a range of dollars that businesses and individuals will be willing to spend for insurance and when they hit the top end of the range then what they start doing is knocking reducing recoveries that they have.

Okay. I understand. I guess it was easier before they had the 9/11 as an excuse to bump up the spending. Right now we just don't have any events like that.

Right.

Thanks.

Okay.

We will be going well here from Nick Fisken with Stephens Incorporated.

Hi, good morning everyone.

How are you, Nick.

Doing great. Can you give us some comfort level to what the First Call consensus of $1.60 for this year? Do you guys feel comfortable with that EPS number for '03?

I think basically, what I thought it was that First Call was $1.59, but whatever it is, we feel not uncomfortable and that assumes that; a, we don’t have a big [hurricane] in Florida; and b, that we make the acquisitions that we would normally expect to make in the last six months.

Is that -- on an acquisition comment, is that roughly equivalent to what you did in the first six months?

Well, somewhere in that neighborhood, we don’t have exactly an articulated goal, but someplace in the neighborhood of, yeah, that amount.

With the E&S lines, the internal growth rates are going down so much, are you seeing that considerable shift for E&S back to the primary lines?

Not really. I mean there is a little bit of that. On some lines, spotty lines, they were kind of HPRish, meaning highly protected risks, almost a highly protected risk where because of capacity a year ago, they were with -- they went to non-standard market and non-admitted market, and now they've moved back to, you know, a standard carrier an admitted carrier; we're seeing some of that. But we are seeing for instance, I'm thinking now of [Frame & Josten Masonry] apartment complexes, we're seeing some Lloyd's quotes coming in that are undercutting the non-admitted companies, U.S. companies, you know, maybe 20, 15-20%.

Nick, this Jim. I guess a couple of accounts we've seen where in fact the admitted market traditional carrier would come in and actually protect their account today to protect that property versus maybe a year ago, two years ago, they might in fact just vacate it and let it go to the E&S market. So, it’s a slowdown and a growth resulting from that flattening of the movement.

Okay thanks.

You will now hear from Nick Pirsos with Sandler O'Neil Partners.

Good morning, just a couple of questions. Just to confirm, was there any change in the retentions in the quarter?

Retentions?

Generally speaking, you guys would as far the same store sales, you would--

Oh, retention of business?

Yes.

No.

No change. So to the extent that there's this slowdown, high -- between rate reduction and the kind of changing client purchasing patterns, do you think one is more than the others -- you know, two parts rate, one part client or the other way around or are they about 50-50? What [they got to tell] you?

Well, it's hard to estimate that, Nick. But I will say this, there is a lot more pressure on the -- upon renewals during really the last 6-8 months than there had been previously because obviously people are trying to fight the rate increases. And so what has happened is as a result of all of that yanking and jerking as we call it, what we really have is we're getting renewal quotes on the day that the [down gone] business renews. So that puts a lot of stress on everybody. But in terms of -- you know our retention seems to be ruining about the same as it always has.

Okay. Maybe you could just help me with some of the numbers, and just looking at Florida Retail, I don’t know if its just a statistical quirk, I may have got an error on my numbers, but if I look at the internal growth in Florida Retail in the four quarters of 2002 compared to the kind of dollar change in Florida Retail, the dollar change has always exceeded the internal growth. And yet if I look in this quarter, the dollar change is -- you're up about 7.5% and yet the internal growth is up 8%. So, I'm kind of curious about that relationship.

Cory, do you have any--?

Nick, you know, what I'm sorry, but I'm not sure I follow you.

Okay. Look for instance in -- if I go back to the fourth quarter of '02, your internal growth in Florida was up 12.9%, but if I just look at the premium dollars for internal -- for Florida Retail fourth quarter '02, versus fourth quarter '01, you're up 13.5%. So the percentage -- the quarterly percentage change was greater than the reported internal growth in that period.

Well now don't forget that every quarter, you know, the base is growing. So I don't know if that's the part that's drawn the percentage off. What I mean that schedule if you look on the facts, I mean it’s just a straight calculation, straight across an acquired business.

Okay, okay may be it’s the --

Just if you look at Florida Retail for this quarter, there is a total change of $7m.

And I calculate that to be 7.5% second quarter over second quarter. And yet the internal growth is up 8%, so I am confused by that.

Well I mean you got to pull out your acquisition amounts. You take that 3.06m that had total change, and of that 3.86 was acquisitions. So you subtract that from the 3.06m and that’s your net internal growth and then divide that by last year's quarter base of 32.576m and that gets you to the 8%.

Okay, let me look at my math again, I may most call you afterwards.

Okay.

Higher to the extent that you've talked about kind of a change in sales practices during kind of hard markets, soft markets. Do you anticipate any change you know kind of going forward?

In our selling practices?

Yes, to the extent that in softer markets, you always talked about prospecting in harder markets, so just where you're thoughts are.

In a harder market, it becomes a placement market, and that’s still where we are. In a softer market, it becomes a prospecting kind of market meaning that you are trying to get people interested to allow you to work on their insurance. Today; just about everybody is interested in having you work on their insurance. The question is can you get it placed at terms and conditions or price that would give them the incentive to move. And so, we think that placement, the hard market mentality continues because what's happenings is that companies are non-renewing accounts on the basis of a change in some of their own goals and objectives. And an example of that would be -- is the Royal & Sun Alliance has made a decision back the 1st January to non-renew all monoline worker's comp. And so -- and regardless of whether it was profitable or not. And so now we have been given a phone call in the last couple of days that in fact they want to take a look at, on a go forward basis, at those accounts that were in fact profitable that are monoline and the ones that are not profitable or monoline, they still don't want them.

So all of a sudden now, instead of us going out and finding a new market or maybe two new markets for that particular piece of that business, the existing carrier is willing to renew it. So all of that sort of thing is the swirl that goes on around the placement piece. And we do have lots and lots of opportunities to cloak, but in fact if we don't feel like that we can -- that we have something to offer to the individual, then we simply don’t get involved. Now I will say this in this marketplace, we have gotten more broker record letters than we normally do. And the reason is -- is that somebody didn't properly communicate some of the price increases or there has been a bruising of the relationship with the client, and therefore they are willing to take a new person, give them a broker record letter and let them take over the account to see if in fact they can do better than their current agent because they don’t want to do business with the current agent anymore. That’s a difference.

Nick, its Jim. I guess typically in a flat or softing market, I think we have performed better in that environment relative to our peer group, and the reason is again when you got more spears you are taking out there to the customer meaning more options, and more companies, and more relationships, you tend to have an advantage at place better than just simply that in fact you are the incumbent and you have got a price. So we -- in that environment, we performed very well.

Great, thank you.

I would just like to remind our audience that if you would like to ask a question you may do by pressing the "" key followed by digit "1". If you have found that your question has been answered you may remove yourself from the queue by pressing the "" symbol on your touchtone telephone. Moving on, we will hear from Ken Coccoburg (ph.) with Stadia Capital Dotcom (ph.).

Hi it's [Ken Coccoburg] good morning Hyatt.

How are you?

Doing well thanks. Just looking at some of the headline issues that you discussed in the quarter, (a) I wanted to know if you have sort of altered your long term revenue bogey for the company, and second just with regard to the EPS guidiance, you mentioned your comfort levels, but that was also predicated on doing some acquisition. And I thought, I heard that your little big questionnaire about the pace of deals for second half. I just wanted to clarify and verify?

Well, yes first the question about altering our long term game plan. Our game plan has always been a long term game plan and it’s not altered. We are the same three hours in a cloud of dust audience an item. So there is no difference there and we do equally well and times when prices are moving down and prices are moving up, so no change there. On the earnings per share issue the bottom line is that I think we've always mentioned that the issue of hurricane in Florida could have an impact. And in terms of the acquisitions, we never count anything until it’s actually done, and so we don’t see any factors out there that are either going to preclude us from making acquisitions or its going to help us unduly or in a way different than in the past. So, we just continue to look and talk and we see the opportunity to make acquisitions at about the same pace that we made them in the past. But I think what you heard me say was, or may be it was Jim that we are very careful about getting into an acquisition where some one is anticipating that because they have grown 25% the last two years, they are going to grow 25% the next year. We are very sensitive to that issue, Ken.

Thanks very much.

Ron Bobman (ph.) with Capital Returns has our next question.

Hi thanks. I have got a couple of questions regarding contingent commissions. In the press release your references that some portion whether it be production or profitability or the metrics to determine whether the contingent commission were paid, and my first question is, are substantially or majority of the contingent commissions include some profit component to them?

Yes that is really almost all of them are profit oriented. Now there is growth piece to it, but one of the things that’s very helpful to us Ron is that our business is the vanilla -- primarily the vanilla kind of business and that business even if you look at our contingent commissions. If you go back all the way to 1993, when we started tracking, I think you will find that every year with the exception of one that our contingent commissions moved up as a percentage of eligible premium, and the one year that they were down a little bit was when hurricane Andrew hit in 1992, the commissions that we received in '93 for the year '92 were down a little bit and then the next year they kept moving up. So we were -- we had -- and of course that gives us an advantage of the fact that our contingent commissions are greater this year than they have ever been, is a direct indication about the profitability of our business. And the other good thing about that is, is that because the profitability that we receive our contingents on in '03 is really for '02, assuming that '03 is also as profitable which we have no reason to believe that it wouldn't be as or more profitable than '04 and beyond looks good also.

What's your policy on the timing of recognizing the contingent commission revenue?

Whenever we get it in.

So its the collection?

Yes.

So its not subject to adjustment for future adverse development at the carrier site?

No its not, and as a matter of fact that’s kind of interesting Ron that you had mentioned that. The – we have -- when we get in contingent commissions, we look on pretty done in carefully because they can be incorrectly calculated and so we may get some in March. That we don't actually enter, maybe until April because we are in a discussion with the carrier because we think it is incorrect meaning that we should get more. So -- but once we have got it nail down and we feel that it is conclusive than yes we enter at time.

Thank you.

And David Lewis has a follow-up question.

Thank you. I guess actually follow up here on the contended flow of it. If I recall correctly, the fourth quarter of last year had pretty strong contingence and I frankly don't remember exactly why -- and we originally anticipate if contingence to be down modestly in the second half of even though it's much smaller portion of the overall annual contingence. Can you give us any thought process on that?

Yeah. That chunky contingent are the great majority of it is the FIU contingent.

In the fourth quarter?

Yeah, we don’t get that until December.

Right so --

And that's the one where -- if there is a hurricane that's when we probably won't get that at all.

So barring a hurricane it actually might be up in the fourth quarter versus this strong number that we saw last year?

I wouldn’t – I don’t think we go up and say its up but we think it probably will be close to it.

Okay. Jim, I want to ask you couple of question about acquisitions. You kind of gave two different versions of what might happen after one which I think is positive that you want to be very cautious and do all your due diligence to make sure you are making the right acquisition which can lead me to believe that, that slows down the whole process at least from your side. And on the other front, if rates are actually slowing and I were an agency owner, thinking about selling in the next couple of years, I think I might accelerate my thinking and say well I better get off to stick and do something now because rates may actually get down in a couple of years, and that would actually hurt the value of my business. Give a little fall on the two varying thoughts and --?

Jim Henderson, [Pres. & COO]: I think the fact that there will be a flattening and perhaps view is being down will cause those – and we have the number of people we have talked to in the past. There is always conversation going on when people will say, look I really want to join you but right now our game plan is really going well and so -- but we are staying in very close touch with them. So, we believe that there will be some activity resulting from in fact there view that tomorrow may be a little different then from today. I guess my trying to convey is that we view that is when they come to use, and as Hyatt mentioned, we are growing at 25% therefore pay us a price based upon 25% of growth rate is nothing that you can believe or pay for that you look at what really happens with that operations. So caution of the day is that you have got the opportunity but make sure you don't overpay for the acquisition.

I think, David, to a kind of piggyback on that some of our acquisition are based on six times operating profit over the next 12 or 24 months, and in some cases its over 36 months, so in fact the market -- is the market on those kinds of acquisitions. Now if it someone who wants to get out of the business and that something different. Now, if they want to get out of the business, and it is the folding where its inner town where we already have an office the we can fold it into an existing locations than of course that’s good stuff.

Right. Can you give me any idea why we had such a slow down in the second quarter, acquisition activity versus first quarter. I mean the bulk of the 6 month acquisition activity during first quarter. Just timing differences --

Its just timing exactly. I think, actually the first quarter, if you look at last year it would be a flip-flop in terms of what happened respect to the growth. And so -- is they – they are lumpy, and if you look historically, for example, the third quarter of last year we did $6.5m. And that tend to be pretty lumpy in that regard. If you look at the first quarter of '02, we did -- it was 1m -- 180 and then the activity was really in the second quarter of last year. It was just flip-flop this year. The third quarter last year was very light, the fourth quarter was very heavy. So it was just a matter of -- it's the timing issue, a transaction that you engage into they involve discussions that spend 3,4, or 5 months before you really get down to closing the deal. And have a lot to do obviously with the people planning aspect of that to make sure that everybody is on board.

Well given that and the fact that you indicated after the first quarter call that the pipeline hasn’t ever been heavier and lot of opportunities out there. Shall we assume that you are probably closer on a lot of opportunities?

Well, we think we are but you know until it's done it isn’t done.

I understand. Thanks a lot.

Okay.

You will now hear from Hugo Warns with J.P. Morgan.

Hi. It's actually Mayfield (ph.). You mentioned before that there was -- the impact of the sunset provisions within the tax changes and I was hoping I would get some more color on that?

Well I think there is an aspect of trying to color in the tax law changed. We have engaged in some discussion activity with people that we constantly staying in touch with, agencies we stay in touch with. And they brought up the aspect of the tax change, meaning the lower personal income rates in the lower capital gains rates. And the fact that there is a sunset provision in those right structure that is not necessarily there forever. So that aspect of it kind of brings in some forward-looking exercise that they have got to decide, gee if I really want to be a part of you, do I do this now or later. We believe the tax law really, probably address us doing this earlier than later. So -- and everybody has a little bit different tax situation and like Jim said some of these sunset provisions they vary from three years out to 10 year out and so it varies from that standpoint. The bottom line is though on the tax change, is that regardless of whether you are C Corporation or S Corporation, you are going to end up paying less in taxes when you sell the transaction in the coming years than you would have last year.

Okay that makes sense. Are you changing the size of your targeted acquisitions at all?

No, no. One of the things that we discussed and we've talked about many times is our sweet spot is $1-10m in revenue, and that obviously, we have done a couple of things. We -- when we acquired Reedmond, there was $54m in revenue there. And when we merged with Cone Associates and took over the leadership of the firm back in 1993 that was about 50m. So, we are not adverse to the larger acquisitions and we think we have the financial capacity to do those. One of things that is different about large acquisition is that there is more risk involved and the reason is there is more moving parts and less opportunity during a negotiation to meet with the leadership other than right at the top, and so if you are acquiring an agency that has $5m in revenue and there are three owners or two owners you are dealing with those people and they are going to bring in -- if they are planning on moving out or if they are not they are going to bring in to the negotiation their junior leadership. So therefore there is a firm understanding before anything is ever done as exactly how we are going to operate on the day after and a very large acquisition that's not really possible to do. So we are not at all backing away from any larger ones and we have looked at a couple but just don’t seem to be the right culture at the right time.

Okay, great, thanks it's very helpful.

And Mr. Brown, it does appear that there are no further questions at this time. I will turn the conference back over to you for final closing remarks.

Okay, well thank you very much and I thought there were some very good questions today and so I am sure that there will be people who will be calling in and wanting to expand on the technical information with Cory. So we will sign off and you all have a good summer and we will be talking to you in October. Thank you. Bye.

Thank you that does concludes today's teleconference and thank you for your participation. At this time you may disconnect.