Brown & Brown Inc (BRO) 2003 Q4 法說會逐字稿

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Before we proceed, we would like to inform you that certain aspects of the information that will discussed during this call; including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance, and that such statements are intended to fall within the Safe Harbor provisions of the 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, desired, or referenced in any forward-looking statements made as a result of a number of those factors, including those 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 call. Such differences may be material.

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

Thank you very much, Kim. Good morning everyone.

Here in Daytona, we have Jim Henderson, our President and Chief Operating Officer and Cory Walker, our Chief Financial Officer and so we are going to turn it over to Cory to talk a little bit about the financials.

Great, thanks Hyatt.

We had another very nice quarter where our earnings per share increased 19.4% to 37 cents per share. Our revenues for the quarter ended up being $134.9 million, which was a nice increase of 13.2% over the $119.1 million we had in the fourth quarter of 2002. Our total commissions and fees for the quarter increased a little over 16% or $18 million.

Of this total, about $12.9 million was generated essentially from acquisitions, similar to the fourth quarter of last year, so that made the remaining $5.1 million, pure internal organic growth and that reflects a 4.6% internal growth rate. Now, this is an increase over last quarter's growth rate of 3.4%.

The specific growth rates by business segments are included as a supplemental schedule in the press release, and Hyatt will go through each one of the business segments in a little bit. But just looking at the other line items on our income statement, investment income is, again, a little bit lower due to lower yield this year than we had last year primarily from our primary investment vehicles of short-term tax-free municipal bonds. Our other income line item was $2.9 million for the quarter and that was resulted primarily from the gains on sales of certain books of businesses during the quarter. As you know, we continually look closely at all of our offices and specifically the books of businesses within those offices that perform under the company averages.

For example, we had one office that had a surety book of business that, you know, was not growing and really was kind of shrinking. The profit center manager there had really done a lot of things to try to turn that trend around but really at the end of the day we decided it was better to sell the book to somebody who could grow it and build a bigger critical mass. So there are other books of businesses like that, similar situations that we sold during the quarter.

Looking at our expenses, our expenses only grew by 7%, you know, as compared to the revenues which grew at a higher rate of 13%. The largest single expense line item, obviously, is our employee compensation and employee benefits, and that as a percentage of revenue for the quarter was only 49.8%, which was a slight improvement over the last year's quarter of 50.9%. The noncash stock grant compensation expense is a little bit lower than our normal 700 or $800,000 a quarter charge, primarily because of the elimination of the charges for people who have left the company.

The other second largest expense line item, obviously, is the other expense line, and that for the quarter was only 13.7% of revenue, which was down from 16.3% of revenue in the fourth quarter of last year. Now, that's a full 2.6% differential.

You know, I would like like to be able to say that we just did an incredibly bang-up job of controlling expenses but the fact is we a normal job, just I -- just a good job of controlling expenses but one thing that will make the differential look bigger that last year in the fourth quarter we made a $1 million contribution to the Florida Kids’ Educational Fund that gives us a big tax credit in the line items tax column. That accounts for a lot of the 1.6% improvement but still a 1.5% improvement is really nice and it’s really across all lines of various expenses -- a little bit here and a little bit there.

The rest of our expenses on the income statement, amortization, depreciation and interest, they are really all in line with, you know, what we reasonably expect and are reasonable percentages. Because of the expense lines only going up by 7%, our pretax margin for this current quarter was 30.6%, which is an improvement over the 26.7% pretax margin last year. Using an effective tax rate of around 38%, net of the $1 million tax credit that we take, from the prior year, our net income ended up being $25.8 million, and that's a 20% increase over the $21.3 million we had last year.

Kind of flipping to the 12-month year-to-date numbers, our revenues for the year were $551 million, up 20% over the $455.7 million in '02. Again, most of our expense line items had a, you know, slight improvement over the prior year, which was, again, continued in kind of the Brown & Brown way, which resulted in our pretax margin being up to 32% for '03, compared to the 29.5% in '02. Net income ended up being $110 million at a 20% rate, and that was up 32% over last year, which resulted in our earnings per share for the whole year being $1.60 up 31% from the $1.22.

From the balance sheet perspective, our financial strength continues to remain strong, with almost $57 million of unrestricted cash. On the flip side of the balance sheet, we only have $59 million of total outstanding debt. Additionally, our total shareholders equity increased 27.2% during the year, to almost a half a billion dollars now. So, everything continued to look strong, and we had a very good quarter.

So with that, let me just turn it over to Hyatt.

Thanks Cory.

One thing I would like to piggy-back on that Cory mentioned, last year in the fourth quarter we did give a $1 million, which is a dollar for dollar writeoff to Kids for Education. This year, I believe, Cory we gave $250,000 each quarter. We still gave $1 million, it's just that we didn't do it all in one quarter.

Moving into operations, Florida retail first. We were at 4.3% internal growth versus about 9.2 for the previous quarter. The property market continues to soften. There is movement from nonstandard to standard, and there is some yanking and jerking going on. Now the capacity seems to be there but every once in a while we find there is a capacity crunch, particularly on larger, let's say, nonsuperior property risks that are considered to be wind-exposed.

The workers comp rate, has moderated, I think everyone knows that the rates went up 11 then down 10, so they are about where they were a year ago. The good news about that is there is an opening-up on workers comp capacity, meaning more companies are willing to write workers comp now more freely; and another thing that's happening, there is a flight away from PEOs now because of, apparently, the PEOs having great difficulty in writing workers comp and/or their workers' comp portion of their fee going up very substantially. So, in the beginning of the year, we had a great deal of difficulty in getting a workers comp company to consider an account coming out of a PEO; today, we have several that will consider them and write them, and we are writing some nice business there.

In the auto, GL, umbrella rates, they are kind of up, down and around. The bottom line is, that they are pretty much based on the loss ratios of the accounts. If it is an account that had a bad loss ratio, it's going up 10 to 20%. If it's a good loss ratio, it's flat 5 or down, maybe 5 to 10, depending upon pricing pressure.

Moving to national retail, we were down a negative 7%. There is some aberrational stuff in that, I believe that's a negative 7 versus a negative 1.9. Part of that has to do with continued aggressive pricing by regionals.

The -- if you look at upstate New York, parts of Pennsylvania, Ohio, Indiana, Illinois, Michigan, Wisconsin, that is the heartbeat of the regional mutuals and the regional stock companies, and they are doing very, very well. The Midwest economy is not robust, and particularly upstate New York. We also have some slices of business, foundries is one that comes to mind, that their businesses are not doing all that well. We have had during the year, four heads of offices that were changed. Any time you bring in a new person as head of office, there will be a short-term change as they are going to institute some changes and take those charges, you know, as they occur.

Western retail was up internal growth 6% versus 2% for the previous quarter. Cal comp is still a problem, and although the governor out there is looking at trying to change the system, some have said it is a barbaric approach, no play on words intended, and that, really, he needs to do something and hopefully there will be some changes. 60% of the market is in the state fund, and many companies just aren't willing to write workers comp in California. So that is a bit of a problem for us, although in the other areas, other than workers comp, the market is pretty open in the west and really doing pretty well.

One of the advantages that we have out West is that about approximately 20% of our revenues are in employee benefits. And, of course, the employee benefits rates have been going up a little more rapidly, or, I should say, they have been coming down less rapidly than P and C. And one of the things that's kind of interesting about those states out there is they have, generally speaking, fatter benefit plans, and they have been less willing to decrease the benefits as prices have gone up, as opposed to, let's say, the Southeast or the Southwest or the Midwest. So, that's a little bit of a difference. Western looks good, and professional programs, professional programs had a nice increase, up 9.8%, as opposed to a negative 2.8 for the previous quarter.

Calsurance was the primary driver, and those are various professional liability programs, including professional liability for insurance agents, error submissions, where the prices are going up, unfortunately, for us. We have had to pay more this year for our error submissions insurance. The dental program for the whole year was down about 2.5 to 2.8%, and it's been down every year for about seven or eight years, and we are kind of thinking it might be flat to maybe up a little bit. Things are starting to change around. Gotten a couple of breaks there.

Lawyers, during the year of '03, I think it's 5/1 of '03, we had our commissions cut by 2.5%. So even though the premium was going up, our revenue was not going up commensurate with premiums. And so looking into this coming year, of course, we changed carriers, the commissions are not reduced, they are the same as they have been sense 5/1. So starting with the second half of '04, assuming that the market continues to be fairly firm, which I think it will be in lawyers, we probably could grow a little bit in lawyers. So we are pleased about the professional programs.

Special programs was, did very, very well, and to give you an idea of where special programs is, it was up 23%. We have in that grouping, public risk, FIU, which is our condominiums, PIP, which is basically shipment insurance from B to B, business to business, and AFC which is our program for social service agencies.

AFC had to change carriers and had a down draft all the way until the last month of the year with their social service agencies, and we are looking to do better in '04. PIP is really kind of hooked to the business cycle, because it has to do with mail shipments, and, and so the bottom line is that they were down 3 or 4%. FIU was up, and public risk underwriters, which is growing, a nicely growing area of our business that deals with small and middle-sized cities, counties, water districts, school boards, and these are middle sized now and smaller, and that is growing very nicely.

We are also expanding into other states. We are currently doing business in the State of Washington, Florida, Texas, Georgia, South Carolina, some in Pennsylvania, and so we are looking to grow that and expect to see that continue to blossom.

The brokerage area, we think of that as sort of being E and S. It is not all E and S brokerage, but binding authority, it still getting some rate increase by 7, 8%. The brokerage though, particularly large property is down, and there is a movement away, and, of course, you will see that brokerage, I think, was up about 10% and, as opposed to the third quarter of about 14%.

We have also opened several offices. Los Angeles, San Francisco and Las Vegas. Los Angeles and -- excuse me, Las Vegas and San Francisco, we opened in December and January 1. Los Angeles was opened, opened, these are all from scratch too, no acquisitions. It was opened, I think, the 1st of October.

We have the least penetration in the West of our own in-house brokerage business, meaning where a retail office is buying insurance through, let's say, Peachtree Underwriters or MacDuff Underwriters or Halcyon Underwriters, or whoever it might be, we have less penetration out West than we do any place else. So we think there will be some nice growth in those three offices because of the relationships that the brokers that we have, also with the fact that there will be business, a lot more business flowing in from our own offices, so we get a couple of bites from the apple.

PPA services just keeps on keeping on. USIS is doing a super job. Their margins this year were about 22% on about $18 million, and they just do, every year, a little better and a little better. TPA services grew very nicely, about 14% or so, and part of that is due to the fact that we have some new managed care products for workers comp that we have been very successful in selling and they are bringing in more revenue than was expected. And then the public sector piece of our TPA, called PGCS is also doing very well. They are also sort of piggy- backing on the growth of the public risk division up in our special programs.

For this coming year, we expect internal growth to be somewhere between 0 and 5%. And in terms of acquisitions, we think we will probably have a little more acquisitions than we did in '03. And to talk about acquisitions and some other things I am going to ask Jim Henderson to make comments about that area.

Thank you, Hyatt, and good morning.

The growth in earnings of Brown & Brown in our history, if you look at the 11-year history in a public arena, is characterized by growth from organic side that Hyatt has touched upon. Secondly, acquisitions and the third area really is in margin improvement or efficiency, using the same dollar revenue.

Touching on acquisitions, the class of '03 of acquisitions, we are very pleased with. It's probably, on average, some of the highest-quality of people and agencies that has really joined us, and we are very pleased with those people and also the earnings and results that they are producing for all of us.

We completed some $40 million in revenue, in transactions in '03. The average size was about $3 million for, collectively, in that $40 million. The largest single transaction was $12 million in size. Comparing this to '02, '02 we completed some $60 million in revenue transactions. The average size was about, just over $3 million, and then the largest transaction in '02 was $27 million.

Looking ahead with respect to acquisitions, what is -- what's consistent and what is changing? Really what is consistent is that we certainly plan to stay in our niche. The transactions we completed are in our sweet spot. We have really not ventured out of that sweet spot, nor, frankly, have we altered the pricing formula that we've used to execute those transactions.

The aspect of what is changing with the pipeline, and with the activity level, we are seeing, I think, a greater number of agencies, and perhaps a greater depth of interest in agencies that may be, in part, due to, perhaps, two key factors. One of those being, is I think those agencies are experiencing the same aspect of the organic side in terms of that being a factor. Is this the best time to, perhaps, look at a transaction, is this the best time to exit the agency ownership, given the fact that tomorrow may be looking at less organic growth. So we are being very cautious about those opportunities, but it is, in fact, bringing back some transactions that we talked to people in the past. They simply wanted to stay the course until there was perhaps better timing, and so we re-engaged in similar activity.

We continue to ramp up the level of acquisition activity, discussions, both our own people and most of the transactions come to us through personal relationships. We are also seeing an increased activity level from the various industry consultants.

Turning a moment to the margin side, many of you are aware of our announced intermediate goal of getting to B40. B, the billion in revenue and 40% margin. And '03 produced continued improvement in marching towards that goal.

Stepping back for a moment, looking at the last 10 years in the efficiency of using a dollar revenue, the pretax earnings of Brown & Brown in 1993 was approximately 14%. That same pretax earnings in 2003 was 32%. So that change alone is some 110, 120% improvement in the efficiency of using every dollar of revenue in terms of converting that revenue to earnings for shareholders. '03 continued the march of that improvement.

The operating profit in '03 increased from 33.7% to 35.9%, and that's part of the march to the ultimate 40% intermediate goal. With respect to pretax, that same improvement, we improved in pretax from 29.5% in previous year to 32%. The improvement in margins is one that is a deep part of our culture. We believe it is a very positive to our people. It's a very efficient way of dealing with our customers and, frankly, it produces great results to our investors. So we will continue that.

The march of that improvement is next year. It involves making decisions about opportunities of those that produce less margins and those that produce, obviously, at high margins, and we are very pleased with that program.

So we continue -- I think '04 will look from, as Hyatt mentioned, on the organic side, we are obviously forecasting a range there. We do believe that there is opportunities(sic) to probably ramp up the acquisition side in '04. We are going to be very cautious in doing that.

I would only mention in that, as an example, if we have an opportunity to do a $40 million transaction versus 10, $4 million, we are far safer in completing a greater number of small transactions. The ability to integrate those, to immediately have them very productive, very efficient. The safety of things that can go right and wrong, and the size of those profit centers in fact, fit very much into the makeup of Brown & Brown.

So, again, we're bullish on the acquisition side for '04 and look forward to producing those results for you.

At this time, I turn it back over to Hyatt for a wrapup and then we'll open the phone for Q&A.

Great. Thanks Jim. Good report. And good report to you, Cory.

Kim, if you'd like to open it up for questions from the people that are on the line.

Thank you, sir.

The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. Also if you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal and we'll take as many questions as time time permits. Once again, that is star 1. And also if you found that your question has been answered, you may remove yourself from the from the queue by pressing the pound key.

We will go first to David Lewis with SunTrust Robinson Humphrey.

Thank you and congratulations on a good quarter.

Thanks, David.

Can we talk a little bit more about the acquisition opportunities out there, obviously the American bank you talked about Wachovia's interested in purchasing a large, I guess, platform to raise scale on their brokerage operations. What do you think that does to pricing, and I know you are well below the radar screen in what they are looking for as far as the acquisitions go. Do you see any impact there?

And, two, acquisition revenue, can you give us a range of what you might anticipate in '04? I know that's difficult, but do you think it is somewhere between the 40 and 60 that you did in '03 versus '02?

Well, that's about as good a guess as any, David, on the amount of acquisitions, because you don't get any acquisitions until you've actually got - the money has changed hands. But we do think that the difference in the pricing, and the pressure that certain carriers are placing on agents, and the fact that there are two or three or four carriers that aren't with us, and that's reduced the available marketplace for some smaller and middle-sized agents, that's to our advantage.

Back to the question on the bank, and the fact that Wachovia is going to buy a big business of some sort, that's all fine and good, and the banks are buying agencies and then banks are selling agencies. (INAUDIBLE) sold their agencies this last year. It seems to me some place in our system – maybe it was in New Mexico -- we bought a small agency from a bank, and we have had others that we’ve looked at where the banks are selling them, and they weren't exactly to our model.

So, our model, the difficulty of our approach is that everything that we do on the front side is harder than maybe our peer group, for us. And the reason is this, when we are doing smaller acquisitions, we are dealing, basically, with one office or you might be dealing with two or three offices, but you are dealing at the same time with the ownership. And if there are three offices, there might be three different people that own the great majority of the shares, and they happen to be the heads of those offices.

So in our negotiation, a great piece of the negotiation is setting up a pro forma that we all agree to that is effected on the day of or day after we acquire. And, so, therefore we go through a lot of brain damage up front, but we get our margins out back, and so far we have had very few surprises. So, we are going to continue to do that.

And the one thing we don't want to do is, in a larger acquisition, you are going to deal with two or three people, and they aren't operating people, those are executives. Those are are people who sit in big offices and pontificate at the horizon. That's not what we do. We are down on the street level smelling the fumes, and so to then go after the deal is negotiated and then find out all the little goodies that are here and there, that nobody knew about and the way people are being treated differently from office to office, you know, is a major challenge.

We’ve done that also, we did that in the case of Phone(ph) Associates and we did that in the case of the Reedman(ph) Corporation. So we are perfectly capable of doing it. It's just a different risk horizon in terms of the potential for the acquisition not working out well.

That's helpful. A quick followup. Cory, can you give me an idea of what free cash flow was in 2003 and if you expect that to expand in '04?

Well, the free cash flow, you know, the earnings was $138 million and backing off of that, probably, about, you know, $20 million of debt. So, you are right at the 100, 110 million.

Great. Thanks very much.

Moving on, our next question will come from Nick Fesken with Stevens, Inc.

Hi, good morning, everybody.

Hey, Nick. How are you?

Good. Hyatt are you thinking of increasing the dividend in light of the slow M&A that you had last year?

No.

You got large insider ownership and you have a strong balance, you think it could easily handle 40 to 60 million of acquisitions?

No. The answer is no.

Why not?

Well, the the bottom line is we have a better way of using the money. The bottom line is, that we have increased our dividends every year, I think, for 10 years by a little bit and sometimes a little more. This year we increased some 22%.

Our goal -- whenever we merged with Phone Associates, they were paying out about 42 or 44% of their earnings and we feel that's way, way too high. So our goal, we had two steps. The first goal was to get our pay up to 25% of earnings and the second goal was to get our payout to 15% of earnings, and we made the first goal and now we’re at the second goal, we are at 15. And we would expect to increase our earnings in line with the growth rate of the earnings per share. So if we grew 15%, you know, if -- and if the Board of Directors felt so inclined they would vote to increase the dividend 15, if we went up 20, probably 20.

Okay. Cory can you give us some details on the 2.9 million? Kind of walk us through the profitability of that?

Well, the profitability of it is fairly profitable, because these are books of business that generally are in our existing offices, and so not purchased books of business that turn about and resold, so everything we sold there is, you know, nearly, was nearly all gain. And, so, does that answer your question?

Yes, that's what we thought.

And then on the 0 to 5% guidance that you gave for internal growth, can you walk us through how you determine that? And if you look at retail over the course of the last year, it went 7-6, 5-0, 3-2, 0-.4. Kind of walk us through if you think that's bottomed out.

Well, actually what we did was, isn't your estimate for us 2.4% internal growth?

Something like that.

Well we just took 2.5 on top of each end of that. That's how we got from 0 to 5. (Laughter)

No, we are just yanking your chain a little bit on that. We think, a couple of things.

There's been a little more lost business this year than normal, and part of that is because of the fact that there's some bruised people, who, even though we did a good job for them, they just didn't like the fact that the doggone insurance went up for a couple of years in a row. So they moved their business or didn't give us the same consideration that they would have normally given us. So some of that business will come back to us.

And the second thing is, as the rates continue to moderate, there is a certain band of dollars that businesses and individuals, families, will spend on insurance. And, so, if the amount of the rates go up, and the rate increase is such that to keep the same amount of coverage, you are going to go outside that band. You are going to get above it. They will simply reduce the number of dollars, of the amount of coverage that they spend to be concurrent with that band of expenditures.

So we think there is going to be some additional opportunities to sell insurance that was lapsed in the last year or two or not renewed. We also think that the economy is getting a little bit better. So when you look at all of that, then the real question is this. What is the temper and resolve of the risk bearers? And if you can answer that question for me, then I can answer your question.

So can you answer that question?

Not as good as you can.

Okay. Well then that's the reason we are 0 to 5.

Nick, this is Jim Henderson.

I think on that, if you look back on that, the last several years, we have been a top end about 12.1% organic company, and the bottom end maybe about 2 or 2.5. So this is not exactly the model that spikes out at 20-25 where you see the type of rate changes in the market, that would indicate, well, gee, this is going to result in a similar type of growth inside of Brown & Brown.

Uh-huh.

So we are back, in fact, to the same type of organic growth we experienced in 2000 and whether or not that would be '99 or 2000 would be in that arena. So we are definitely prepared to deal with that organic side and grow the company from there.

Great. Thanks so much.

Okay.

Hugh Lawrence with JP Morgan has our next question.

Good morning, everybody.

Good morning, Hugh, how are you?

Good. Hopefully you guys are a little bit warmer than us up here in the northeast.

It's actually 68 degrees and brilliant sunshine.

Good for you. I think we are going to hit a high of 5 or something today - or 10.

Right.

A quick couple of questions.

Cory, first on the numbers side, if I look at the internal growth schedule and I look at this quarter, 12/31/03 over '02 and then I go back to '02, the numbers have changed again. Do you recast that every time there's a divesture or some change?

Yes.

Are those numbered recast every quarter?

Yes. Because if you have a divesture, there's no revenue in the current quarter.

Uh-huh.

But last year, there was revenue relating to that divesture. So I pulled those numbers out of the base year.

Right.

Because what you are trying to do is figure out what same-store sales are.

Okay.

And so that's why we have it excluding contingent income and divestures.

Okay. That's what I kind of thought.

And so if we take the number, for example, if we look at this 12/31/02 and compare it to what you reported that quarter. We can just assume it is all just divestures?

That's right. Because then you have the whole reconciliation that goes right to the commissions and fee line on the income statement.

Okay, perfect.

So you really have all the numbers there.

Okay, great. I just want to make sure there was there was not another offset.

Looks like you paid down about 11 million of debt in the quarter?

Yes. 28 for the whole year.

Right, from a free cash flow standpoint, is that something we should continue to expect as we go forward or was that with some covenants or is that some kind of arrangements where you had to make payments of that size in this quarter?

No. Most of the big debt that we have is the SunTrust Bank loan, and that gets paid down $12 million a year, okay? So anything outside of that, there is a little bit of debt that we assume from the Reedman Corporation and that's fairly small. The rest of that usually is the biggest components are earnout payments, shown as that.

Okay.

And then, Hyatt and Jim, I wanted to see. Can you give us an update. You mentioned the PEOs. Can you give us an update on the Texas situation and what was happening down there with the PEOs from the brokerage standpoint?

Well, the PEOs are having difficulty in every state. Florida and Texas are the two places where I think the PEOs, I think, have the greatest concentration, or penetration, I should say. And so all of those that we know about are having great difficulty in maintaining workers comp rates that are lower than, you know, the market. And so therefore people are now starting to look out outside the PEOs and coming back to, you know, where we are writing their business.

But if I remember correctly from some of the filings there was an issue with a lawsuit between one of the PEOs and yourself in Texas. Is there any update on that?

Well, that was settled, that was in our 10Q back in October, wasn't it? Yes, very positive. It is gone, a venue matter and that is resolved, so we are very pleased.

Okay, great. And from a national retail standpoint, I understand the competitiveness that is going on from the mutuals. Now I thought in the West you had run as well into some of the stronger mutuals. Is that not the case?

No. Actually, Hugh, in the West, we don't have the concentration of regional companies. California has killed most of them off.

Okay.

And they have gone broke, or quit or, you know, gone away or something. But in, out there, let's say in Colorado, New Mexico, Arizona, there are companies, Liberty Mutual has a division called RAM, and that's Regional Agency Management or something like that. And so they have a company that will have, will have a different name, it's not Liberty Mutual, and it's in every state and sometimes there are two or three states. An example, one of the names, I think is Pinnacle for Colorado, and maybe New Mexico. Well, we're writing a bunch of business with them.

The same thing is is happening in Arkansas, Oklahoma and Texas with another Liberty Mutual. But out West there are some companies that are regional mutuals, but there are very few. It's just not like the concentration in Ohio, Indiana, Michigan, Wisconsin. There's a huge number of them up there.

Okay. I guess one last quick question.

Hyatt, any thoughts or impact on your distribution group from the St. Paul / Travelers combination?

We don't think so. You always have some dislocation of people.

Sure.

Meaning between St. Paul and Travelers, but we have very good relationships with both. We write a lot more business with the Travelers than we do with St. Paul. Although the St. Paul may have been, for the first six-months of last -- for the last six-months of last year was maybe a little more aggressive in writing new business, in our group.

Okay.

I think we see that as very much a positive. We can cross- pollinate relationships with Travelers which are very strong in the Northeast with St. Paul that is very strong in the Midwest and in the West. Travelers, I think is trying to strengthen their position with us and the West and we see some great opportunities to do that.

No overconcentration with carriers in any particular office?

No. Collectively, if you take the two of those together, they may represent our largest carrier in total. That number may probably be just still still 5% over our revenue base if you take all of that together.

Okay.

So that continues to be very much to our favor.

Okay, perfect. I have a couple of followups but I will come back later at the end.

Thanks.

Moving on, our next question is with John Keefe with Ferris, Baker.

Good morning, guys, how are you?

Fine, thanks thanks.

With respect to your national retail, internal growth you mentioned the impact that lower rates are having on volume. At some point, Hyatt, will those lower rates translate into increased commissions?

Well, it's funny you would mention that, John, because the answer is, yes. We are now starting to see that.

I think I mentioned on the last call, excuse me, back in October, that we had seen the first bonus commission being paid, and it was only on an account. Now we are seeing something happening a little different, which is, well, if you will write x- number of additional dollars with us this year then we will give you x% extra. So, the answer is yes.

But one of the things, John, is that in those North and Midwestern states, the economy is not so robust. There is not, there, the optimism that there is elsewhere. So that's having some some impact on us.

John, I think we have seen some indications from carriers that are coming in, and they are saying, gee, we just closed '03 and we had a combined of under 100, and we added a surplus, and we have just established that we need to grow next year by 10% or 8% or 12%, and how do we do that? And that is always great news to us when they come to us and tell us about that game plan. That is a little different than we have seen in the last three- or four-years, and ultimately that does translate into; are they willing to invest in that growth with us? So we are much encouraged by that capacity.

Is it fair to say that in, I guess, that maybe in some of the past couple of years, you, you all would be calling the carriers in search of business?

It's been a placement market. As we have had more customers and we have had opportunities with carriers to place it. We are seeing a slight turn in that scenario.

Uh-huh.

Secondly, can you talk about net new account trends in national retail?

I don't know that we have those kinds of numbers right on our fingertips. We do have a top gun report. And it is, it doesn't come off our computer system, it is basically trended and actually it is reported by the marketing department.

We do have, this year, in all of the national, all of retail, we have an increase in our hits of about 12%. And our hits are about the same size as they were, you know, a year ago, about $11,700 is the average hit, meaning that's commissions. So if the average commission is 11% then the average hit is probably $100,000 or something like that. So we don't, I can't give you exactly what you are looking for just as regards national retail.

Okay. Thank you, very fine quarter.

Okay, thank you.

The next question in the queue will come from Adam Klauber with Cochran, Caronia.

Good morning, thank you.

Good morning, how are you?

Fine, thank you.

Can we talk a bit about the program area?

Sure.

Can you give us a sense of what was rate versus unit growth? Now, I don't need an exact, but just a sense. On an organic basis, how much of the growth came from rate versus unit?

Well, Adam, you always ask those very complicated questions, but good ones.

The program area we have experienced rate increase. Especially in the professional area, and there's really not been any meaningful diminishment of that.

I think the legal environment continues to create concerns to carriers about entering this sector. So we are able to push through and still achieve rate increase. The unit sales, I think, have been, fairly consistent, there is some net new sales there.

We have had a couple of contracts that renewed, where, in fact, because of, again, the appetite for the carrier is, we have had some pushback in commission that have kind of offset a little bit. So, in fact, our unit sales in pricing has been better than the results indicate, because of redeployment, for example, of markets, where we have a unit that sells a certain line of coverage to nonprofit companies, and we have had to redeploy a new carrier, the new carrier says, well gee, initially I am going to pay you less commission.

So that’s off and running and I think ultimately will get a greater commission. So there is the growth there. The public sector arena has been a leader in that arena, both in terms as to product implementation and growth in rates. So we are very pleased with that sector.

Also, is fourth quarter typically a stronger quarter for the program business?

I don't think so. We were kind of pleasantly surprised, quite frankly.

Yes. Okay.

As far as the national, you mentioned that there are four new heads of offices. Where did those individuals come from, and are they changing things in those offices right now?

Well, one came from outside, and three came from inside, and the answer is, there's always a change; you know, we get a new person, and they are going to change things, and that always causes a little bit of a discombobulation. And then hopefully when that settles down, then you rise to the next level, and that’s what we think. So we are pretty aggressive in making sure that our heads of offices achieve the results that we would like for them to achieve.

How long do you think it will take them to get the offices running like you would like to see them?

Well, it depends on circumstances. You know, if you have got an office in Los Angeles, versus an office in the middle of, let's say, Indiana or, let's say, some places in Michigan, you have got a little difference in the economy. And if you are going to compare it to Florida, it would be the same thing where the economy is becoming more robust.

So generally speaking it takes about six-months to a year for a person to get their ducks in a row, because there's generally some change in personnel and there's some change in accounts, you know, there may be accounts that they have been handling or sectors of the accounts where they decide they want to sell them off, because they don't think that they are profitable versus the amount of time and effort that is spent on the accounts.

Thank you very much.

Okay.

Thanks, Adam.

Moving on, Charles Gates with Credit Suisse First Boston has our next question.

I have two questions.

My first question, did you recognize or witness a noticeable change in the commercial lines market fourth quarter versus third quarter of '03?

I don't think there's a market change, Charles. I think what we are seeing is continued downward pressure on rates, and that's continuing.

I think the area we have had probably most significant would be large property and probably catastrophe or wind-exposed property, where we've had the additional capacity that has come to that market has been, I think has been, a little bit of a surprise to us and to the industry. We have actually had some accounts we’ve had to take back to market midterm, because where the pricing level had changed, and this is really probably in the excess and surplus lines arena, that has changed. And I don't -- do we see that continuing? We are not sure about that.

But I think that was a glitch and had to do with -- seems to be a lot of additional property, catastrophe, reinsurance capacity insurance coming online to support that change.

I didn't understand that. So midterm, I have a policy in midterm that comes back?

No, it doesn't come back. Another market forces it back to you.

In fact, the account is sitting out there, and another agent calls him and says, have I got a deal for you. And so you may have to protect or defend that account at that time.

To give you an example, we have an account that is located on the west coast of Florida, had an account that was located on the west coast of Florida. Renewal date was January the 27th. In October, we get a notice that the policies are being cancelled, and a short-rate cancellation at that, because of a difference in pricing. Well, what had happened was a company, broker, another broker, had a -- an admitted carrier who would write the property insurance, and this is on joisted masonry and some frame apartments, and they are spread around some, not a very good loss ratio, but the difference in price was 41%. So they cancelled us and went with the new people.

Is this, in part, the Bermuda capacity?

Well, it can be. In this case, I am not sure who it was.

Is this similar to what occurred in the spring of '87?

Have you been around that long?

Unfortunately.

Yes, and the answer is yes, but it is not as widespread. It is not as virulent.

You know, we probably see more of this, the property issue I'm talking about, because if you think about where we are located, we are located up the Eastern Seaboard of the United States up to New Jersey. And we are located around into the Gulf Coast of Florida and then into, Houston is not exactly coastal Texas, but it is not too far in, and so we probably see more of this kind of problem than many.

We also have a pretty good chunk of habitational business. Habitational really falls into two groupings, one would be condominiums. Generally, they are condominiums, particularly in Florida, that have superior construction, not always the case. But then when you get into apartments, which is another kind of habitational, those are in many cases framed and not necessarily located in large cities. So the protection class rate is not as highly protected. Therefore, prices are higher, and when they have a -- fire, they tend to be a bigger or total loss.

Charles, I would also indicate that we typically do very well in market change and dislocation, and that is characterized by having -- if you can go out and you have more spears to throw than the other agent, then you are going to do well. So in this arena, we typically operate very efficiently.

Thank you. That was a great answer, guys.

And we have a followup question from Nick Fesken.

Hi, Cory, tax rate for this year should be about 38?

Actually, you know, we are in more of the states that are getting closer to higher tax rates, and so we really -- we are really going to move the rate to 38.5%.

Okay.

On the balance sheet there were two items that increased pretty sizably with other current assets up about 50%, and then deferred tax asset up 2.3 to 15 million sequentially. Can you give us some color there?

Yes, the biggest item on the other current asset was last year, we had right at the year end, we had the payable to our good friends at the IRS of about $3 million, and after we got through doing all the current deferred calculations. This year we actually ended up at 3.5 to $4 million of, really of prepaid taxes. So that is in that other asset current line item, and that's the biggest part of that.

The deferred income taxes is (sic) a -- relevant to the acquisitions of companies that we acquired the stock of over the last year, year and a half in the trueups, to where it is the book tax difference where we step into the shoes of the old shareholders. And whereas on book purposes we are amortizintg that purchase price in the purchase accounting and so that deferred taxes is part of that true up that comes along when you end up having your earnouts.

Okay.

And then lastly, first quarter '03 you guys just had an incredible contingent payment quarter of $18.2 million, which I guess, was over double what it was the prior year. Can you give us an outlook of what you expect on this quarter?

Well, obviously, we really don't know what to expect, although our loss ratios, based on what we have seen, our loss ratios continue to be very good and our companies are posting very good numbers, and they don't have their numbers together. They start getting them together about the first part of February. So they come in February, March, April, May and some in June. And so we think that we will probably do, maybe as good as last year, maybe a little better than last year. But, Nick, frankly, we don't know. We don't have any hard data on that.

Okay. But the loss ratios were as good or better in '03 versus '02?

That's correct and we didn't have a hurricane here either. We had a hurricane and it affected our office in Virginia Beach, but it affected -- affected our office in Norfolk, a little but but it affected believe it or not our office in Richmond more than Virginia Beach because of the way the hurricane came in.

Uh-huh.

But those don't flop over. We do have, we did have a chunky contingent commission last year from the Royal, and the Royal, of course, is gone. So we have to fill that hole in. So I would say, probably, you know, the outlook is probably flattish.

Okay, and then lastly, Hyatt, you said you are seeing the economy get better. Can you translate that into -- have you seen the number of exposure units insured go up?

Well, let me tell you where that comes from. When I go to various offices and I am sitting in sales meetings, part of that sales meeting is a report of the marketing department. And sometimes we get into renewal as opposed to new and asking the questions about, "what are you seeing relative to exposure units, payrolls and etc," and in those other than in the Midwest and upstate New York, the reports seem to be that they are on the upswing, and they are on the upswing in Florida too. But I can't say at 2%, 5% or 1% or 8% but definitely there's some little building there of the economy getting better. Business is getting better for people. That's not true in the old-line manufacturing business. That's not true there.

Okay. Great, thank you.

Moving on, our next question will come from Nick Pirsos with Sandler, O'Neill.

Good morning.

Hey, Nick, how are you?

Doing well, thank you.

First question, I want to get further clarification on property rates in Florida. Hyatt, I think when you were talking about Florida retail you indicated that property rates are down, but later on in your discussion on FIU I think you said things were looking up. I want to get a better reconciliation between those two.

Okay. It does sound like it is a bit incongruous.

The property rates are, and particularly where accounts have been put in excess and surplus lines, those rates are coming down, period. In the case of FIU, the FIU grew in the quarter, but it was partially, mostly due to new accounts and some rate differential between, you know, this quarter, meaning the October quarter and the October quarter of last year. Looking into this coming year, though, I don't think FIU will have a strong growth year because there is now some competition on those kinds of condominiums. So we are kind of being flattish on FIU for the coming year.

Great, that was helpful.

Second, in '03, I imagine that there was there was some drag on organic growth from the perspective that you had lost some carriers over the course of the year. As you sit here today, in terms of, you know, it's becoming less of a placement market. I imagine your roster card with carriers is largely filled. So would we see a pick up in '04 versus '03 comparison of in terms of that drag going away?

I think so, one of the questions that was asked of me by someone recently was "do you see any other Kempers out there" that all of a sudden go from an A to gone? The answer was, no, we don't. And thank goodness.

One of the old line companies that has had some problems, Atlantic Mutual, has had to basically sell off their commercial business to another company. Well, all of that creates dislocation for us, and we have a program, a wholesalers and distributors program, that we are having to move, and we have another company that's writing it, but still, in all it creates dislocation. We see less of that, Nick, going into this year of '04.

Nick, I think in the area of change, the dislocation was probably greater in the program area, meaning the number of companies that would exit that business. Programs became somewhat of a whipping boy in '02 and '03 with respect to CEOs back to their leadership saying, we got into this line of business, and we were harmed and, therefore, we are not going to do that again. That caused a withdrawal from programs both good and bad. So we have had the greatest dislocation of carriers in that sector. We have come through that well, and, certainly, '04, we look forward to not having replace, you know, the Kempers and the (INAUDIBLE) and the Courages, and the, and, and, and. So that would be a great pleasure to focus on new opportunities, not refilling the hole.

Great. Thank you very much.

Next we have a followup question from David Lewis.

Thank you, just got a quick question.

Can you give us any expectation for margin expansion in 2004? I assume most of the budget has been done.

Do you think you would get somewhere between 50 and 100 basis point improvement over '03?

And second, Hyatt, can you give us any comfort with where the range of earnings might be for '04 from $1.80 to $1.85?

Well, I think the range that I have seen, I think Nick Fesken has us about $1.75 or something, to $1.80. So I don't know, I haven't been looking at those specifically.

So, right now, you know, we are still committed to growing our earnings per share 15%. But, it ain't done till it's done, and we -- to get to that number, it's going to depend upon a little greater acquisition activities, and not just activity, it's closing. So in terms of the margin difference, when we start off the year, we build in a little bit of fat into the budget in order to make sure that we don't stub our toe.

The difference of 50 basis points to 100 basis points is not an unreasonable assumption. I couldn't, you know, say, yes, that's exactly what we are going to do to date. But, you know, I had mentioned before that we are looking into a choppy year. That doesn't mean that that is a negative to us. It means that it presents more opportunity, and also more challenges. So we are still bullish about it, and, rather than say, yes, we are going to do this or, no, we are going to do that, not do that in terms of earnings, we'd prefer to leave that a little bit up in the air and let you figure it out. You know, there's all kinds of smart people on this call and I am sure they can figure it out.

Thanks, we will do our best.

Okay, David.

As a reminder, press star 1 to ask a question .

Is that all, Kim?

It appears there are no questions at this time, sir. Please go ahead.

Okay. Thank you all for listening and we will look forward to talking to you then in April. You all have a great '04. Thank you, Kim.

Thank you, gentlemen.

That concludes today's conference. Thank you for your participation. You may all now disconnect