Brown & Brown Inc (BRO) 2004 Q1 法說會逐字稿

Welcome to Brown & Brown Incorporated Conference Call. As a reminder, today's call 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 views -- 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 or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the Securities and Exchange Commission.

Additional discussion of theses 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 the call. Such differences may be material.

Speaking today will be Mr. Hyatt Brown, Chairman and Chief Executive Officer; Mr. Jim Henderson, President and Chief Operating Officer; and Mr. Cory Walker, Chief Financial Officer. With that said, Mr. Brown, please go ahead.

Thank you, Greg, and welcome everyone. I am going to follow the same batting order. As we have in the past Cory will start of with another review of the financials. I will talk a little bit about, what's going on around the country in the profit centers. Jim will talk a little bit about mergers and acquisitions. And then we'll further open to your question from whoever wants to ask question. So Cory, you are on.

OK. Great. Thank. We did have very nice quarter. We also had the benefit of a little bit more contingency in profit sharing revenues in the first quarter of this year then we did kind of anticipate, but that did help. The results were that our earning per shares for the quarter was 53 cents per share, that's up 20.5% from the 44 cents we earned in the first quarter 2003. From a revenue standpoint commissions and fees for the quarter increased 13.9% to $164.3 million, that's up from the $144.3 million last year first quarter.

Of course included in our press release is our table that summarizes the total growth rates of the commissions and fees and the internal growth rates on a core commissions and fee basis, which is as you know, from the pervious call exclude any of our contingent or profit sharing agreement as well as any divestitures which would be, you know, revenues from offices or book of business, the programs allegedly sold by the company during the last 12 month period. And if this core number that we've really feel that represents a standard, the continuing day-to-day policy-by-policy revenues that are generated by our office on kind of same stores sales basis and that's really the most meaningful analysis, I suppose quartering with contingency increases or decreases.

But in that schedule there is also a recognition that you will see that ties out directly to the income statement on the total commissions and fee line. And for the first quarter of 2004, the only different in those two numbers is the 25.7 million of contingency profit sharing revenues that we got in the first three-month of the year. Relative to that number, this represents 41.2% increase in the contingency revenues that we received just in the first quarter -- over the first quarter of 2003. Now even though this is a tremendous amount of profit sharing revenue, you know, we're very happy to receive it. The fact is that most of that increase over the prior year really relates to the fact that the insurance carriers seem to have completed their profit sharing calculations earlier this year and actually send us the checks by the end of March. For the entire year of 2003, we received contingencies that total about $32.5 million.

Now relative to 2004 year, our best guess of what we think we'll receive for all the contingencies for the whole year and, you know, just based on what we received in our first quarter and the discussions with the carriers in terms of what they are saying. Our best guess is that it's probably going to fall for the year around 29 to $31 million. On a quarterly basis, we think that in the second quarter, we'll probably only receive around 2 to $2.5 million of contingencies. That compares to about $10.2 million that we received in the second quarter of '03. Now in the third quarter for this year of '04, we probably will see -- will receive less than $0.5 million of contingencies, so that's the lowest quarter for the whole year-over-year in terms of contingency.

Last year in that third quarter, we received $1.2 million. And then in the fourth quarter of this year, we probably will receive somewhere between 1 million to 1.2 million in contingencies that's provided that Florida doesn't get hit by a Hurricane. And of course, last year in the fourth quarter, we received almost $3 million of total contingencies. So kind of summarizing, what all that shakes out to be is that we think that for the whole year of '04, our contingencies will be down about 10%. But keep in mind that this decline is really due to the fact that last year we received over $3 million of contingencies from the Royal Insurance Company. We also received substantial checks from the likes of (inaudible) of Atlantic in cambering some carriers, which we're not going to receive a comparable amount this year, so there was just a whole to fill-in. So, we really received, you know, we're very, very please to have the 29 to $31 million. It's very good, but I just want to make sure and thereby understand how that did you seem to have fallen more than the first quarter of this year.

So with that said, going back and looking at the total -- the schedule of internal growth, we had total core commissions and fees increase for this quarter of 13.2% or an additional $16.2 million of new commissions and fees. Of this total about $11.8 million of revenues were generated from businesses that we acquired in the last 12-month period. The remaining $4.4 million was really internally generated organic growth and that reflects the overall 3.6% internal growth rate. Now how it's going to talk, as we mentioned, specifically about each of the various sectors, so we'll leave that there. Now moving on and just looking at the other revenue items, we had total investment gains of $668,000. A largest portion of that gain was around 550, and that represented a sale on an investment in which we had a 50% interest in a third party administrator. Now, this TPA was not part of our operation, it was simply an equity investment that we had accumulated from one of our prior pooling acquisition, and we sold that during the quarter.

On other income, we had a total of about $563,000 and that in addition to just very slow miscellaneous items that always come in every quarter, we did have some small gains on sales of various books of business that no longer really fit to that particular offices game plan. As it relates to our expenses and our pre-tax margins, there was a full 2-percentage point improvement in our pre-tax margin to a total of 35.9%. Now, as I mentioned the majority of this improvement is directly related to the increase and the contingency in profit sharing revenue that we received in the first quarter. However, if you exclude the contingency revenue impact, our pre-tax margins on a normal basis still improved between 20 and 30 basis points over the prior year. Well -- you know, a vast majority of our offices are already various session, and there is no one specific area of our expenses that we believe needs significant attention. All of our leaders and the folks in our operations understand the basic tenet of how to increase margins, and that is if you increase your quarter revenue at a faster pace than you -- your expenses increase. And you know, they do this every day and they do it very well. So, with that kind of summary about the margins have moved up in both the core and on a total basis, I'm just going to bypass a line-by-line discussion of every expenses, because everyone seem to kind of, see slight improvement. But we are happy, you know, to say that we you know -- we did have total pre-tax income of $59.4 million at that 35.9% margin, and that's 21.1% increase over the $49 million that we received in the first quarter of '03, which was at a 33.9% margin.

Now our effective tax rate for 2004 has increased to a little over 38.5%, which again is a full 1-percentage point higher than the rate used in 2003. The increase in this -- in the rate is really due to the fact that we got more and more of our income being earned in the state that have higher state tax rates than Florida does. So, I know a lot of -- you know, there's been a lot written recently about how a lot of these US companies that have significant earnings, but then they turn around -- not really paying much to the US government entities. But I'll tell you what, you know, we are good corporate system, because we pay awful lot of taxes, you know, in cold hard dollars. Last year we paid $61.5 million in all of '03, and then in '02 we paid $48.3 million, and then -- because today is such a good tax day, we're going to wire in another $20 million in tax payments today.

So, if anybody out there don't feel like they pay enough incomes taxes they are more than willing to -- more than welcome to have a little bit of ours if they want. But so really just to conclude on the income side. We ended up with net income of $36.3 million and that was 19% over last year's first quarter income of 30.5%. So, a very good quarter from an income perspective. If you look at our balance sheet, it's accentuating that we're fast approaching $1 billion in total assets. At the end of the quarter, we had $920 million in total assets. Those assets we have $18.5 million of ready, non-client cash as of March 31st. In addition to that, we have in place a $75 million credit line, which gives us ample short-term cash for any acquisitions that really presents itself to us in the near future. But and, you know, given the fact that we only have $55.9 million of debt outstanding, and therefore we have a relatively low debt to capital -- capitalization ratio. We do think that in the next quarter it may make sense to take advantage of the low interest rate environment, and borrow some additional funds from the private debt market place.

Now, depending on you know, how the market place looks you know, we may borrow as much as $200 million and we probably do it over a 10 year period. You know the question we (inaudible) is it better to get more money than you really can put to immediate use as long as you get it at a lower rate or do you, you know, try to structure some higher borrowings over a longer period. We generally tend to lean towards getting the best interest rate possible, you know, even if we were to sit on the money little bit.

So, with that if you look at the other items on the balance sheet. There're really only two other categories that really show any significant fluctuations that I really mentioned to you and that there is, you know, accounts payable balance at the end of March, includes what's higher than the yearend number and that because there is $20 million payable that we're going to pay to the taxing authorities that are going to go out today so that's -- and whereas at the end of the year we had already made all of our estimated payments and didn't have any payables, significant payables relating to taxes at yearend.

The other accrued liabilities at year end is -- was much higher than -- about $10 million higher than March 31st balance and the reason for that is at the end of December we have the accrued profits center bonuses for all of our offices that are accrued and they're paid out in January. And so those are paid out and now the only accrual for in the March is really what they have accrued since, you know, for the first quarter. So, really kind of with that difference or that analysis of the balance sheet that ends the financials, I'll now just turn it back to Hyatt.

Thanks Cory. We're very pleased with our quarter and things are looking good across our 30 states. First of all, let's talk a little bit about Florida. Our internal growth rate was 7.7% up from 4.3% the last quarter. We had strong new business. We do have declining proxy rates.

Worker's compensation continues to be challenging its really, kind of, all over the place. There are two national carriers repositioning their worker's comp but what that mean is, is they're trying to reduce it by 50 or 60% and that means that we have to replace that business and additionally there is another national carrier that has retreated to hang along and we're replacing that worker's comp business. So, it's causing us some pain but that's part of the price of leadership. We continue to see regionals in Florida coming on strong and that means being aggressive on writing new business and pricing. In Florida, we had 1% core margin improvement, which we're pleased about and the rates in general lines are trending down. There continues to be a major challenge in Florida, that is if they were growing very rapidly in Florida, in terms of new property values, homes or just bringing up like wall fire, new condominiums, new shopping centers, new manufacturing facilities and all that brings upon a great demand for additional capacity, and capacity could be running a little short later in the year, don't know that for sure, just kind of guessing.

National retail is getting better, new from a negative growth of 7%, a negative growth of 3.1%. Pricing in the Midwest is eroding but we're done better on new business and we think the economy is helping us a little bit.

Contractors business continues to really be tough and particularly in New York state where we're facing or the risk bearers are facing some particularly thorny state laws. I will mention that the rates in New Jersey around the New York city area is the one area in United States where we see some increase, some continued increase I guess, I should say and what that means is may be 5 may be 10% on cash reliance. We also are seeing and this really would be across the entire United States where we're seeing an increase in social services pricing. And we do write-up pretty good chunk of social service business throughout at our various offices.

Western Retail grew at 5.1%, about the same as it did the last quarter at which it was 6%, just very good walking and tackling all the way throughout the West. We're growing very nicely. We're bringing on some new people that are very high quality and very productive. We also had a 1% core margin increase in the West. There continues to be turmoil in the California work comp market, although, I understand that we have just been able to contract with a new risk bearer that is specifically looking at some of the lines of insurance that the state fund out there really doesn't want. And the state fund will like certain of the more difficult lines, the problem is they don't pay any commission to those, and that's not very attractive to us, so we may have a solution to that. Regionals are price aggressive in all states of California, and in course, California called, over a period of time that's going to killed off all the regionals. So good things are going on out west, professional programs are about the same, 9.8% growth last quarter, 9.3% this quarter. Good news is that for the first time, I think, in maybe seven or eight years, we had, what I would consider a nice growth rate in dental, our dental program was up -- internal growth about 2.5%, so, we're happy about that. CalSurance out in Los Angeles to rise business in California, but then all throughout the US, their internal growth rate was about 13%. And lawyers, and basically, mostly new sales small rate increases, growth and programs in CalSurance. Our lawyers are slightly down; opto is slightly up in terms of internal growth.

Moving to special programs, we were down there from a robust 23% last quarter to a negative 6.2. And there is about three reasons; number one, our wholesalers and distributors program which was with the Atlantic Mutual, obviously, had to be moved, since Atlantic was getting -- selling their business - their commercial business. And the appetite didn't continue with the new risk bear. Also there was a geographic limitation, so we move that to another national company the Hartford. However, and anytime that occurs, particularly, when you know how much advanced notice there is going to be a big drop in renewals and no new business until all of the eyes are got in and all the things are crossed, and so we've done that. And probably, by the end of this quarter, meaning by 1st of July, 1st of August, we should be back in pretty good shape there.

Second thing is, as there is price competition in Florida property markets, particularly, the Florida Condo market. And it doesn't matter whether it's a AAA property or Georgeton (ph), Mason or Fame (ph), those prices are going down. And then, we also had a drop for this quarter in our social services businesses written in our AFC subsidiary and there's one in Pennsylvania. Now the reason for that was that we did have to make again a change in carriers, and when we made that change in carriers, the new carrier had a left broad appetite for the types of risks. And even though the prices are up, the number of risks that were acceptable had drop off, and therefore, for this quarter we were down. We think that will recover again by the 1st July.

In our brokerage area, up a little bit, 12.8% internal growth versus 10.1 brisk new business. Our property rates going sound. Brokerage, if there is a firefight and pricing going on any place, I would say, its in brokerage. And that has to do with really nor property than in casually although its going to get into casually too. Binding authority is at business, its still checking along. Now those are smaller not as sought after by many of the risk bearers and so that's going along fine and we can't expect that do the signing for the rest of the year. I might also mention that we have seen something in the last 30 to 60 days, that is a bit unusual and that is as regards two particular accounts I am familiar with and this seems to be starting to catch hold a little bit. And these are redeemable accounts on middle and smaller size public limited companies where they had no problems, no claims, no drops -- valet drops in earnings or anything like that. So these are good risks and the D&O renewals were down 25 to 35%. So that's kind of unusual particularly with all the litigation that's going on in that particular area. Last PPA as you know just keeps on peeping on up about 13.3%, a little down from last quarter at 14.9 and our margins are up their about 4% and its -- I would classify PPA at three (inaudible). So we are very pleased there. Again for everyone before you ask the question, the forecast for internal growth through the rest of the year is between 0 and 5%. So having said that, I'll turn it over to Jim to talk about our M&A activity. Jim.

Thank you Hyatt and good morning and happy tax day. We are pleased to report a very active first quarter on the acquisition front. We completed some twelve acquisitions. There were sixteen entities involved in those; any location may in fact contain multiple legal entities that involve acquisition of all those entities. The acquisition activity accounted for some 52 million of revenue. This was definitely more active than '03 and '03 for the entire year was approximately just under 40 million in acquisitions. We continue to I think benefit from a long standing product culture that is to be a dual focus on operating intensity as well as being in an environment that we can select, acquire, integrate profitable agency acquisitions to help fuel the growth and earnings for the company.

In regard to the growth and the acquisition on the first quarter I would like to pay special recognition attention to two of our regional Executive VPs, they really drove the activity in the first quarter, Tom Reilly, the Regional VP in the North East. Tom today has just showed us some 150 million in revenue based reporting to him and then in the West, Ken Kirk, really a region of equal size and those two leaders had in fact the activity that really drove first quarter acquisitions. I'd also like to recognize our acquisition team, the case of Tom Dominin and Mike Visaw, Dena Turstani (ph) and others that work with them that really are just to help execute these transactions getting on board and help us understand in fact the nature, obviously the agencies we are acquiring.

Working in the acquisition area, some questions are often asked, what about -- is there a change going on there, are you seeing more competition, less competition, I'd say really -- it really is about the same once you've focused and with talking to an agency, they tend to stay with the (inaudible) until we know we just want to do the deal or not. So the -- that's the factor of direct competition in many cases were removed from that situation. The dynamics and the P&C brokerage area continues to be relatively the same. There is the demographics of ownership, the age of ownership if you look at some superior consolidation and a need for leadership create winds of change that blow around our direction and create the opportunity for us to step in and acquire agencies. We continue to use cash to acquire assets that really is the most favorable from our shareholder standpoint and the pricing continues to be a forward earnings performance base either two or three years, a similar formula that we've really used since the mid-80s.

The -- with respect to forecasting, we really do not forecast any particular activity level on acquisitions. The pipeline is very pleasing. I think the number and the quality of people we're talking to continues to be only better. And so the timing of any or all of those being completed really is something that is a lot to do with people, understanding people how they would really integrate with the company and go forward. And we really do not budget acquisitions from policy standpoint. So, Hyatt, I'd turn it back over to you. I'm not closing.

Great. Thank you very much. And good report, Jim. Greg (ph), I'd like to now open the floor for questions from any of the people who are listening. Are you there, Greg?

[OPERATOR INSTRUCTIONS]

We'll hear first from David Lewis with SunTrust Robinson.

Good morning, and congratulation on a strong quarter.

Thank you, David.

I think couple of questions. Hyatt, first, if you can kind of walk us through -- your internal growth assumption is 0 to 5% for the year, assumed something in the middle. Acquisitions running stronger and, you know, historically over the past four to five quarters, you've achieved 15% or better growth that you target for the full year 2004. If you didn't do any significant acquisitions, it appears to be that will be difficult to get you. So, can you give us any idea of what you might need in acquisitions to kind of achieve there or -- and/or do you anticipate another 50 to 100 basis points improvement in the pre-tax margin?

I think the answer to your question is all above, David. We do have an accruable price on margins and of course, I think everybody knows that. It's not as easy to do as lot of people think it is, but we think we'll be able to get it done. Secondly, in the area, David, of acquisitions, you know, we just don't really have a convertible goal and the reason we don't is that we don't want to make any dumb acquisition or mergers. And so, we just try very, very carefully to stay away from making any kind of snap acquisition or getting outside of our comfort zone.

But, I would say this, the market which is pricing, which is heading sales is I think helping us, and it is -- one of the things that's occurring is that and many agencies that are in our sweet spots are $1 million to $10 million of revenue. They have a limited number of markets, and when they have a company, as I mentioned, couple of companies in Florida, and this is happening throughout the country but it's -- in different levels of intensity. But, when a company comes in -- a major company comes into an agent and say, "We're not now right in the hands of the workers compensation which you have now". That puts a heck of a lot of pressure on that agent who may not have any other companies that he or she can go to. So, we think that there is some dynamics occurring, which are very helpful to us.

It's helpful. And just one final question. Are you seeing any deferred changes among your broker competitors out there? And you know, any change in the retention rate and/or producer groups leaving your firm or coming to your firm?

Now, we don't have any particular ones leaving or/and we don't really like to go out and hire and haven't hired any "teams of people". We find teams who don't, in many cases, have a great deal of loyalty, and they're really not attained there all about millions and the term, "we" is not in their vocabulary. Now, we are bringing on new producers and basically most of those are coming from internal group. In other words, we're growing people attractively as we can, and we've stepped up -- I think I talked on the last conference call a quarter ago, we've stepped up our recruitment, but between the time you give someone and they are mature enough to go into the field, there is a little bit of time unless they are already with -- in the selling business. And of course, if we -- if someone comes to us from another agent or broker and they have a non-piracy, we respect those non-piracy.

So, that means if they have to start pretty much from scratch unless the other broker would be willing to sell to us some of the broker business, which sometimes they are. So we don't see -- we continue to see a lot of interest and people from other agents and brokers talking to us but we're fairly picky about that. In terms of the M&A where -- you know, everyone thinks that there may be four or five or six agents or brokers that are properly ground that are out looking for every acquisition really isn't that way, and we have a same a heck of lot of change in the pricing in the last three or four years. It's about the same.

Great. Thanks very much.

Hello?

Mr. Lewis, anything further?

That's it. Thank you.

Thank you. We'll now hear from Nick Pirsos with Sandler O'Neill.

Hi, good morning. I had two, kind of, broad questions. First on contingent commissions. You know I was surprised by that -- the absolute level for '03 or 04's commissions will be, I guess, on par with '03. Given the industry has kind of improved underwriting results, given your book of business, now I understand that doesn't offset their actual of some carriers. Maybe you just kind of add a little bit more color around that?

Well, couple of things. The -- we had an addition to our standard contingent commission that will be paid on the basis of an individual contract with individual officers. Last year, we had an additional $3 million of commissions -- contingent commissions based on growth and also to a lesser extent the loss ratio with Royal (ph). So that three is gone. Kind of addition to that, we had some contingent commissions that came in from Atlantic Mutual and some -- and others were -- we are just not in the business any longer. So, that's part of it. Now, we may be being a little concerned with it, but we don't go through. We'd rather be conservative than have a negative surprise. And quite frankly, it's very difficult, Nick, to estimate these things because the companies really don't give us updated information. It's very active. It's not that they're not trying to do that; it's just that they don't really get their numbers altogether until really fix the (inaudible) accurate. So, the companies that are coming in later, we're not sure about that and -- but we're really kind of trying to be careful. Cory, is there anything you like to add to that?

No, that's it.

Nick, I think, one note please. We have -- going into '03, '04, there were some companies that kind of tweaked their profit sharing formula in anticipation to drive, you know, their earnings on their forecast. And to our pleasure, we're seeing it come back and probably for '04 and '05, we're seeing some changes going back to previous levels. So, there is some -- in our case, I think, we actually produce more profits for the carriers. Some of the formulas produce probably some less sharing, and I think we're seeing now perhaps some trends to go back to a higher sharing of these profits.

Well, I think there is one other thing to add in there is that there were something that went into a couple of contracts that last year that kind of just sort of slipped in there without either knowing about it or realizing it and had to do with growth. And so if, in fact, you don't grow the revenues with the premiums, with the company about 10% or more, then you are not eligible for a profit sharing, even though you would develop a substantial profit. And so, then if those company decide they want to vacate a particular line of insurance like workers comp, which means that we would like to renew the coverage within the -- they didn't want to renew it, and all of a sudden, that keeps us growing 10%. Now, we are in discussion, aggressive discussions on that, but those are the kind of things that, you know -- it's really hard to quantify.

Great. That was very helpful. And just turning to my second question, topic is, pricing cycle in general, how in your estimation have you kind of moved from a placement to prospecting market at this point, just given some of the commentary you've given?

That's correct. And it's kind of interesting, how that is Nick. I think, we are seeing more BOR, Broker of Record letters and the PNC that we're seeing in quite a while. And exactly why that is we're not really sure, but here is something that I think that isn't necessarily as obvious to somewhat maybe others. If you look at the published results that came out at the end of March, the top property and casualty insurance carrier, the largest AIG had combined of 92.4, second largest travelers combined of 96.3, third largest ACE combined of 91.5. Well, those are very good numbers. I have never known travelers to have that kind of number in the history of world. Now, it might have certainly do with Sarbanes-Oxley, because you can't beep up your reserves the way that you once could maybe.

And that is a good thing in terms of having the market not get out of control, and what I mean by that is this - is that, we don't think any of the risk - excuse me, we don't think any of the risk bearers have had an opportunity to really to replenish their reserves adequately, like they were able to do an 85, 86, 87 and maybe 88. So therefore, you combine Sarbanes-Oxley with reserves and maybe aren't - about a full and under reserving for workers compensation. And I don't think that risk bearers are going to be able to substantiate unreasonable price decreases for very long. But having said that, we are seeing particularly with regards to regionals or many cases mutuals are not publicly. We're seeing them in the vanilla middle market be pretty aggressive.

Great. Thank you, very much.

We'll now hear from Nik Fisken with Stephens Incorporated.

Hi. Good morning, everybody and congrats on the quarter.

Well, thanks, Nik.

On the contingent, Cory, can you give us the numbers behind that? You said, excluding contingents pre-tax margins were up 20 to 30 bips?

Well, I mean, there is not a lot to that, its just that, you just can't take the full differential between 25.7 and the 18.2 that we got in last year quarter. Because as we -- as an office receives that -- those contingents, we have to accrue certain cost relating to that, which is primarily bonuses that the profit center makes. So the number that I was taking is - you know, you take your compensation and your other expenses, and all of those on a core basis, which is extracting those contingencies. They are all, either the same amount, as a percentage of that core revenue or there - it's a slight improvement, and so when you put it all altogether, there is a - it's between 20 and 30 basis points that are margins actually improved.

Can you give us one of those numbers so we can serve the other one?

Well, I mean, it's a pretty detailed calculations of pulling that out by brands, I mean, I would have to give you a whole another income state.

I'll call you after this - after the call.

I mean, the reason why I said that, you know, there is - the percentages on compensation -- you know, how you take compensation as a percentage of revenue. And on a blended basis, I mean, on a consolidated basis, we have $76.3 million employee compensation benefits in aggregate, that's 46.1%. Now, if you extract the cores and the bonuses out of that, that particular one would go down to like 70, you know, $72 million, which is, you know, would be somewhere around the 50, 51% of total compensation. That is very comparable, as it's slightly down by partial -- couple of basis points from what that same number would be last year.

So when you take all of that together that's where you aggregate it down to that 20 to 30 basis points. So, the point being is that there, you know, there is no real area where there is huge savings. You know, it shifts a little bit here and a little bit there, and that's how -- when you have efficient operation, you just don't make big leaps and bounds at this kind of level, it's just growing your revenues a little bit faster in expenses. And so that's why, there's really just -- there's very small differences in each line on a core basis. All but not too detail, but hopefully it explains what I was referring to.

Yes, that 72 can get me there. I think 25 basis points. On the fourth quarter contingents for this year, I'm struggling why you guys can't get to three, did you guys change carriers there?

No. Here is the reason for it. Last year the -- at FIU, every year the reinsurance and FIU separately get an estimate done by modeling companies as to what the probable maximum loss on the book of business is for the worse case to a worse case trail for a 250 year store. And so the model that was used had a flaw and the probable maximum loss over the previous year went from that $650 million to about 1.2 billion. We've all been, whenever and so the reinsurance then, the various carriers bought additional CAT for that particular exposure. We disagreed violently and so then in about 4, 5, 6 months all the sudden the modeling company came back. So while we had a little problem, and that P&L dropped all the way down to 800 million or 900 million up a little bit but not a great deal. In the mean time the reinsurance had been purchased and once purchased that's it. And so that means that the overall profitability on which we would share in a contingent commission draw. So that's kind of a complicated way of telling you why that is. So it all works out.

And then on higher use -- on the social services...

Yes.

You said you expected that to come back in July.

Yes, and here is the reason for that. The bottom line is that the social services business -- we had a big chunk in our AFC facility. OK. So it was with campus and campus got in trouble as of January of last year. And when they did that then we were having to start to move the business, while we'd to find someone. In the meantime the renewal policies in the first quarter were buying pay-all coverage because it was on a claims made basis. And so that inflated our revenues during the first quarter in that particular subsidiary. Secondly, new business, of course, was going on OK. But because of the fact that this quarter the risk bearer that we have has a more narrow appetite meaning instead of writing 75% of the marketplace they write 30% of the marketplace. Therefore our revenues gone south now. We have been able to make some changes on those underwriting criteria, so that the big increase in our revenues we hope will come in the July quarter. So, it's kind of complicated you have to see the numbers understand exactly why that is.

And last question for Jim. On the acquisition front are you seeing what you're characterizing acceleration versus the last time we spoke when you announced the fourth quarter in terms prospecting out there?

Well the prospecting, you know, we drive very deep into each, regionals and their respective offices and so it's really -- it's on their score card each day to track and I'll be talking to those that may in fact be at quality to join us. So, yes, I think the level of activity grows because as we grow, in fact we kind of spread our ability to talk to more people, and I think I had mentioned -- the level of the health serious people are in terms of timing has a lot to do with, how they see the future and their own personal situations and -- the timing of the acquisitions are loppy (ph) because in fact, we may talk to someone maybe two years before, we've complete the transaction. And really, knowing them they know us, and how you go forward on the very productive basis. So, we -- we're pleased with the level of our activity. We -- this time, we never know, is how many of those and exactly which ones go from kind of warm to the very - to very hard to complete it. And in fact, where the buy off of that transaction have to emanate from an operator, from the regional or from that office saying, I want to put my bottom the line and I really want to do this and it makes sense. So, but again, we're very encouraged by the activity -- nor do we see a lot of winds of change with respect to, competition things or kind of as they've been -- in that arena.

I think just piggy back on what Jim saying we've been very, very -- pleased with the fact that the people have joined their -- team in the last quarter, there is very little, if any remodeling that has to go on prior to them coming on Board, and they're already producing margins that are at our levels. And there not a lot of people after they're doing that. So, we're very pleased about that.

OK. Great. Thank you.

Next.

We'll hear now from David Schutzi (ph) with JP Morgan.

Hi. Good morning, everyone.

How are you David?

Good, good. Just have a couple of quick questions here. I'm -- I guess I'm trying to reconcile, excuse me, trying to reconcile your comments just in general, what you've said in them is, you mentioned that pricing heading South, it's were in a prospecting more mode today, in a reasonable are competitive underwriting results sort of are I'm pressed in yet, on the other side, afforded capacity appears to be coming under a squeeze as we go out for the second half of the year. California, is still seeing troubles workers comp, firm and that piece of it, where does this all kind of shake out?

OK. What I'm trying to do, David, what I'm trying to do is characterize a market today that is different from the market, four, five years ago, when everything was going South.

OK.

You know, back in the really most all of the 90'sworkers comp was a very aggressively sort out line- and the bottom line is that's not true today. Secondly, even in those days professional liability was the sort out line and in some states now it is not sort out in any state, I know how today particularly for an individual after malpractice so. And again appetite vary about reason of the company -- of the country -- more than back end what I would call the previous soft market. So, this is a choppy market and -- it's very difficult for us to categorize, but what we know is that the risk bearers are making profits most of them, at levels that they haven't really ever seen in a long time, if not forever. And so therefore that makes them want to be more aggressive and as a matter of fact, I think I'd mentioned in the past back I think I'd mentioned in October, that we've seen the first time that the risk bearer had been willing to coming in and pay us an extra commission on a particular commercial account, if we were with them and so then we -- in the first quarter of January saw a company coming in and offering us extra commissions for growth, and now we've just yesterday seen another and so that's what's happening. And so does it means that the -- this market is going to help, no it doesn't. What it really means is, I think the risk bearers are going to be much more careful about identifying where they can go after business that will continue to give them a profit at the level that they might be currently out and that means and we're seeing this, that for those risks that are not good loss ratios or have some kind of -- here on them or something, they're going to continue to pay more. And for those risks, they are really good they don't pay less, reported that all check out, it means a slight moderation in the market. And the one thing we don't know is, lets assume, they're on or about (inaudible) that most of the national carriers say, we haven't made our topline goal, what does that mean for the last two quarters, well we think -- we think it means softening prices.

OK. That's helpful. And I guess as we look forward into the January period, I know its a little bit off here but, you know, we have to go out there 0 to 5%, I mean - I'm wondering across assumption that, you would not be happy with the 0% organic growth.

Well, you're right on that. We've never had one.

OK.

But that doesn't mean that we couldn't have one, depending on what would happen. But, you know, we're going to push the internal growth as fast and as hard as we can. And the one thing that we're not going to do is, we are going to not be at any business that or at any account that doesn't make our margins. And there was the time when we would accept profit centers that were making less than 25%. Well, we're not going to do that in the future. Now we have a couple of profit centers that we are no longer have, and we got some more that we may not have. But we also have one very large and very profitable profit center call United -- USI, United Self-Insured Services and they have come from something like a 12% to now a 22% operating margin, it's a TPA. And no one else operate to that margin and they have about a $19 million revenue and growing, so in -- OK and they get to the 25, well.

You know the...

...get pretty close there. So -- but on all of those offices and profit centers were our peer group not the peer group, I thought that our peer group in Brown &Brown, is operating at 35 to 40, if they're at 25 they really need to get up to the 35 to 40. So there is a lot of pressure there and that means, that we're not going to allow them to do things in terms of writing new business that doesn't make our margins. And therefore that could be a slight impairment to showing a great internal growth rate. I know that the market is very, very sensitive internal growth rate. We -you got to understand David, our strategic plan is very simple and the first component of four components is we're in the moneymaking business. And so what we have to do is grow earnings per share 15% every quarter on an item. And if we do that then, you know, we'll do OK and our shareholders will benefit.

Great. Thanks Hyatt

Plus more than, you're open to hear I'm sure.

And we'll now hear from Adam Klauber with Cochran Caronia.

Hey, Adam, good morning.

Good morning. You'd mention of that several large, as we've two large workers comp carriers are trying to reduce the exposure in Florida?

Not trying or.

Sorry about that. First, how significant is your exposure to those two carriers. And second, it's related -- is there reduction specific in Florida or is it a effect of the workers comp market as challenging across the country and they're reducing across the country.

Well, they're reducing it at every jurisdiction where they think their loss ratios are trending in the right direction. And so, in the case of how significant is that, then far away. As we don't have any single company that is what we recall hugely significant. The bottom line is that, it is painful, because it's where I try to right new business and we got up. And so we're pushing a short on that, at the same time we know that we got our rate replace these three or four workers comp accounts this month. And in one office yet it takes time that could be used to place new business. So that's the takeaway. We'll get it done, and we'll -- it all get repositioned but it will be so much easier if they were just an automatic renewal.

OK. Is this a start of a trend in -- for the workers comp obviously that have to roll it back. Do you expect or is it possible for more carriers to pull back out of the state?

It depends on their own loss ratios. I would not consider this for Florida State that is in large trouble. But workers comp has a very long tail off and so, for risk bearers who are concerned about that -- they, I think, they're going to pick the states that they are making the least margin and reduce their exposure. I think that's the reality.

OK. Going back to contingents for a moment. Thank you for letting that out on a quarter-by-quarter. Now that's quite helpful. In the quarters, for 2004 where the comparison is -- couldn't be difficult will that also make the margin comparison more challenging?

Probably, yes.

OK. And finally, it sounds like the market, in general, is very active, very competitive how are your retention -- your customer retentions running in this market?

About the same as always. You know and if you look at our regular retail, we're in it depends on which office, but 93 to 96% retention which is -- we just -- we got to get those renewals, so we do. Now, if you're in the brokerage area, now this is E&S brokerage, you know, 60% to 70% retention is considered to be pretty good in that area. So, I can't say that the -- that our ability to hang on to renewals has diminished any Adam. I think its about the same.

Thank you very much.

And the final questioner in the queue is John Keefe with Ferris Baker Watts.

Hi. Good morning all. Jim, you made a comment in the press release talking about the margins in the class of 94.

Right..

Are they coming out of box or operating at levels expected of established offices?

Correct.

Can you give a little perspective on that?

Well, I think Keefe, we just forced them into being able to attract certain operations that, in fact, prior to going in to doing the remodeling in the case of -- they're expense based, they're producer compensation, they're operating expenses that they look very much like one of our offices that they want. So, they're also in the niche, they have some particular product line or some value-added they have at the table that causes them to be quite profitable. So there isn't a case we're having to go in and find -- we find an operation that, say, is below 20 or 20, elevated about 25, and then hope we can get from 25 up to 30 or plus. So day one -- so much of their culture -- the way they've been operating is very similar the way we've been operating; and that's really that's right to say, because there has been no change in environment from day one with us, going forward, from where they were at before. We'd love to find more of those opportunities.

Would you expect that you could in the future?

Well, we believe, we can. We are talking to a number of those. In some cases, you know, they may feel like they are worth so much money that we just -- perhaps, we can't execute because for where they think they are where they are going to be, and perhaps it maybe an opportunity down the road. So, yes, there is an ability in this industry, if you focus on selecting your customer wisely -- and what we do -- and if you look at our attention to margins, that is a code word for, in fact, customer selection. And the fact dealing with those that's willing to pay you a margin is acceptable to you and your shareholders. So, yes, the industry is blessed with very good margins, very good earnings, and we continue to run into operations with niches that is very focused on what they do; and those operations typically are even more profitable, because they do so well in that particular product line.

OK. Very good. Hyatt, you had -- you gave several examples of market dislocations. The one in the past has been your Florida physicians program.

Yes.

Has there been any change in that program, any -- maybe, any loosening up in terms of capacity?

I wish that I could say, yes, but the answer is no. And we think that we have something that we might be able to roll out later in the year; but, honestly, you know, John, it is a tough, tough area. And so we don't see any change, right now, if we are able to come forward to risk there that would be willing to write in Florida and of the other states that we've written in. We could write some business, but we haven't been able to find one.

OK. Very good. Thank you.

And we do have a question from David Lewis.

I think I have a quick go follow up for Cory. Can you give us any guidance on how to predict the non-cash stock grounds? And also investment income rate was higher than what I was anticipating; that has dropped off fairly dramatically since a lot of the (inaudible) came in second half of the quarter. Is that accurate?

David, on the -- on this -- let me -- on the PSP charge, there -- as long as -- until the stock price hits $42 a share, the next big slog of cost will not hit the books; and we're getting up there. So I would suspect that we would hit at least that $42 level; and so, you know, you're going to see probably a 20 to 30% increase in that overall costs start to move up. And, then your other question, David, I forgot was cost -- you mentioned, but I was...

Well, before you get into that, let's assume, we had $42 in the next week or whatever, you know, early in this quarter. When you say 20% increases, is that after the first quarter or is that versus a year ago?

OK.

No. That would be taken essentially with the quarterly numbers, because the most recent quarter will be most indicative of what the ongoing amount is, because that would have netted against any forward presumptions that you'd have. So I would compare it against the sequential quarter, not the prior quarter in the previous years.

Let's just assume, we get it today, what would be 845, you know, to roughly $1 billion in the second quarter and if we stayed at that level and continue in the third and fourth quarters. Is that what you're telling me?

Yes, exactly.

OK. That's up. And the other thing -- just the investment income, probably, falls off a little bit because some of that cash being spent on acquisitions, here, in the last couple months?

Yes, that's true. You know, but the good side about that is that, you know, we were never making a huge amount of income on that, you know. I mean, I think, we were -- you know, we were in the high yield coming in on, you know, high-grade bonds. So, you know, we were overnight funds; so we were only making, you know, 1% -- probably best at that. So.

OK. A final question. I think you did about 110 million of free cash flow in 2003. What you would get us -- 120 or 130 this year?

Well, I mean, it just depends, you know, on where we finish out; and that's dependent upon, you know, what the acquisitions are. But, you know, we are growing, right now, at 20%. So I would say you take -- you know, take an increase of 20% from last year's number.

So 130-plus?

Yes.

Great. Thanks very much.

OK.

And there are no further questions, at this time. Mr. Brown, I'll turn things back to you for any additional or closing remarks.

OK. Well, thank you very much. Everyone is listening, ladies and gentlemen. And we've had another good quarter, and so we're looking forward to having a good quarter in April; and we'll be talking to you in July. So thank you very much, and good luck. Bye.

And that does conclude today's conference. Thank you and have a great day.