Brown & Brown Inc (BRO) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to this Brown & Brown Inc. third-quarter 2004 financial results conference call. Today's call is being recorded. Before we proceed we would like to inform you that certain of the information that will be discussed during this call, including answers 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 and current events, including financial performance and that such statements are intended to fall within the Safe Harbor provision of the private 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 the number of factors including those risks and uncertainties that have been or will be identified from time to time in the Company's report filed with the Securities and Exchange Commission.

Additionally, discussions 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 immaterial. With that said, Mr. Brown, I would now like to turn the conference over to you.

Thank you very much and good morning everyone. And I would like to ask Cory Walker, our Chief Financial Officer to talk about the numbers.

Thanks, Hyatt. We had a very good quarter considering all the ducking and weaving that we had to do around the four major hurricanes that hit Florida during the six week period in August and September. From the revenue standpoint our total commissions and fees for the quarter increased 20.2 percent to $158.9 million. That is up from the $132.1 million we earned in the third quarter of 2003. Kind of digging down through those numbers we've included in our press release the table that summarizes our internal growth rates from our core commissions and fees, which as you know excludes contingency or profit-sharing commissions as well as the revenue from the offices and books of businesses and programs that have been sold by the Company or terminated since the third quarter of last year.

This schedule ties to the total commission and fee line included in the statement of income. And as you can see, that on that schedule our current quarter's profit-sharing contingency commissions was a little less than $1 million or about $200,000 less than the $1.2 million we received in the third quarter of 2003. Since we have such an impact from the hurricanes this year, we will probably only receive an additional $400,000 of these contingency profit-sharing revenues for the fourth quarter of 2004. And I know the big question is what will our profit-sharing contingencies look like next year because of these hurricanes, and that's a darn good question. The really the short answer is we really don't know and will not know until the carriers determine their ultimate losses and calculate the contingency revenues to us.

With that said, let me just tell you some specific information about -- during the entire year 2004. We will probably receive total contingency profit-sharing income of around $30.7 million. Of this total, $12.1 million came from our Florida retail offices and wholesale units. And if you take the Florida offices that had the majority of their businesses in the areas that were affected, mostly by these hurricanes, those offices received about 7 million of the 12.1 million. Now some of these offices will only lose some of their contingency revenues. And others may lose all of it. But we just won't know until the insurance carriers calculate their total losses and let us know essentially around next March.

Continuing on just the reconciling items on the internal growth schedule is the revenue from the sole businesses since the third quarter. And these revenues represent primarily the revenues from the operations, which we sold which were the two medical TPA operations and our North Dakota offices that we sold last quarter. If you look at the top part of the internal growth schedules, our total core commissions and fees for the quarter increased 25.4 percent to $32 million of new commissions and fees. Of this total, 28 million of that revenue was generated from businesses that we did acquire since last year, and the remaining $4 million of that revenue was therefore internally generated organic growth, and that reflects the 3.1 percent overall internal growth rate. Hyatt is going to talk about the specific activities in each of our business segments in a second.

Moving on from the commissions and fee line for the quarter, we had a little bit more investment income since we had more cash on hand primarily due to the funding of our $200 million debt offering. On the other income line it was slightly down because we have less sales of those miscellaneous books of businesses that are periodically sold.

Dropping back down and looking at our related, relating to our expenses and our pretax margins, our pretax margin for the third quarter actually fell by 30 basis points in a quarter-over-quarter comparison. However, 80 basis points of the 90 basis points dropped was the result of higher interest cost due to the debt carried from the funding of our $200 million debt offering that occurred in the third quarter. As you may recall, we funded 100 million of that debt on July 15. And the other 100 million was funded on September 15.

Additionally, there was another 40 basis points which is attributable to the increased amortization expense, and that is directly related to the increase in acquisitions we did. We've acquired now over $100 million of acquired revenues through the first nine months of 2004. So if you look at our operating profit, which is pretax income before interest and amortization for the third quarter we improved that margin from 35.2 percent last year's third-quarter to 35.3 percent this quarter. That is even despite all the disruption in a normal operation caused by our relentless ongoing hurricane season this year.

This slight margin improvement was generated by an improvement in the employee compensation and benefit line, a key aspect of this improvement was the fact that this quarter was the first full quarter in which neither of the two medical TPA operations that we had were not included since we sold those two. As you know the medical TPA business is extremely labor-intensive and without these payroll costs our margins improved. However, these costs were then offset by higher costs in our other operating expense line and that relates primarily to higher T&E expense, insurance costs as well as professional fees.

So if you look at the final result for the third quarter of 2003 we ended up with net income of $30.1 million, an increase of 15.5 percent over last year's third-quarter net income of 26.1 million.

If you look at the nine months year-to-date results, we increased our pretax margin from 32.5 percent in 2003 to 33.1 percent in 2004, which reflects an improvement in every expense line item as a percentage of revenue, with the exception of the interest expense and amortization expense for the reason we just talked about. Thus for the nine months year-to-date, we had an increase in net income of 16.6 percent to $98.6 million. Our earnings per share of $1.42 for the nine-month period in 2004 was 15.4 percent higher than the $1.23 we earned in the first nine months of 2003.

From a balance sheet perspective, the only thing I think will jump out at you is the increase in our cash balance and the increase in our long-term debt, which are both directly related to the funding of our $200 million debt offering. And as you know, cash is king, and we do enjoy having the ready cash on hand to be able to quickly make any acquisitions that we feel meet our strict cultural litmus test.

One last item that I wanted to mention is that we have historically released our quarterly numbers and held our earnings conference call immediately after consolidating our numbers received from our branches. As you probably noticed, this quarterly conference call was around a week later than normal, and in fact all of our future earnings releases and conference calls will now occur four to six weeks after the quarter end. What is the reason for this? It really is because of the Sarbanes-Oxley requirements and the control procedures that must be accomplished before we and our external auditors can confirm that all the significant internal accounting control procedures have in fact been completed and documented by each of our 125 profit centers.

One of our main internal accounting controls is the reconciliation of our various bank accounts in each of our profit centers. And thus, prior to releasing our earnings we must confirm that each of our offices has completed this cash reconciliation process for each of the cash accounts. Since most of our offices don't receive their bank statements from their banks until the third or fourth week of the month after each quarter end, and then they're going to need another week to perform the reconciliation, have it reviewed and documented as being completed, once we can confirm that, that is when we will then release our quarterly earnings from now on.

So with that long-winded explanation and financial overview, I will turn it back to Hyatt.

Thanks, Cory, good report. Moving into Florida retail we had a rather anemic internal growth rate of 1.6 percent downput from 3.7 and obviously we have been averaging in the 5 to 10 percent range pretty much in the past. So this has never happened before. There were four hurricanes. We had several thousand claims, lots of overtime. But really the issue is a great deal more than that. During the month of August we were unable to buy property insurance for 7 out of 22 days. During the month of September we were unable to buy property insurance for 15 of 22 days. So effectively we were shut down 22 days or about a month's working day during August and September, never ever happened before. We were shut down, in addition to not being able to buy, we had to move out a number of our office buildings, particularly in the larger towns where the buildings were closed by the owners and mandatory evacuation was ordered because of an approaching storm.

The reason that we are unable to buy in (ph) is because when a hurricane gets "inside the box" which is a latitudinal and longitudinal box around the peninsula of Florida, when the hurricane gets inside that box and we can't buy insurance. And so in addition to that this year we saw a greater exodus of people out-of-state going out-of-state, than we've ever seen before. Part of all this was due to just all of the television stations closing everything down except 24 hours a day talking about all the horrible things that were going to happen and then as they were happening. The hurricanes definitely were not good. We are behind them now. We're coming along fine. We are going to have all sorts of opportunities to write new accounts, etc. Now that's the positive part of it, meaning the new accounts and property rates -- I'm sure everyone will want to know what's going to happen on property rates, and the answer is at the moment except for E&S rates, we are not seeing any change. But we're seeing reticence to write new business, and we had one company that said not only will we not write new business, but we don't want you to increase any existing accounts.

So if someone had an increase in inventory for that company, we can't increase the inventory coverage, so therefore we have to move it to another carrier. So by January I would expect we'll know what is going to happen relative to property rates and I would expect them to escalate up some. I would also expect the capacity and commercial to be limited somewhat, and I would also expect that the deductibles would probably be changed particularly in Central Florida which is supposedly hurricane proof.

Now the crisis is going to come in personal lines, and we do have about $20 million of personal lines of revenue in Florida out of 150 million. The crisis is that the three largest writers, Allstate, State Farm, Nationwide are really, really concerned about the potential for their tremendous losses that could occur if another hurricane occurred, or if we got a hurricane that came into a more densely populated area like Dade or Broward County.

What that means is that we have a lot of opportunity to write a lot of personal lines, homeowners, assuming we can find someone to write them. That is not necessarily -- there is no solution at the moment at our fingertips. Citizens, which is a State Company is the court of last resort, company of last resort, and I am sure their business is going to pick up very substantially. So casualty rates still going south. Umbrella still going south, GL, API, workers comp, there's a little positive on and a little negative. The little positive is is that more companies are willing to write new workers comp, which is good. We also understand that there will be a potential for a 2 to 3 percent rate decrease in January.

We are also seeing the nursing home market open up a little bit from zero to now where there are a couple of players. That's good. So almost without fail when something bad happens like these hurricanes, then there is good things that are around the quarter, and we are looking forward to that. Now if you look at the national retail, we are a -2.7 percent growth versus a positive 1/10 of 1 percent. So it is kind of all over the ballpark in terms of what's happening. And I will try and give you a little feel for that by talking about some individual offices.

In Indianapolis, and they kind of represent the middle part of the United States, kind of the middle America, those rates are going down 10 to 15 percent regularly. And part of the reason is that that area is where the greatest amount of penetration of the regional insurance carriers is. And they have very strong balance sheet. And they don't have asbestos, and they don't have environmental losses they reserve for. And so they are being very aggressive and doing very well. So we are continuing to see substantial price erosion across the board.

The economy seems to be flat. Moving to Texas and using Houston as an example, there is softening particularly in those accounts where in the middle market where there is a lot of property. And those could be 10 to 40 percent down. Workers compensation, there are markets, although the Texas Mutual which is kind of the state Company is the largest market. But as of January 1, there is an indication that those rates are going to go down about 5 percent.

Any contracting risk that has anything to do with habitational has problems on pricing, they are either going to go up, or it is going to -- they are going to the E&F and of course that means limited coverage and higher prices also, potentially. Clark, New Jersey, now bear in mind that is sort of in the New York City area -- it is about I guess 40 miles out of New York. And those renewals are zero most, meaning flat and maybe 5 percent down. The regional carriers in that area are saying they will hold on to their small and middle vanilla renewals regardless. And so what that means is is that they are going to be very price aggressive.

So if you look across the tougher casualty accounts, if it is a New York City contractor, then it may e up 5 or percent, and if it is a contractor that falls over into Pennsylvania, then maybe it's down 5 percent. Workers comp is a very tough market, and again believe it or not in New Jersey the regional companies are the most aggressive. Looking into upstate New York, Rochester, specifically, the construction pricing is flat. The nationals are sort of in some respects retiring a little bit from the contractor market, and some regionals are quite aggressive on pricing. Property is going south 10 to 15 percent, habitational contractors during the last year have all moved from the standard markets over into the asbestos and surplus lines market and of course, this is because of the construction defect problems that have come to us from California and Nevada and Arizona etc. A good thing is that construction projects are perking up, and so we are looking to some more bond business in that area.

So if you look at what we call national retail, which is everything other than Florida and the Western retail, it is a very mixed bag, and we expect continued pricing pressures there. Looking out in the West, if you look at the West it did pretty doggone well out there. We were up 5.6 percent, and they had good strong new business. But again if you look around the West, and we think of the West if you draw a line from El Paso up through Denver and North and go West from there, that's the West for us. In Denver renewals are flat to down 5 percent. If you are going to get a new account, it’s going to have to be 15 to 20 percent below expiring. Auto, believe it or not, auto driven accounts are the softest, in the Colorado area. They are off on renewal 15 to 30 percent. That is kind of scary.

Aviation is flat. Again, in this area the regionals are more aggressive than the nationals. And I'm talking about the middle market now. Employee benefits, the renewal on employee benefits even though prices are still going up because clients are reducing or modifying coverages the commission income per account is basically flat.

Moving over to Santa Barbara, California, the renewal P&C is flat to down. Construction is flat. The Umbrellas are moving down about 10 percent, but there is more capacity meaning higher limits are available. So if the price goes down sometimes we are able to move the limits up so that the income remains about the same. It is the same market relative to Denver as getting new accounts that is you have to be 15 to 20 percent below expiring to get there. And again, the regionals are stoking the fire. And they are doing something that regionals have not done in California for several years and that is they are renting apartments and condos and employee benefits is not (ph) market. Tacoma, this is Tacoma, Washington, this is an office where we are probably about 50 percent employee benefits.

(technical difficulties) to write new business and have done very well so far this year. Employment apparently in that area is going up, at least with the people whose insurance we are writing, so therefore as more employees are added, there is more premium there for higher income. Property rates are down 5 to 10 percent, and you don't have to be quite as competitive in the Tacoma area to get a new account. Ten percent is probably what you need to get to or maybe a little less. So that gives you a little potpourri on national.

Moving over to Professional Programs, we grew at 2.5 percent, down from about 4, both dental and CalSurance did very well. Lawyers, however, shrunk a little bit with about a negative 4 percent having to do with pricing. In Special Programs, moved up very nicely from 1.3 percent to 10.3 internal. And the leader in the clubhouse there is Public Risk Underwriters. And brokerage services, again the opposite from 16.1 percent to 6.5 percent internal growth, 6.5 percent this quarter. And it reflects basically the fact that E&S pricing is going south and in many cases, it is going south faster than other areas at least in our book of E&S business because our book across our offices is more involved with property than is with casualty. And that is where the softness has been. Now of course we will see that in Florida that will turn around.

And then in TPA services, we just keep plugging along, up about 21.9 percent internal growth. And we have 2 TPAs left, and they are both very good. They are both very good margins. PGCF (ph) which is Public Risk TPA and governmental claims and we have United Self Insured services which has been around for a long time, both of those are operating in the 22 to 25 percent margin area which for, and that's fully loaded with all expenses. So that is very, very good for TPA. So we are very proud of them.

Now I will turn it over to Jim to talk to a little bit about M&A and some other issues.

Thank you, Hyatt, and good morning. I wanted to add a little color to some numbers that Cory had mentioned, which is the acquisition activity for 2004. For the first 9 months of this year we've had some 20 deals close, representing 100 million in new revenue to the company flowing in over the following twelve-month period. This compares to, if you look at '03 numbers we've previously announced to you for the twelve months of '03 in fact, was 14 deals representing some 38.3 million in revenue. But the depth and breadth of these acquisitions is something we are very proud of. The last twelve-month period we had an acquisition in every region. We've had some 8 leaders to locate, sponsor and close, exceptional acquisitions.

With respect to the pipeline, it continues to be very active. The prospects are really cultivated by our regional leaders that find, identify and sponsor the acquisitions. And in fact, the best opportunities are those relationships that we cultivate over a several year period. The most common element of a successful acquisition is that people fit. In real estate its location, location. Certainly in our business its people, people and people. The people fit is very critical. The cultural buy in very important and the belief in the Brown & Brown operating model from the beginning of those that's willing to come onboard and share that spirit of model.

Cory mentioned also that we had completed the funding of the $200 million in private debt placement this year. This gives us a lot of dry powder, some 180 million in cash sitting and available for acquisitions, and we certainly are very pleased that we are planning for opportunity as we go forward. The element of certainly funding acquisitions what we are most proud of is our ability from an operating margin standpoint to bring in acquisitions and operate most tomorrow like we did yesterday.

Our margin improvement in a very tough organic environment which continues to improve the operating margin in 2004. This accomplishment is not a new feat. If you look at the price market change in the 1990s in that period we are also able to improve margin at the same time continuing to grow the company. If you look at a class of 2004 from an acquisition standpoint, we are very pleased that this group has from day one produced margins similar to our existing operations. Obviously we will continue to stakeout those opportunities that best fit our operating model.

I also like to mention that in 2004 going into 2005 that we intend to expand the Brown & Brown University. This is a capability we've had here in Florida. We want to roll it out to have on a national scale to have the capability to assisting with this is an in-house producer development program, individual Tom Pinwall (ph) that runs that class, we've been very pleased about the results in terms of the grow our own we are convinced is the way, it certainly takes time to get these high-quality people in place. But we feel like it is really part of building for the future.

I would like to close by saying a very special thanks to all of our employees for driving the great results of this quarter and for the year. And even more special thanks to the Florida retail locations that have gone above and beyond the call of duty. They are handling really thousands of claims, and they keep your operations attuned at an extraordinary rate. We have a couple offices that have been hit more dramatic than others. In the case of a young lady, Allie Cole (ph) that operate our Port Charlotte office. Here is a young lady in her 20s, one of our youngest leaders in fact, was faced with having to relocate, having to get the office back open, deal with claims and in fact kind of rebuild the office there. So we are very proud of her and others that have just done an incredible job during these trying times during the hurricane season.

Hyatt, I will turn it back over to you.

Okay. That pretty much completes our discussion, and now Laurie, if you would like I will open it up for questions.

(OPERATOR INSTRUCTIONS) SunTrust Robinson Humphrey, David Lewis.

Thank you. Good morning everyone. Given that Elliot Spitzer has been surrounding your industry here the last few days, Hyatt, talk about one, what do you think the outlook for contingent commissions are, not related to how you have done it in the past, but given his goal of eliminating those for the industry, do you think that is very likely? And two, how does Spitzer's focus on the industry maybe change the M&A activity? Are people going to be more optimistic to sell, concerns that they might lose those commissions and do you price it any differently today than you did a month ago?

Well, I think, David, the issue is not contingent commissions. The issue is bid rigging. And bid rigging is absolutely categorically unequivocally forbidden in our culture. Now let's talk a little bit about the structure and the process because it is very important to understand that in order to understand how all this unfolds. Now if we take the case of the national broker. As we understand it, the national broker structure is to have four or five global broking centers geographically located from which all renewal and new business is placed, but it flows up to a central location in New York City.

Now by comparison in the case of Brown & Brown we have 125 or 126 profit centers, of which 101 are retail profit centers. Each of those profit centers has a head of office. Each of the profit centers also has a marketing department or a marketing person. Each of those profit centers also contract directly with the various companies for the basic insurance contract, and they also contract individually for contingent commission contracts. And we will talk about contingent commissions and it means something different to us than I think it means in then journal articles that we write. So if you look at all of our offices, then how does all of this business flow in?

Number one, when a producer goes out and roots up a new account, we're trying to get it away from an incumbent broker. We are also possibly being in competition with one or two agents who are also trying to get the same account. We may or may not be assigned to a market, but we probably will have two or three companies that we would go and seek quotes. And so what happens is that that underwriting information goes into the marketing manager in that office and the marketing manager then places it along probably in the case of smaller offices with help maybe of the head of office with the most competitive company that we can find, both terms and conditions. And then if we in fact our successful, we send binders on the insurance.

There is no roll up to a central location, and in fact the relationships that allow these things to occur are all individual. And so what happens is that ABC Company may be a company that let's say our office in Atlanta might be very close to and can get more competitive quotes than that same company let's say in Spartanburg, South Carolina, meaning if we represented that same company in both offices. So what we have is a totally decentralized structure and process, which is diametrically different from the national broker.

Now additionally, of the all of our business for the first nine months of this year, we have about $8.2 million of fee business in the retail area. Now what that means is is that as opposed to going out and bidding against other agents, we may be asked by a client -- and this is not in every case (indiscernible) -- but we may be asked by some -- to in fact place our insurance or provide other services. We do such for a fee, and so then we go and place the insurance and we're the only competitor, competing agent on the account. That's 8.2 million, if you annualize that, that's probably $12 million of revenue for twelve months. And so that's $12 million of revenue out of 86 hundred and 40 million (ph) or 650 million that we will end up for this year. So it is a very small fee.

And so in those particular accounts, where the national broker is the only person negotiating on behalf of the client, then there seems to be a potential of a conflict if there is no disclosure. Now we absolutely mandate full disclosure to all of our clients to the best of our knowledge of ability. Now we have always disclosed our contingents. Our contingents are somewhere in the neighborhood of 30 to $32 million, $32 million in '03 and they are 30.5 million so far this year. And so that means that those are about maybe 5 percent of our total revenues.

The contingent commissions, though, mean something different to us. TSAs and MSAs as we understand them are volume driven, period. Contingent commissions to us mean that we must make money for the insurance company, the risk bearer before we get any of the profit sharing. And so what happens is that the contracts that are negotiated, and those are negotiated on an individual office basis, sometimes offices have combined in the past 3, 4 or 5 offices, thinking maybe they can do better by combining. And in many cases they found they do worse. Because one office will have a bad loss or a bad loss ratio, and it will affect the contingents that the others might have gotten had they been separate and freestanding.

But these are negotiated on an individual basis, and in fact there is no roll up. Now if in fact companies are very aggressive in certain areas and as a matter-of-fact in times where prices are going down, where markets are softening, we do have companies -- and I have talked about this on a previous call, we do have companies that have come to us and said we are going to give you another 2.5 percent commission or whatever it is in order to place more business with us between now and let's say January 1, because we are behind on our quotas for the year. And in fact that is just as we speak happened in the western part of the United States with one of our companies and maybe more than one of our companies. So the bottom line is is that we do front-line underwriting in order to try to make sure that there is profit for the insurance company.

So how does that benefit our clients? Well, it's very simple. If we are very profitable for companies, we are able to get more competitive quotes in the middle market for our clients than those particular companies might be for another agent. Let's say even a mile down the road. Now that means that those clients that are well-run will pay attention to loss control and are sensitive to doing business carefully. Those people will have lower loss ratios and lower pricing, and that is a very beneficial pricing model for our clients. For those clients that we have whose loss ratios are not good, they are going to pay more. And that is the way it ought to be. And so we work with them to try to get those losses down so over a period of time they can get into a more preferential pricing period.

So when we talk about contingent commissions, really in almost every case there is a profit hurdle over which we have to jump. Not in every case, and there have been cases in the past where on on a two or three office or several office basis, there have been commissions 2.5, or 1.5 or whatever it is paid for periods of time because companies are behind, let's say in their goals for the year. So what I think is is that contingent commissions have been around and known for probably 75 years and since contingent commissions at least in the middle market where we are, not necessarily where the national brokers are, in the middle market we think contingent commissions are in the best long-term pricing interests of the client because they force the agent to be as loss sensitive as they can. In other words, cooperate and work with the risk bearers and the client to have more profitable business risk. Therefore, a stability of pricing.

Therefore, we kind of think that contingent commissions are going to be around. Now, is there some kind of other structure that they will be set up as? Maybe. Do we think that other insurance agents are going to come to us and say no, we think we better sell now because we are not going to get contingents commissions in the future? No. We are seeing people coming to us now thinking that John Kerry is going to be elected, and they want to get money now so that they can get a lower capital gains tax rate. That is kind of the way it is in the (indiscernible), so I hope I have answered your question, David.

You have, and thank you.

That's more than you wanted, I know.

Adam Klauber with Cochran Corona.

As far Florida after the hurricanes, is there potential benefit as there is a significant increase in the house (technical difficulty) commercial property market and housing market? I mean obviously there is going to be a lot more building going on over the next two years. Do you think you will see the impact of that in '05 and '06?

Yes, and it will come in a number of ways, one of the things that you must recognize is that we have roofing contractors from all over the United States down here and we still don't have enough roofing contractors. But all of our own roofing contractors, as an example, are just covered up. Same thing with air-conditioning and heating. So we are going to have additional premiums on audit that are going to be 6 months, 9 months, 12 months out. And the business is not going to just keep (ph) go up for 90 days and then back down. I think it is going to go up over a period of the next couple, three years.

I think that there will be some additional requirement in terms of building codes, so that means the cost of construction particularly in the residential area will go up in the future, but I think that the homes will be much better built. We live on a barrier island here in Daytona Beach. There is mandatory evacuation for the barrier island. We hunker down, put up shutters and the eye went over the house and other than the fact we lost about 15 or 20 trees, none of which fell on the home, there was no damage. Now our home had been done according to all of the standards for the eaves and the doors and windows and the shutters and all that stuff, which many people had chosen to ignore for the future.

So as I mentioned, Adam, if we can get markets to write homeowners in Florida we will write a lot of new business. The question is where are we going to find the markets.

Adam, this is Jim, I think if you look at post hurricane Andrew we were able to, because we are based here to do probably as good or better job than some of our peer group in terms of finding markets to deal with a market problem that has a dearth of property capacity. So I think if we can perform and we can find us markets and get to customer in need, we feel like we do have an opportunity there to benefit from that activity of finding these markets.

Just two follow-ups. If the homeowner goes to the Citizens Company, do you retain the commission on that?

Yes, we do and I think the commission is 10 percent.

Okay, and also you mentioned the Central Florida deductibles will likely go up. Is that a significant portion of your business? And would you venture a guess, what the level that deductibles will go up at?

It really doesn't matter because what's going to happen is deductibles are going to go up, the prices will stay the same or go up. And for instance some people are pretty darn lucky -- Jim didn't you have a $1000 deductible on your home?

Yes, which sitting near the policy open for many years, but the element of deductibles again, this is all market conditions as to what will encourage companies to come back into Florida. They are likely, typically what has happened is the movement from the standard companies over to the E&S (ph) companies because of some fear of accessibility because the tab here, if in fact there is a shortfall in Citizens or with companies that in fact may not make it economically, that falls back upon other property writers if there in admitted market. So the ability to move business back into the E&S market in the last six months to nine months we've seen business moving from the E&S market over to the standard market. We believe that will in fact stop and start going back the other way. We are certainly prepared to deal with either market.

Thank you very much.

With Credit Suisse First Boston, JF Tremblay.

So Hyatt has provided some very insightful comments regarding the (indiscernible) commissions and the whole gathering issue but just to make sure I understand, your perspective. So you are saying that the kind of business that lends itself to bid rigging would be more the fee-based type of business. Is that correct?

That's correct. You see, you know, we are always in competition, almost always in competition with somebody else. In other words, to get an account away, every once in awhile we will get it on a broker of record letter but that is kind of exceptional for P&C. So what happens is is we are trying to knock someone else out of the box. And so once we get the account, generally the clients will say well, let's see if we can't try for to stay with this carrier for two to three years before we go out and get other proposals. So then if the client gets unhappy with us or the client gets a little unhappy with the Company, there may be a reopening at the end of the year. And some of our clients push us to go every year to get renewal proposals from three or four other markets. And so in many cases the pricing that we bring in will be below the current market.

And the bottom line is is that if it is more than 5 percent, then there's probably going to be a movement unless the existing carrier will agree to reduce the price if it's in the neighborhood of 5 percent or less, and the client is happy with the current company because of a claim or because of the loss control, etc., then it probably stays where it is. In the case of the fee-based, you're in a contractual agreement with the Company, with a, let's say a client. Let's say ABC Corporation. And so what happens is that there you are getting a fee of $500,000, and you agree to go out to all the markets and bring to them the best of all of the quotes and show them what they are and then make a recommendation. That is a little different situation then we are quoting against other people who are trying to get your business.

Let me just elaborate on that. In that situation where you are getting a fee, you are the sole person and you are almost operating into a vacuum where that client has turned over their insurance life to you and put the responsibility on you to find the best quote. In the mid market agency system that is about as pure, true-driven competitive marketplace on a day in and day out basis that you'll finding in any industry in this country.

And then contingent on commissions based on your comments you seem to imply that we should expect contingent commissions to remain part of the picture, or as the revenue stream brokers maybe they're going to be paid out in a different form.

Well, you see the brokers versus -- we consider ourselves to be a little bit more of an agent than a broker. Agent has a little different connotation. But you see we have been used to having our contingent commissions almost all hooked to loss ratios. And national brokers have kind of gotten away from that to some extent as we understand it. And hook it only to volume. And so one of the advantages for our clients is when our contingent commission is hooked to loss ratio, that means that our companies are making money and therefore we are going to be able to push them to be more competitive on new and renewals for our client. So therefore the value flows through although not necessarily exactly directly.

So basically it is safe to imply that should the industry because of their whole practice of contingent commissions, the revenue stream is associated with profit based contingent commissions could be less likely to go away than if associated with the volume based on the commission?

I think that would be an accurate assumption, yes.

The other thing you need to keep in mind and Hyatt alluded to it that the continued commission by being profit oriented, the key idea is aligning the interest of the insured along with the carrier and the agents altogether. And if you look at the 25 or 30,000 insurance agents throughout this country, if you look at their financial statement, they are not quite as disciplined in the normal operation of someone like a Brown & Brown. So when you look at their financial statements they may have one or two agents that work in their office, they may pay them 40/40 or 50/50 commission and they really don't make that much money on a day in and day out basis, or month in and month out. If you look at their bottom line at the end of the year, most of their profit really falls -- if they were able to do a good job for their clients and the carriers and they get their profit sharing. So I tell you if you were to get 50 legislators, state legislation passed to do away with contingency, I tell you you would cut the heart out of the small, midmarket insurance agent.

Two last questions. One again regarding the industry and one regarding your numbers. Regarding the industry, so you think the problems currently experienced with the national broker is at (indiscernible) much of these for the middle market brokers? (inaudible) And finally, the last number question, regarding your operating expenses, how much of the increase get attributed to onetime events or the hurricane season and we are looking at a new run rate?

Cory, you want to talk about that question on the numbers?

Well, the actual onetime event, that is hard to quantify. I mean we did have $200,000 or $300,000 hours of extra overtime that we had to pay people to move from offices down to help the claims process. More importantly, I think, was the disruption caused from the lack of ability to write new business because of how many days the insurance carriers were closed. And the fact that our salespeople were helping their existing clients handle claims and hand holding their client as opposed to their normal day-to-day activity of going out and soliciting new bids. So I think that is more the softer numbers that were the more immediate impact.

JS, could you repeat your first question again, please?

The problem experienced by the national brokers (indiscernible)national accounts do you think it creates some opportunity for the brokers to focus on the middle market?

We do not run into Marsh Aon Willis very often truly. As I mentioned, JS, our average annualized commission on new accounts is $12,500. They don't really send anybody out to look at an account unless its 100 or $150,000 minimum. And so yes, we might get some more business, but I certainly -- we just keep on -- we are in a market area which is different than the national brokers. And so we just keep on keeping on it and if we can get some of those $100,000 commissions we sure as heck want them.

Great. Thank you very much.

David Sheusi with J.P. Morgan.

Just a couple follow-ups here, just to beat a horse on the contingent commission issue. First in terms of Brown & Brown's exposure to business that was highlighted in the complaint relating to the excess casualty lines of business, does Brown & Brown first have business with those lines that were highlighted in the Marshall McClennon (ph) complaint with AIG (ph) (indiscernible) that are under discussion right now?

Now excess casualty, frankly I'm not sure exactly what you're talking about there. Are they talking about excess limits of liability and etc.?

That's right.

Layering of business?

Yes.

We have some business, we have some accounts that are layered, probably more, well I would say more property accounts then maybe liability accounts wouldn't you, Jim?

Yes, but I think they would serve as a market of choice based upon coverage or pricing as any other market. The question it goes back is there an agreement for which there is some type incentive and that does not exist in our case with them in that world. If you go back again I would encourage you to look at the, read the complaint and that's dealing with issues surrounding with the fee-based business that where there may be an assertion or certainly conclusions that this is the sole source of compensation to the broker.

And secondly, there was in fact leveraging of other carriers dealing with staging the quotes with respect to create a favorable placement for that broker. So the introduction of the profit sharing agreements based upon underwriting results with this is something that is another step that is, has really, it has not been tied back into the complaint per se.

I think the layering of the place that we see layering is on habitational accounts, meaning frame and joists and masonry apartment condominiums that are either -- certainly if they are wind exposed, but if they have had bad loss ratios and so we do see some layering on that. But that is not the core of our business. The core of our business is middle market packages. You know that.

And as far as I think everybody is trying to understand what the legal exposure is and put our arms around that. But just from a civil litigation issue is there, how do we understand that side of the equation?

Well.

I know it's not easy at all.

Frankly, I don't know enough about what is the -- I've heard all the assertions, don't understand the necessarily -- I understand bid rigging. But basically what I haven't heard is is that contingent commissions per se are illegal or immoral if there is a fiduciary responsibility. And you are getting fees from someone and you are the only person placing the insurance, then that is one thing. If you're on a commission basis and basically as everybody knows, our average commission is about 11 percent across all of our business. If you are on a commission basis and you're not the only one, it is a whole different set of circumstances.

Okay, and moving on to the core business side, clearly the M&A pipeline is full. Can you just give a little bit more color, Jim, on that side?

Really its business as usual. If you go back to a previous question saying even the environment dealing with these litigation, how do you see that. One is if there is a profit-sharing commission, in an acquisition they really are treated very differently because you can ascertain that it would represent sustainable revenues and sustainable earnings. And would this uncertainty create an environment where more people want to pull the trigger and move forward was yet to be seen. I don't see any element here that would necessarily cause a change in the environment for acquisitions. And certainly we've looked at the profit-sharing piece and size agencies for years and accounted for those in a fashion to make sure that they will go forward. So I don't really see any blip on the radar with respect to how this would affect the acquisition side.

And will you look at it in terms of the core contributions in growth, organic versus acquisition growth, I guess are you looking into '05 to assume about the same level? I know it's pretty volatile.

We are putting together our budget at this time, and again, obviously the organic growth has slowed down. And we are working very hard. We've got meetings this week really dealing -- we continue to push the organic growth side, even during this market in the case of new products, new people to do that. Because the operating platform, the bedrock of our company is the operating side. And we are going to push that. But we are fortunate that in fact if it continues to slide some that we would have some great opportunity in the acquisition side until that organic side turns around.

Okay. Thank you.

Nik Fisken with Stephens Inc.

Good morning, everybody. Cory, remind me of the number that you guys normally get in fourth quarter if there is no hurricanes.

Well, whenever you deal with contingencies there is nothing that normally -- it is all based on the losses. And so just last year I think we got about 1.2 million in continuance (ph) last year. Of course we get continuance from retail offices and other places. But our best guess right now, like I said, is probably around 400,000.

So the best starting point is to take the 30.7 plus the one point, gives like a $33 million number and adjust it?

Well,

32.

We are 32 million 200 right now, and take the 400, we probably finished the year out at 30.2 so yes, start with that. Then of course, from a hurricane impact that's where I gave you that, out of all the offices that had business that was hit that had most of their business in the hurricane zone, that was about 7 million of the 12.1 million in Florida. So I would say it is somewhere probably won't be as much as 7 million hopefully, but somewhere less than that. But we just can't get that.

But that 7 million that Cory is talking about is actually 7 million that is affected next year, which is February, March, April, May, June.

Okay, okay. And what is your expectation for Florida retail? And then give us an update somewhat related item, your internal growth guidance on a go forward basis?

We have a standard internal growth guidance of 0 to 5 percent, and so I guess you heard that before, Nik. Florida retail will do better in the last quarter.

Okay. And then Cory, what happened on the tax rate? And then give us an expectation going forward.

Well, on the go forward basis we still think it should be around 38.5, 38.6. In the fourth quarter we -- in the third quarter here we did file our '03 tax return year. And so when that gets filed you have to do an accrual to actual tax return adjustments. And so any of those adjustments came through, and that is why the effective tax rate was a little bit less just in third quarter this year. On a go forward basis I would use 38, 38.5, 38.6 effective rate.

Okay. Thanks so much.

Nick Pirsos of Sandler O'Neill.

Good morning, everybody. Just a couple questions. First, I just want to make sure I understood the implication of -- and I think Hyatt the number you said was approximately 22 days in the quarter that you effectively couldn't sell because you had to. I guess what I'm trying to understand, presumably competitors also in that same timeframe ere not able to sell because they were also shut down. So if a renewal came up in a week when you guys were shut down, were you able to buy in that renewal when you got back up? Or is that business is going to slip to the fourth quarter? That's what I am struggling with.

No, no. On the renewals with certain exceptions then we were able to -- and the companies must offer the renewal you see when it gets inside the box -- the problem is that we are unable to write new business.

I got it.

That's the problem. Then we also had some situations where on a particular account that I know, where there was about a $55,000 commission on it. We had it with company A, company A was unwilling to do what was supposed to be done. We then went to a couple other companies and we got company B, at the same time company C comes in from an underwriting office in Boston. And they made an offer that was better than the existing, but not as good as our company B offer. Company B when we went to buy in the coverage said well we have cut off the binding this morning at 10:00. So we went bananas, and in the meantime we were scared to death to try and hold the client where he was because for fear that we could not get it down with the new carrier. And so we had to say well, you probably need to go with the company out of Boston. They bound the insurance and then our company that said at 10:00 they wouldn't bind it came back at 4:00 and said we will bind that account. So we lost a $50,000 renewal. That is the kind of screwed up mess that you can get into. And it always benefits people who are not in Florida because the companies aren't for some reason or another, they don't quite understand the box elsewhere.

That was very helpful. Second, in your comments on I think it was national, no, Western retail and you said Denver and you said auto was off 10 to 15, which is scary. Was that personal or commercial auto?

That's commercial auto.

Okay. Let me better understand on the hurricane kind of contingent element, I'm confused on the timing aspect of things. I think the number was 7 million is the number that was kind of in the Florida hurricane zone that could potentially effect next year's numbers.

That's correct.

I guess what I am trying to understand is in the fourth quarter of this year if last year's base rate was 1.2 million and now we're kind of adjust down to 400,000, why would we be adjusting down this year for the fourth-quarter based on this year's event? So that is the timing I'm struggling with.

Because we don't really know exactly what those contingents are, and we're trying to be conservative.

Okay.

You know one of the problems is, and you will learn this over a long period of time, if a company says to you in October we think the contingent is going to be $800,000, don't ever say it because if you say it, then they will come with some new IBNR (ph) and instead of 800 its 300. So that's why we're being conservative.

So the conservative doesn't speak to the then third-quarter hurricanes, per se?

No, that is correct. That is basically correct.

Okay, great. Thank you very much.

I'm sorry that we can't go forward. I have got to be on a radio program at 10 minutes (indiscernible) till, in 10 minutes. So we have one more question. If anybody wants to have one more question?

Doug (indiscernible).

Ferris Baker Watts. I work with John Keefe. I have a question about margins. In your B-40 (ph) specifically does that 40 represent an EBITDA or EBITA?

EBITA. We are not there yet.

Okay, and also is it correct to assume that third quarter seems to be seasonally your worst margin quarter just sort of looking at the patterns? There's a sequential decline but it was about the same as last year.

The third quarter has traditionally been the most difficult quarter for us and we do not know exactly why it is. The fact we had hurricanes this year made it even worse. So that's kind of the way it is. Seemingly this. If it does, as we get bigger we seem to smooth out a little more so that each quarter seems to get closer together in terms of revenue except for the contingent commissions.

We also have a lot of program business that in fact would originate in quarters other than during the summer, in the case of the fourth quarter and first quarter, second quarter. So that also tends to influence the quarters.

Thank you very much.

Okay. Laurie, let's go ahead and close it off because I have got to go to this other radio program. So thank you all very much, and we will look to talk to you in January.

Thank you everyone; that does conclude today's Brown & Brown conference call. You may now disconnect your line. Everyone have a great day.