Brown & Brown Inc (BRO) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Brown & Brown Inc. conference call.

Before we proceed, we would like to inform you that certain information that will be discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature, and reflect our current views with respect to future events including financial performance and that such statements are intended to fall within the Safe Harbor provisions of the security laws.

Actual results and events in the future are subject to a number of risks and uncertainties that 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 these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission.

Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated in this call. Such differences may be material.

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

Welcome everyone. We are very pleased to welcome everyone to the January February March -- whenever it is first fourth quarter earnings release. So I'm going to ask Cory to talk about the numbers.

We obviously had an excellent fourth quarter to finish off what I think is a very good year. We are really proud of all our individuals at Brown & Brown for generating such good results, especially in light of the tumultuous year we have been, you know, for the insurance industry.

For the quarter, our earnings per share increased 16.2 percent to 43 cents. Our total revenues for the quarter increased 20.9 percent to $163 million. That was up $134 million that we had in the fourth quarter of '03. The commissions and fees for the quarter increased 20.3 percent or $26.7 million of net new commissions and fees.

This increase in commissions and fees is really even after overcoming a reduction of $2.6 million of profit-sharing and contingency income that we didn't earn in the fourth quarter of 2004 as a direct result of the four hurricanes that hit Florida this past summer. In the fourth quarter this year, we received only $386,000 of the total profit-sharing contingency income.

Now that compared to almost $3 million that we got in the fourth quarter of last year. So with that drilling down further into our fourth quarter commissions and fee numbers, our core commissions and fees -- as I will discuss here -- exclude these profit-sharing commissions as well as revenues that we sold from divested businesses.

With that, the core commissions and fees for the quarter actually increased $32.4 million over last year's fourth quarter; and of that total, $25.5 million was generated from businesses that we have acquired since last year.

Now keep in mind that in '04, that was the second most prolific year we have had in terms of acquiring annualized revenues. In '04, we acquired somewhere around $104 million of total annualized revenues. Back in 2001, which was the most we ever had done in terms of acquisition, we acquired $142 million at that time. So if you take the $32 million of net increases in core commissions and subtract the $25.5 million that was generated from acquisitions that leaves $6.9 million that we grew internally; and that reflects the 5.5 percent overall internal growth and, of course, that is up from 3.1 percent internal growth that we had in the last -- in the third quarter of '04.

The specific internal growth rates are listed in the press release we sent out and then Hyatt, obviously, will talk about each of those business segments and their internal growths in a little bit.

Moving into our down the income statement to investment income, we earned $1.1 million during the quarter from interest, primarily from the $200 million that we borrowed last quarter; and of course most of our funds are in short-term tax municipal bonds.

The next line item is "other income" which we received $3.6 million this quarter versus 2.9 in the fourth quarter of '03. Most of these gains results primarily from normal sales of books of businesses or offices that are no longer a strategic fit for us. So it was just a little bit higher than the prior years.

Looking down at the expenses, while our total revenues grew at 20.9 percent, our total expenses grew at 24.2. So having our expenses grow during the quarter at a faster pace than our revenues grew is really highly unusual for us although explainable here.

These expenses caused our pretax margin of the fourth quarter at 28.7 percent to be 1.9 points lower than the 30.6 percent pretax margin that we had in the fourth quarter of '03. Now 1.4 points of that 1.9 point differential is attributable to the higher interest expense that we had this quarter; and that is coming right from the $200 million additional borrowings that we had.

The amortization expense. It accounts for .4 points of that difference and there's two reasons for that. The first reason is obvious. We have had a lot more acquisition. The second point is that, during our annual intangible asset impairment analysis -- which is done every year as of November 30th -- our studies this year led us to decide that the amortization period that we used for our intangible asset called "purchased customer accounts" really should be a 15-year amortization period, rather than what we currently use (indiscernible) 20 years.

So this is a change in an accounting estimate which is handled on a prospective basis. So we take what the inevitable net book value is now and we are going to amortize that over -- now over a shorter period in the future. So that is going to add about $530,000 of additional amortization expense each month in the future. So since it was done as a November 30th in the current year '04 numbers, there is another $530,000 of amortization expense relating to that. But on a go forward basis, it should add about $6.5 million of additional amortization just the prior acquisitions next year and all the years subsequent to that for a period of time.

Now looking at the largest expense item we have is the employee compensation of benefits. It accounted for .6 points of the 1.9 percent change in our fourth quarter margin; and as a percentage of total revenues, the "employee compensation benefit" line item is 50.4 percent of revenue which has increased from the 49.8 percent of revenue in the fourth quarter of '03.

There are two major reasons for this. The first reason is that, in this quarter, there was an increase in the net bonus expense compared to last year's fourth quarter; and that was mainly due to the fact that we had a strong December this year. The second point is that we have a higher relative cost in this quarter of '04 for group health insurance compares to last year's fourth quarter. That's primarily because last year there was an adjustment true up in the insurance that we got a $600,000 credit at year-end that is in the '03 numbers that aren't in the '04 numbers this year.

Our non-cash stock grant compensation expense of $741,000 is closer to our normal level expense and that up from the 448 last year. Our other operating expenses improved to 13.2 percent of revenues from 13.7 percent of revenues in the '03 quarter; and that is an improvement of actually .5 percentage points of that 1.9 differential. And even though this was a net decline in the aggregate expenses of other operating expenses, there were some rather larger than normal costs that came through this quarter. One being that we have about $500,000 of additional legal and professional fees surrounding the implementation of Sarbanes-Oxley internal accounting controls audit. We also have various other adjustments that relate to unusual state use taxes and some other items that in aggregate add up to about $1.2 million.

There is also a couple of expenses that were offsetting these increases that helped on the overall decline; and there were some insurance expense and some legal reserves that were able to be reduced because of certain claims that were resolved during the fourth quarter. So that helped our overall expenses.

So with all that said put together, our pretax margin for the current quarter was down -- was 28.7 percent and down from the 30.6 margin last year. On the income tax rate, we ended the whole year at a 37.74 percent effective tax rate; and of course, during the year, we have been running a little bit more conservative rate of a 38 percent, 38.2 percent effective tax rate. And it turned out that obviously we only needed 37.74 when everything was said and done. So obviously that adjustment fell through in the fourth quarter income tax rates.

For the full year of 2004, we had total revenues of $646.9 million so that was up 17.4 percent and our pretax margin for this year was 32 percent which was the same as last year, but a lot of the same reasons. For the whole year, there were some additional expenses. For instance, that $.5 million additional expenses on Sarbanes-Oxley was 500,000 in the fourth quarter but for the whole year we probably spent an additional $1 million surrounding that; and of course our contingents were down by almost $2 million. And on top of that we had additional $3.5 million of additional interest expense.

So when you factor all those in, we actually did have margin improvement during the 2004 year.

Net income ended up for the year at $128.8 million or a 16.8 percent increase over the $110.3 million we had in '03; and the earnings per share were $1.86 which is 16.3 percent higher than the $1.60 we had last year.

From our balance sheet perspective, our financial strength remains strong. We have almost $188.1 million unrestricted cash as of 12/31 and our total assets are around the $1.25 billion. So I think we've got a very strong balance sheet and it has given us the opportunity to do some things you'll hear about later today.

So with that financial overview, I am going to turn it back over to Hyatt.

Thanks, Cory, good report. By way of introductions, in addition to Cory and myself, Tom Riley is here with us in Daytona, and Jim Henderson is on the conference too. Jim is in Fort Lauderdale today and we will be hearing from him in a moment.

If I had to pick an adjective to describe what has been happening around our offices in the last quarter of last year and the first 40 days of this year I would use the word "swirl". We have been running hard and fast. Not only do we have Sarbanes-Oxley that we had to complete, we had a substantial amount of additional M&A activity. We put on some additional pushes to write more new business and we had thousands of claims in Florida, all of which create a lot of activity.

So having said that, the results, if you will remember last year, last quarter, third quarter, we had an internal growth rate of only 1.6 percent. This quarter it's 8.4 percent. So we are back to what I would say is normal. Combination of what caused this. No hurricanes, obviously. Good new business. Flat to just a tad up in property rates. Casualty down 0 to 10 percent, depending on the line. There also might be a slight amount of catch-up from August and September. What I mean by that is is that because of all of the things that occurred, as a result of the hurricanes, I am sure that we had a goodly amount of business that was bound and we just couldn't get it done, couldn't get it entered, and some of that I am sure slopped into October and November. So there might be a little bit of that in the 8.4.

One of the things I mentioned on the third quarter call was I thought the property capacity for commercial lines would be reducing and it is not. That sort of surprised me. There is capacity. Now there are differences in conditions. Higher deductibles, etc. but it's -- the capacity is there.

Now that is not true in personal lines. Homeowners is in, frankly, a world of hurt. Placing new homeowners -- and of course you know we have thousands of homes coming on line every week in Florida as a result of the continued growth pressure that we have. The only market in many cases is Citizens which is the state company and of course that is really a redistribution among all the other companies in Florida.

But Citizens is there, even though it's a very reduced coverage. Now there is also another little problem, it's that Citizens has had a tremendous amount of trouble handling this huge volume of wind claims. Part of that is because they simply didn't have a staff that was set up or ready to handle the kind of volumes that occurred. So we are working through that.

Anyway Florida retail did just fine. National retail also fine, up from a negative 2.7 percent internal growth last quarter to a positive 3.8 and some good things happened. We had a lot of new good new business in the P&C and employee benefits. Matter of fact, excellent employee benefits growth. The P&C rates are going south. Again it varies with where you are and what geographic area, but they are generally going south except for construction and construction is tightening. Workers comp in some states is very tight.

Property, though, is the most I guess you'd say it's the softest line maybe 10 to 25 percent on a lot of accounts; and then, again, you run into accounts that are flat. So it just depends on the circumstances and the underwriting criteria.

The employee benefit rates are moving up 5 to 10 percent; and we think we may see some pickup in new employee hires which would mean that the premiums would be going up; and, therefore, we would be benefiting from that.

I would also say that in the Midwest the P&C rates seem to be the softest of any area of United States with the possible exception of the Far West. One of the reasons I guess is that in the Midwest is where there are a lot of regional companies who have had very good underwriting results and they are actually quite aggressive.

Out in Western retail, Western retail had a little sinking spell. They took some bumps. They were down 3.8 percent internally, lost some business and they didn't have a very good new business quarter. However for the year, the West was up 4.2 percent which is very pleasing.

There seems to be, in the various niches of business that we have in the West, there seems to be a very substantial amount of pricing pressure. The P&C specifically. Everything is going down 10 to 15 percent except construction. Something that is good news is that we have been very concerned about California workers comp market and that's softening up. There are people coming into California that are writing business for us now. So that is good news.

We also had one other thing that slowed down the internal growth rate and it will catch it back up is that, on several large accounts, they moved from annual pay to monthly pay. So instead of having a full amount of twelve months' commission, we might have a quarter or a month.

So moving into professional programs. Had a very good quarter -- 9.1 percent internal growth up from 2.5 and that was primarily driven by CalSurance with a 12 percent growth and dental with a 7 percent growth. This is the biggest quarter that dental has had since I can remember and that goes back to 1993. So very, very pleased about that.

The medical program -- which you know has been dying a slow death -- is now gone. Our lawyers is flat and we are writing new business there and we have got some additional opportunities in the lawyers this year. So we think that is going to be good.

Special programs. It is up 5.3 percent. That is down from about 10.3 last quarter. Acumen Re had an excellent quarter and Telco risk and Afreda (ph) Washington were both up; and brokerage services, they did exceptionally well. Up 20.5 percent up from 6.5 percent internal in the third quarter.

Just a lot of new business. All kinds of stuff going on, led basically new business by Peachtree and Energy and Marine. Energy and Marine is in New Orleans. Of course Peachtree's home office is Atlanta but they have got offices spread around four or five states.

Now pricing is various. The binding authority, which is the smaller business, is flattish. And except for non coastal property and non coastal property is going south so we are finding a lot of competition; but we are also writing a lot of new business. So we are very bullish about what is going on there.

In the TPA area. TPA just keeps on chugging along. 13.2 percent internal growth -- down a little bit from third quarter at 21.9. The whole year, TPA was up 16.6. As you know, we have sold off the TPAs that don't make the margins that we require and the two TPAs that we break out -- USIS in Orlando and PTIC in Orlando -- also are above 22 percent margin. So those organizations are slowly moving towards 25.

Quite frankly, sometimes we tend to overlook that if you look at many, many, many TPAs across the United States, the average margin is 8 to 10 or 12 percent. So our TPAs are really very, very well run and we are very pleased with them.

The outlook for '05. Now internal growth -- so that everybody won't have to ask the question -- is 0 to 5 percent. We do feel good about '05 and (indiscernible) is getting closer. So having said that I will ask Jim Henderson to talk about the M&A activity. Jim.

Thank you, Hyatt and good morning and greetings from sunny and warm south Florida.

I would like to touch on two areas. One to talk about acquisition activity, a little bit of coloring on some numbers that Cory conveyed. Also talk about a very important area and that is recruitment and training of new leaders.

As Cory mentioned, the activity for 2004 on acquisitions was brisk. We had some 19 transactions, $102.6 million in revenue that would flow in over the following twelve-month period. That was up from 2003, some 14 transactions at 38.4 million. I would like to use this opportunity to extend a very special welcome to the five new businesses that have joined Brown & Brown in early 2005.

Dana Hendo (ph) and her team in Houston. The new employees and teams that have joined our Ocala, Florida retail operation. The ECC brokers in Chicago, Dan Reel (ph) and his team -- a very fine organization we are very pleased to have with us. As well as the Braischfield (ph) organization in New Jersey and Florida that has joined us in the first quarter.

With that, I would also like to -- a very special good morning from all of us here to the folks listening to us up in Roanoke, Indiana with American Specialty. The team there, Pete and Tim Escherman (ph), Dave Harris and Dan, good morning. Great to have you guys with us.

American Specialty is a very unique operation. Just as we have grown our -- improved our retail operation, we've a number of niche program pieces like American Specialty that has joined us. This company is involved in providing unique products and services to the sports and entertainment industry. Their clients range from professional sports to theme parks to amateur sports to special events to electronic game centers to college university sports and the like. They are both a program administrator and a wholesaler in the production of that business.

Perhaps one of the most unique features of the company is its culture. It so much mirrors that of Brown & Brown and the ability for us to come together and move forward at a rapid pace has just been very pleasing. This operation has also has built a community in addition to building a very very fine company. So, welcome, welcome all the new members of the team in the first quarter.

Would also like to mention to you the execution agreement last evening and the reason I am in south Florida is the signing of a definitive agreement to acquire Hull & Company. They are based in Fort Lauderdale and subject to Hart-Scott-Rodino filings and transactions. Will go forward, hopefully, in March, no later than April of this year.

Hull & Company has been actually a market for Brown & Brown, for our retail offices in the placement of, especially, wholesale products going back for a number of years. Dick's history in this business is some 40 years in length. He has built -- really, if you mention Hull & Company in the wholesale arena there is an immediate identification as to quality of people and service that is the hallmark in this industry niche. One of the principal product lines is the binding authority business that they excel in. They have grown this today to some 20 offices in some nine states. Those operations will come on board, continue to operate with their present leadership intact with the Hull & Company name to go forward really as a hallmark with Brown & Brown to provide this product and service.

The combination of Hull & Company and our existing brokerage operation will give us some 125 million of revenue in the brokerage niche in 2005 to carry forward.

I'd also like to cover briefly the environment dealing with acquisitions. In summary, it still is very active. I think because of the market -- the perception of the market changes and reality of change. There's probably -- the discussions are more specific and more intense than they typically have been. We are very cautious as to the market cycle and changes. To the sustainability of revenues and earnings, there is nothing we are looking at very, very cautiously and making sure that the profit sharing agreements remain in place and move forward. Again, it is a very, very active pipeline.

With respect to competition on acquisitions, no -- perhaps other than I think we do see the banks looking at that at least based in their service area and fit at least part of their better product distribution. We will continue to look at opportunities that drive revenue and earnings and obviously make very acute selection from those opportunities.

Turning to the recruitment and training of people. Really, this is the material that will build this organization to carry it for years ahead. For 2005, we have, will continue our policy of establishing a budget of 1 percent of revenues to hire people that, frankly, are not in the budget. This number will approach some $8 million for 2005.

We also have re-upped our discussions with our leadership. Asking them to be accountable for new hires and their effort to identify and hire, as a matter of fact, their successor. That way, they are really -- they are going to build a bench that they need for the (indiscernible) of this Company.

Then, obviously, once this new talent is on board there's the need to spend time with them, to develop them, to train them. In this arena for 2005, we have expanded our B&B University which is our in-house sales training program. This program is conducted by Tom Fenwall (ph) in Orlando.

So for 2005 we have taken this class from Florida to a national class. In February, we will have our firs class attending. It is a one-week boot camp for sales leadership; and the results that we have seen of the individuals, the young men and women in this class and coming out and their immediate sales results have truly been very encouraging.

I would like to wrap up by going back to the operating side. We are really a very, very good acquisition company because we are a good operating company. I wanted to extend a very special thanks this past year to every B&B employee for their efforts, frankly, to take themselves to a new level and then they take the Company to a new level. We can acquire because we operate so well and certainly their efforts is what drives the entire effort.

With that, I'll turn it back over to Hyatt.

Thanks Jim. Excellent report and to Dick Hull, and Bill Simons (ph) and all the other leadership people at Hull & Company we are very very pleased that you all are going to be part of the Brown & Brown team and we are looking forward to working shoulder to shoulder into the future. As a matter of fact I guess we have been talking to Dick now for about 2 or 2 1/2 years.

So it shows you that good things take a little while to happen and this is a really good thing and we are very pleased.

I think that, probably, you all would recognize that there is a great deal of enthusiasm among our leadership about '05. It looks pretty good. It is not going to be an easy year. We do expect a lot of yanking and jerking in the marketplace in terms of pricing, but that is kind of where we always do well. Don't forget, we are solidly in the middle market and that is where the change seems to come about, sometimes a little more rapidly.

But if our offices are able to stay in contact with the markets as we have proven in the past, then we excel in this kind of marketplace.

So having said that, I will open up the phone to questions.

(OPERATOR INSTRUCTIONS) David Lewis with SunTrust Robinson Humphrey.

Two questions. One is for Cory and Hyatt and then the other for Jim. But first, Cory, can you talk a little bit about the outlook for contingent commissions? I know it's a guessing game at this point with the hurricanes and the negative implications, but look at it from both what you think might be potentially a range of impact. And I would also guess -- given last year's first quarter's greater proportion of contingents in there, it'd probably be a little more spread over the first and second quarters that gives you a little more difficult comparison in the first quarter. That is part one of that question.

2, Hyatt, maybe you can give us your thoughts on what might happen to contingent commissions? Is it more disclosure? Do we have to get reimbursed in a different way? And then I will come back with the question for Jim.

First of all, relative to the contingent commissions it is kind of a guessing game. Obviously we start receiving those in February and then in March and April and some even in May and sometimes as late as June. It is kind of a guessing game. We are going to have a downdraft in contingent commissions in several of our Florida offices. And we are going to have more contingent commissions than some of our other offices. So our best guess if you take the whole Company is that we probably would be around $30 million for this year and that's a guess. That is about where we were last year.

How it comes in, David, is a little different. I just don't know because the companies are honestly pretty damn careful about how they include their calculation of reserves. So that's answer to part 1.

On part 2, on the situation in question about contingent commissions. The contingent commissions in our opinions are going to continue to go forward. We have been disclosing those for a long, long time as you know on these conference calls and we disclose them in our new and renewal proposals.

Now we don't disclose to the individual clients the exact amount because we don't know how to do that. We try to give our best estimate and we talked to a lot of our clients about it and they understand the circumstances and life goes on.

As you know, I've always talked about the fact that contingent commissions are in the best interest of the consumer; and it is very simply this. Now if you're talking about the large risk management accounts, where you are always on a fee and should not be receiving other than the fee -- if I understand the contracts provisions. That is one thing. But if you are in the middle market, one of the things that has occurred as a result of, really, about 60 or 70 or 80 years of the property and casualty business is that the companies, the risk bearers are trying to place the agent or broker as a front line underwriter.

So when we have a good loss ratio with a company -- which means that we then will get contingent commissions -- we also can be more competitive on new and renewal accounts. If we have a renewal and we are subject to a lot of intense pressure, we can get the company to do pricing that they wouldn't do otherwise. And we see that where agents and brokers that we compete against, who have no regard for the quality of the risk and will write accounts that the -- let's say the loss control is less than stellar or that the individual operation hires drivers with no respect to their driving records who have accidents and hurt people -- those people, those agents and brokers are not going to be as competitive with Company A as we will be with Company A where we have a good loss ratio.

So the contingent commissions and the receipts thereof is in the best interest of the consumer. So that I think deals with the contingent commissions.

What was the third question?

I have a third question on acquisitions for Jim. Could you tell us, 1, where the Hull & Company acquisition will be carried on your financials? 2, what kind of level of operating margins do they produce or expect to produce at the time of the closing? 3, what do you think capacity for acquisition and revenues are in 2005? I know you had the $200 million on the balance sheet from your recent loan in the third quarter.

I guess, back up. First of all, Hull & Company will be, it is a wholesale brokerage operation. So it would be in the broker sector or if you will that's a division of our Company.

Second, with respect to the margins. Their margins are in fact, really, very much in line with comparable operating units within Brown & Brown. This is not a -- this is a Day One fit operationally. Culture, the attention to detail and the financials and by department, by office, components of the P&L. This is a culture that really just matches up very, very well.

With respect to powder for acquisitions. The 200 million we acquired, that's the long-term 7- and 10-year money. So we will not use all that money with this particular acquisition at this time. It is a earn-out, upside opportunity for Dick and his team for the next three years. So we feel with cash flow and certainly the opportunities there to expand our line that we will have the powder we need to grow.

I think I could add on a little bit to that. The Hull & Company, our operating profit across the Company is about 38 percent and Hull & Company is at that level or better than. They are a very well-run organization. As a matter of fact one of the things that both Jim and I have been very impressed in doing the due diligence and understanding how they operate is, they do some things a little differently than some of our offices and better. So we are was looking to learn. That is a plus -- big plus.

Ron Bodman with Capital Return.

You described it as a swirl but it looked like more like everyone was out beating the pavement, making sales.

Well it is all of the above.

I had a question -- two questions. One about the -- if you could sort of educate me about the Florida homeowners market? Some companies are going to be parrying their ratings, fee and nonrenewals and just (indiscernible) on a non-renew business, what is the procedure they have to go through as far as notifying the insured?

Generally I think it's a 60- or 90-day notice. Now in the past, back in the Andrew days, there was a state statute passed which precluded companies from non renewing more than a certain percentage of their business. I think that was 10 percent statewide; and that law has expired. There is a lot of anxiety on the part of companies, relative to the exposure to Florida wind losses and homeowners.

One of the things that people don't realize is if you have a homeowners policy that has $.25 million on the home itself, then there is all sorts of additional exposure to loss. The contents which could be 100 or 150. The additional living expense. All of these things. So you are talking about a lot of money in just an average home or a little above average home.

So there are a lot of take-out companies that have been formed. They are -- they do not have huge capital bases and the take-out companies are encouraged to take books of business out of Citizens and write it hopefully at a profit.

There have been some stumbles, as a result of that and as a result of these losses. So it's a particular problem in Florida, Ron, because our -- it appears to me that the intensity of people wishing to buy new homes -- both the single-family dwellings and condominiums -- is increasing. In other words, the demand is increasing.

My second question was in the area of premium finance and I'm wondering to what magnitude is Brown & Brown receiving payments from premium finance companies for a client business of yours that is being financed by these finance companies? Where does it show up in the P&L?

We do and have done premium finance since the 60s and we do receive a fee for placing those finance contracts. In many cases, we are able to place the terms and conditions better than they could. Finance them with a local bank or something like that. So off the top of my head I don't know, about 5 -- Cory is showing me that we have about $5 million in revenue as a result of premium finance out of a total revenue base of 647 million.

Where's the (indiscernible)? Is it part of commissions and fees?

Part of commissions and fees, yes.

Greg Lapin with Surinac (ph) Capital.

How much in goodwill vs. continued amortization will there be here and how much of that goodwill gets tax-deductible?

All of the -- well, that's not true. When we buy assets and one of the things you'll notice with the Hull & Company and the great majority of our other mergers and acquisitions, we are buying assets. So, basically, it's all tax-deductible. Now if we buy a corporation and buy the stock, it is a whole different ballgame. And of course, that is one of the advantages -- there are two advantages to buying assets as you well know. No. 1, you don't get the liabilities. No. 2, you get Uncle Sam to pay 38 percent.

So, Greg, is the question the mix between goodwill and expirations?

Yes.

Greg, right now we are running probably about 40 percent gets allocated to identifiable and tangible assets like purchase customer accounts and 60 percent goodwill.

Wanted to also ask, do you expect the margins for -- whole profit margin to migrate to the level that your current brokerage and special programs department generates?

Basically, it is already there or above.

The --

They are currently above our current brokerage margins.

Apparently the brokerage and special programs margins is about 10 (MULTIPLE SPEAKERS)

Wait a second. (MULTIPLE SPEAKERS) this is not special programs, this is brokerage. Brokerage -- this is -- Hull's margin is around 38 percent.

The current brokerage margins in the handout that you put out is close to 50 percent. Just trying to think about the (indiscernible)?

That is a different operation in the transactional as well as the binding authority business existing with Hull & Company.

What is the revenue per employee there?

It would be, it would be very similar to our existing Brown & Brown with add-on. I really cannot pull it off the top of my head, but it would be very similar to our existing operations.

Adam Klauber with Cochran and Caronia.

How much of Hull's business is property-oriented?

Good question. Jim, do you know?

It would be probably -- I don't know if any different mix. Because of the Florida location, you would think in a case of, obviously, Florida, the wind exposed would be a major part of it. Frankly, my best guess of that really is probably in that range of mid to high 20 percent. A lot of business really is on the package side dealing with GL and other lines. Certainly personal lines. Bear in mind that we are operating, they're operating in nine states; and a major sector of their business has to do with the underserved medium and smaller agency out there that really cannot find access to -- in some cases standard markets and in other cases really E&S market to write unique risk.

Okay. In a softening market, traditionally (indiscernible) plus business shifts back to the standard market. Do you think that is going to affect Hull going forward?

In the case of the transactional side, I think there is some movement to -- back to the standard market given the appetite for the standard market. With Hull & Company, though, a larger share of their business really is the binding authority business that does not experience that same movement to the extent that the transactional, the transactional is the open market placement, account by account.

How long is the earn-out on that?

It is three years.

As far as divestitures, do you expect more in 2005 and, also, do you expect the tax rate to normalize in 2005? (MULTIPLE SPEAKERS)

Relative to divestitures we don't have anybody we are thinking about at the moment, but we look every quarter at the performance of our offices. And as you know, Adam, we have indicated that we didn't want anything that was not going to perform at least at 25 percent. And of course as you know time goes along, that 25 will creep up to 27 or 28 or on 30. So at the moment we are saying when relative to those profit centers that we have. Now relative to the tax rate, Cory?

Let me just finish on that one comment though. As you make more acquisitions, there is always these slivers of businesses that don't fit our strategic plan and we sell off; or you get a group of Peta (ph) accounts that we don't want so we sell those off. There is always these small items. Relative to this quarter which is a little bit more than normal, 1.2 million to that gain related to the sale of our United Benefits TPA, which was actually done in the third quarter of '03. But at that time we could only recognize about $800,000 of gain or $600,000 of gain at that time. It was a 15-month earn-out so the earn-out did not actually complete until December of this year. And so we couldn't recognize the other 1.2 million on that particular sale. So that was the largest sale in that whole book.

Then on another occasion, we had somebody that wanted to leave and the people wanted to pay us $550,000 to buy this person out of a noncompete agreement and so we said yes. That makes sense and it was worth it for them. It made sense.

There was one other larger book of business sale that was about $500,000. So the vast majority of that was really in a few sales. So as a going forward, there is always going to be some sales. Maybe not quite as large as these but that's just a little background on that other income.

Relative to the effective tax rate, the effective tax rate this year was 37.74. So I would use around, we will probably fluctuate a little bit between 37.8 and 38.0 for next year's estimate.

Meyer Shields with Legg Mason.

Could we talk a little bit about hiring? Is that exclusively new producers or are you seeing producers at other shops seeking to affiliate with Brown & Brown on an individual level?

Actually we don't really look to bring people from other producer, other shops, other particularly national brokers. Now that is not true in every case but, generally, we are looking for people who have other kinds of backgrounds. They may be in the accounting fields. They may be in the sales field. They may be a lawyer. We are looking for fresh ideas, fresh people who don't bring to us the vestiges of another culture that is different from ours.

Don't forget, we are not just looking at producers. We are looking at marketing people. We are looking at financial people. Many of the people who come into Brown & Brown in a financial position, internal audits, etc., etc., etc. They may eventually move into sales and then eventually into being head of our profit center or manager of a department or something like that. So we are just constantly looking for new people.

Switching gears a little bit, is six to eight times EBITDA a rough appropriate range? First of all for wholesale and second of all for the overall market?

No. What did you say, how much EBITDA?

Six to eight times.

Probably, yes, on the -- our side would be as far as we are concerned -- six is what the market is.

A few years ago, you had a fourth quarter charitable contribution that offset taxes. Is that -- has that practice been discontinued?

No it hasn't. It is just that we accrue for that every quarter as to $250,000 a quarter.

John Keefe with Ferris, Baker Watts.

Hyatt, I believe you mentioned this earlier. When is the Hull deal expected to close?

We -- assuming the Hart-Scott goes through timely. Normally, I think there is a 30-day wait, and we have asked for an acceleration and of course we don't know whether we'll get that or not. But we would like to do it March 1.

Hull, I believe, is one of the 10 largest wholesale brokers. Is that correct?

I believe that's correct, yes.

Also, Hyatt, is there an issue possibly with regulators looking into relationships where wholesalers receive commissions from their retail parents?

I think it may be, it could be the other way around. I don't know that wholesalers receive commissions. One of the things that we do, we do not say to our retail offices, "You must use our owned wholesalers." What we say is "Look, you have got to get and keep the business. So you deal with whoever will get it and keep it for you and if you are in the E&S business, obviously, we would love for you to do business with one of the Brown & Brown owned but that doesn't necessarily mean that that is where you go."

So we think that maybe as much as 70 percent, 65 percent of the business that we put in the E&S market is not with a Brown & Brown owned operation. We do make disclosures on the new and renewal proposal saying that we may if we place the E&S part of your account with a Brown & Brown owned wholesaler that we may, at that level, get commissions.

So the bottom line is is that if anyone asks us about those sort of things we are very pleased to discuss it with them.

Very good. Thank you. Excellent quarter. Keep up the good work.

Nik Fisken with Stephens Inc.

Since you just finished the budget processes, is it safe to say the budget is yielding an internal growth above the 0 to 5 percent range you just gave us?

I think (indiscernible) 5. I can't remember.

So a very intelligent question.

That's right. You sort of pick it.

What was the internal growth rate at Hull?

I don't really know.

I think there were -- with some products they have, they certainly I think they've probably done a little bit better than our organic growth rate.

Better than your brokerage organic?

No, not our brokerage.

Are we going to wait to hear a purchase price on it?

I think you're going to wait.

Is it going to be all cash?

Yes. It is a cash deal, yes.

(MULTIPLE SPEAKERS)

Walk us through their reasoning why they would sell. It sounds like a great operation.

It is a great operation and I think Dick, obviously, is a very very young, early, seven-year-old (ph) with exceptional energy and I think as he looked (indiscernible) his people. I think from the standpoint he has built a very very valuable organization and I think he wanted to look at the opportunity for it to go to the next level. We would like to go there as well and we have been -- this is one we've been courting for a long time. We are very fortunate. This is not -- this particular opportunity did not go to the open market. There was not an outside investment adviser. This was one-on-one with him and his team to arrive at this transaction.

So I think it is a really good fit for his team to go forward and for Dick and his life at this time.

I might also mentioned that Dick isn't going away. Dick is going to be very much involved at least for the next three years. He is a very active person.

Jim, you said that brokerage should be about 125 million in '05. So if I take the 69 at Hull and the 38 you reported in '04.

63 at Hull.

63 -- sorry. So the 63 and the 38 reported for brokerage in '04? (MULTIPLE SPEAKERS)

Bear in mind, we have the acquisitions that came online in '04 and certainly the front end of '05. We can probably with Cory we can step through the pieces that build that. International, E&S, Braischfield, ECC, those components really that have built the number to that level.

That is just simply adding up the number.

That's correct.

Thank you so much and congrats on the quarter.

Nick Pirsos with Sandler O'Neill.

I have three broad areas. First, on employee benefits. Hyatt, I think you said you had some good results there. And you talked about picking up some volumes. Just curious. Volume pickup. Is that market share related or improved economy?

I think it is improved economy. I think that people are hiring. I think the numbers of employees are growing and, particularly, when I was making those comments, Nick, I think I was making them relative to the Northeast where we -- in the Northeast would include Philadelphia and New Jersey, all the way up through Boston, etc. And we have -- and out into Buffalo, New York. We have a lot of very good employee benefits operations there and they are just doing well.

Second question on commission rates just in general. Given where we are with pricing, are you seeing movement on rates upwards as pricing in general has come down?

I haven't seen that yet. I think in the last quarter, maybe one company or two companies and a couple of regional areas offered some additional commissions to try and make their budgets. We haven't seen what you are talking about yet.

Last question on organic growth. I am just trying to get a better sense for what may have occurred in the fourth quarter. As far as I know, there was pent up issues from the third quarter. So I guess the 5.1 that you posted in the fourth quarter, how much of that is just pent up and in relation to your '05 guidance of 0 to 5 which would then suggest that even if you hit the 5 for '05 that would suggest coming off of the 5.1? So I am just trying to reconcile what is going on.

We are not saying we are going to hit 5 for '05. We said 0 to 5.

Let me restate that. Even if you should hit the 5, that would be down from the 5.1. So my point is, directionally, you are saying things are down from the fourth quarter so I'm trying to ascertain what occurred in the fourth quarter. Was it a temporary blip from the third quarter? Disruptive issues from the hurricanes or was there something else? (MULTIPLE SPEAKERS)

No, no don't forget, the hurricanes only have really affected, basically, the Florida business. Where we had the downdraft was in the West and part of that is there's lots of pricing pressure out there. Then we just didn't have very good new business and we lost some business. So I don't see anything -- it's kind of interesting. Can we put our finger on any one particular thing? No. Really can't.

Any given quarter can be lumpy with respect to the cost of timing issues or market shifts or particular product lines as well.

I don't think you can really look at it, Nick, like a sequential event. Last quarter we were at 3.1 and then we're 5.5 on average for the year. We are 4.3. I think the main thing is, are you within a reasonable band and our reasonable band, we really believe, is in that 1 to 5 percent, (technical difficulty) range or even 3 to 5 would be more of a positive band for you. It is going to fluctuate in that range.

(OPERATOR INSTRUCTIONS) At this time, it appears there are no further questions. Mr. Brown, please go ahead.

Thank you all very much and we will look to talk to you in, I guess, it will be April now. One of the things was a little discombobulating for us this quarter is that because of Sarbanes-Oxley we released earnings at a lot lot later than we normally release them. So, Cory, I think that in the next quarter we will be able to release them on a little more timely basis. Will that be correct?

It will be earlier. It won't be quite as quickly as we always have but it will be sometime in -- it will be in April. Probably the last week of April.

Thank you all very much and thank you Kimberly and we will be seeing you in April. Bye.

That concludes today's conference. Thank you for joining us.