Brown & Brown Inc (BRO) 2005 Q2 法說會逐字稿

Please stand by. 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 or 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 provision of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or reference 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 Mr. Brown, I'd like to turn over the call over to you.

Thank you, Kimberly. And welcome everyone to quarterly teleconference. Batting order will be as in the past, Jim Henderson is with us, our President and Chief Operating Officer and Cory Walker, our Chief Financial Officer. I'm going to turn the meeting over to Cory. He'll talk about the current financials.

Thanks Hyatt. We had another good quarter, especially when you consider the current pricing and the regulatory environment. Our net income for the quarter increased 15.2% to $37 million. From a revenue standpoint, commissions and fees for the quarter increased 23% to $192.7 million. That is up from $156.7 million that we earned in the second quarter of 2004.

As shown in our internal growth rate schedule, profit sharing contingency commissions for the quarter was pleasantly $4 million. That is $500,000 more than the $3.5 million that we received in the second quarter last year. We did receive a little more profit sharing revenues than we expected in the Florida retail group, as well as the wholesale brokers division.

We believe that we will probably average of around $300,000 in each of the last 2 quarters, which will give our best estimate of how much profit sharing contingent revenue that we will receive from all of '05 to be in the $32 million to $33 million range.

Excluding the profit sharing contingency revenue, total core commissions and fees for the quarter increased 24.9% or $37.6 million of new commissions and fees. Of this total, 34.3 million of the revenues were generated from businesses that we acquired since the second quarter of last year.

The remaining $3.3 million of revenue was therefore internally generated organic growth, which reflects a 2.2% overall internal growth rate. Hyatt will talk about each of the business segments in a minute. Moving on from the commissions and fee line items, our investment income for the quarter increased $1.2 million due to more cash available for investment as well as an up tick in the short-term interest rates.

We had more cash to invest in short-term investments this quarter due to the lower acquisition activity that we had. We would rather be spending our cash on the high-quality acquisitions than earning the 2% or 3% of available cash. Other income for the quarter was $1.7 million, of which a majority was from the 12-month earn out on last year's June 30th sale of our medical TPA operation in Louisiana.

As it relates to our expenses and our pre-tax margin for the quarter, our employee compensation and benefits expenses as a percentage of total revenues improved slightly to 48% of revenues. That is a little bit down from the 48.3% that we had last year second quarter.

Our other operating expenses as a percentage of total revenue was 60 basis points more in the current quarter moved to 13.3% of total revenues, which is up from last year's percentage of 12.7. One of the main increases in our expenses are the additional legal fees that are being incurred to handle the various regulatory inquiries.

We are currently incurring approximately $1 million of additional legal costs each quarter. In addition to that, other miscellaneous expenses generally increased a little bit faster than our commissions and fees increased, but they were primarily offset by a reversal of a $1 million accrual for the state of Florida Communications Use Tax that was repealed by the state legislature this April. We had previously expensed that in the fourth quarter of last year.

Amortization expense is higher in this quarter for 2 main reasons. One, is the acquisitions that we completed in the second half of last year as well as the first quarter. But additionally, as you recall in the fourth quarter of last year, we changed our amortization estimate period from 20 years down to 15, which incurred another $1.6 million of additional amortization expense each quarter.

That portion alone amounts to nearly one and a half cents a quarter additional P&L charge. Interest expense for the quarter was up $3 million, which obviously was due to the $200 million we borrowed last year. From a tax rate standpoint, there is no significant change in our effective tax rate that we expect for the rest of the year, so it stays solid at about 38.8%.

For the quarter our net income ended up being $4.9 million or 15.2% over the second quarter of 2004. The trend that we just discussed on the quarterly basis really are very consistent with what the 6 month year-to-date changes are. And so with that I'm going to bypass a line by line discussion of those 6 month year-to-date changes, and just summarize by saying our year-to-date earnings per share for 2005 was $1.15 or 16.2% increase over the $0.99 we earned in the 6 months ended June 30, 2004. With that financial overview, I will turn it back to Hyatt.

Thank you Cory, good report. First of all, give you all a little health report on me. Four weeks ago to almost the hour, I had quad bypass surgery. Now that is kind of a dramatic sort of announcement to make. It is possible to have a (inaudible) quad bypass, I had that.

According to my doctor, there are a number of factors considered in terms of the recovery of individuals from this kind of an operation. Number one, Do they or have they smoked? The answer is no, I haven't. Secondly, are they diabetic? The answer is No. Thirdly, are they overweight? No. Fourthly, are they in reasonably good physical shape? And of course I have had a regular exercise program for the last 35 years. Lastly, do you have any kind of family history? My father passed away when he was 78 with a heart attack.

The bottom line is I was out of the hospital on Saturday morning, 4 days after the operation, started my exercise program on Sunday, which was walking. I am now walking regularly 3 miles, in about 12 minute miles. The doctor will not allow me until 15th of August to do jogging and my normal pushups, sit-ups, and all the other exercises that I do. The reason is that my sternum will not totally fuse for about 6 weeks after the operation. The only limitation -- I've been back to work now halftime, starting about 10 days ago. And about a week ago I came back full time.

The only limitation I have at the moment is the doctor does not want me to fly, because at the moment if we ran into an air pocket some place and dropped 1,000 feet it could be a little painful. So I have to wait until about the 10th or the 15th of August. In the meantime, life goes on and I am feeling very, very good. As a matter of fact, the doctor says that A, I will feel like I am 50 years, which I am 68, that will be nice and B, these kind of tubes that are around my heart are good for about 30 years. At age 98, I might have to consider a Roto-Router job.

Having said that let's move on to those things that are important. This particular quarter was a modest quarter in terms of internal growth, as I'm sure everyone recognizes. First of all, relative to Florida retail, internal growth in Florida retail was up 9% versus 6.7 for the last quarter. Workers comp in Florida and elsewhere continues to be much more competitive. Property. There are 2 or 3 classifications of property. Property generally away from the coast is flat to down 10%. On the coastline, there is a difference. There is a capacity problem. There are some admitted markets that are no longer writing new business because of capacity.

We are seeing coastal property up 5% to as much as 15%. Starting in May, we saw this stiffen even more in terms of coastal property. So it is very interesting that when Hurricane Andrew occurred back in 1992, it occurred in late September, first of October, it was June before the market started to really react. That is about what has happened this time.

Casualty rates in Florida are down 10% to 15%, but that is masked by some fairly nice additional premiums that are coming about as a result of audits. What is happening is as a result of the hurricanes, all the contractors are just flushed and have been flushed and are doing much more business than they have in the past. We're getting the benefit of that.

I will mention that history does have a habit of repeating itself. In Q4 of this year, Dade, Broward and Palm Beach counties, the lower 3, have a potential cap capacity crunch. I have seen in 1984, 1985 during November and December it was almost impossible to write new property not just in those counties but in Florida. Different reason then than this time.

Then it was because of rapidly increasing rates and a strain on the ratio between the capacity of the company, meaning the premiums they're writing, and their particular net worth. I think that we are looking at that in the bottom 3 counties for the last maybe quarter of this year. Also, benefits in Florida are 6 to 8 to 10% up. In some places they are also flat. There continues to be moderation in increases in employee benefits -- pricing.

Going on to national retail, it was down 3 tenths of 1% versus up 2 tenths of 1%. So it is basically flat. Pricing around - and national retail is everything except Florida and the West. And the West is Colorado West. Pricing is all over the lot. Most offices are seeing 10 to 20% reductions this quarter. The regionals are by far the most competitive. And the Midwest is the worst. We're seeing 15% to 30% reductions on plain vanilla. And when regional gets after an account, it can be even worse than that.

Workers comp, believe it or not, in several states has changed. When we get to California, we will talk about that too. But in the Midwest, workers comp has changed from being pretty tight to being very aggressive. Discounts and dividends are back and increased commissions are up. We do have some condo business nationally that is flat. Distressed accounts are really paying heavily, through the nose. The benefits, again, somewhat like Florida, although in certain areas, we're finding flat renewals and that is kind of unusual.

Then on to Western retail. Western retail continues to have a sinking spell. One of the reasons is that seems to be the most competitive market. In talking with a large risk bearer this week, actually last week, he indicated -- this is an executive of a large risk-bearer - he indicated that their pricing in the California market and elsewhere in the West was below what it was elsewhere in the United States. We're seeing that.

Rates in California are leading the way down in terms of the West. That includes our workers' compensation. Workers' compensation in California a year-and-a-half ago, there was only one market, which was the state fund. The state fund was making it much more difficult to do business. They reduced their commission rate from 10 to 12% down to 5.5%, and in some cases 3%. All of the sudden now, there's a number of new companies writing, aggressively writing, workers comp and reducing prices and increasing commissions, at 8% to 10% is norm on the new entrants. It is a wild and crazy world in California.

The new business in metro areas of the West is 25% to 35% below expiring. Bear in mind, I am talking about the middle market business. It varies a little bit with where you are talking about. Washington state would be different than Las Vegas and Los Angeles and Denver et cetera. The new accounts that we are writing is being driven by the workers comp line.

Everybody is uptight about workers comp and with these new entrants, it is a real opportunity to open up new accounts and write new accounts. Umbrellas are kind of crazy in the West. Professional liability is flat to sliding a little south. And I guess the worst case, excess umbrella case, that I have heard about in the last several days since I have been talking with our various offices, had to do with a risk located somewhere in the West that did have a substantial number of trucks. But they are not long or intermediate haul, they are local delivery and a good loss ratio.

In '03, Company A, for $10 million, excess of a million, wrote it for $310,000. In '04, and re-marketing Company A would not reduce the price. Company B wrote it for 280,000, a reduction from 310 to 280. This year in re-marketing, Company B, who was writing it for 280,000, offered a lower price and it went to Company C at 176,000. So you can see, that is what is happening before us. This is a very good, clean account.

Benefits in the West are up 5 to 12 to 15%. The question is, what is sort of an average rate downward pressure? The best measure that I can give you of that is we have a Top Gun report that comes out every month. Among other things -- this is retail only -- among other things, the Top Gun report actually measures every account, new account, that we write, new to the company, retail, of 2500 or more in commissions.

For the first 6 months of '04, the average was $13,200. That is the annualized average commission at the date when the account was written. For the first 6 months of '05, it is $11,316. So it's a 14.3% reduction. And frankly, that is about what I think, if you went across the country, that's probably about what you'd be seeing, rates going down, with the exception of Florida.

In professional programs, they are down about 5.7. That is a little misleading. Here's the reason. CalSurance was down about 8%. But it has nothing to do with insurance pricing. A very substantial piece of the CalSurance revenues is TPA doing the loss adjustment for our various professional liability lines.

And during the last really 7 or 8 months, the claims count is down about 25%. Reasons -- Number 1, fewer claims. Number 2, we're closing them faster. That has reduced our income. That is basically what is happening there. The professional liability premiums that we're doing, these are small and middle sized, are basically flat. We do have a couple of small retail programs that are down a little bit, 5% to 15% a pizza (ph) program etceteras.

Dental continues to do well, up 4% for the quarter. Lawyers was down 3%. We did switch carriers. XL is the new carrier for our lawyers' program. And our professional service plan, which is sort of a direct marketed plan, in Florida was up about 10%. We're happy with that. Special programs was up 13%. It was about 4.9 the previous quarter. All programs are doing well. There's really not too much to report on that.

Brokerage services -- lots of things happening. It is a wild ride. We were up 19.7% versus up 15.5 for the previous quarter. Both property and casualty are big ups and downs. There's just all kinds of movement in the marketplace. Peachtree was up about 50%. International, E&S and Hull, new during the last quarter and the last 6 months, are doing very, very well, up substantially over their budgets.

Our TPAs, the 2 of them, continue to chug along, 6% increase. The margins are up now to 23%. As you know, we have an inexorable march towards 25. So the first 6 months, we are at 1 point from 22 to 23. So now, what is the outlook? I think we are going to write more new business, A and B, the internal growth rate estimate is 0 to 5%. Having said that, I'm going to turn it over to Jim for M&A and other info. Jim?

Thank you Hyatt. It really is great to have you back. I do want the name of your doctor. I resolve that I'm going to give up trying to eat healthy and exercise. When necessary, I want to go see your doctor and have my tubes blown out as well. Those of you who cannot see Hyatt across the table, it is quite remarkable, the recovery, and great to have him back.

With respect to acquisitions, the second quarter of 2005 we closed on 3 small transactions, each of which was less than $1 million. This activity does reflect the rather lumpy nature of acquisitions. You really cannot pick the quarter. You pick the time, deal with the deal flow. The right deal and the timing simply is going to happen when it happens. For the year to date through 6 months, we purchased annualized revenues of approximately $94 million. This represents about a 14% tag onto our 2004 revenue volume.

This quieter than normal period though, does not reflect rather significant activity on prospective acquisitions. Certainly, looking at deals today, we are proceeding with caution. Having managed insurance operations through different cycles of the last 30 years, we're in a period of decreasing prices.

The experience as a great teacher. We're very cautious in purchasing an insurance brokerage business in a time when in fact prices are heading south. Sustainability of earnings over a lengthy period of time is very important. The payback period, really, is 6 to 8 years plus. Definitely plan that there will be a cycle, the revenues that you're purchasing, to make that they will be there tomorrow.

For the current quarter, we can tell you that we did walk away from 3, what we classified, really larger than average prospects. And the reasons for that exit was, in some cases, the price difference. In some cases there were some cultural matters there that perhaps did not fit with our company, we didn't see the fit and so we decided not to proceed with the transaction. We continue to be very encouraged by the quality of opportunities that are presented. There is no systemic changes out there with respect to either competition or price or terms that really present any significant issues to us.

I wanted to tell you also, looking back this past year on some of the acquisitions, how have they done? We're very pleased. Our most recent class of acquisitions are performing well. In most cases they are ahead of their budget, revenues and earnings. Hull and Company and Emerald Benefits -- Emerald Benefits was a transaction Tom Riley initiated and completed. Tom is with us here today.

Their organic growth has been outstanding. They're ahead of both top line and bottom line. Hull and Company has had back- to-back best months in their corporate history. We're very pleased with the team there. Dick built a great organization and we're pleased to be a part of Brown & Brown.

With respect to margins on acquisitions, the actual delivered margins on this most recent class continue on plan. From day one, these margins are at or above the margins of existing Brown & Brown profit centers. On the acquisitions in the fourth quarter, one that Ken Couric (ph) brought on in the West, and that's International E&S. They're doing very well, providing products to the construction industry.

They're both top line, their budgets and revenues and profits above their plan for '05. Also wanted to touch in the regulatory environment, looking kind of -- hopefully what is developing is the post-Spitzer (ph) era. With respect to that environment, we are spending additional time to respond to inquiries from the various states. This process is distracting, but it is not disruptive.

In the recent quarter, we did not receive any additional requests from any state. We currently stand at some 18 states that have made inquiries regarding information from Brown &Brown. We are in the process of responding or have responded to the majority of these requests.

The last thing I wanted to mention, and perhaps it is an ingredient of our success that may be the most important, and that is the pace at which we are bringing in new, fresh, talented leadership. Although you can never have too many young, talented leaders, we are pleased with our recruitment and the training program of our leaders of tomorrow.

B&B University (ph) recently completed a class. They have started a new class for this quarter. The existing class is in the offices out there. As one of the young rookies quoted, in the cheetah fashion, that he is biting hard and leaving his mark. We're pleased with that effort. We continue to spend the 1% that we set aside at corporate on people not in the budget. We are on target with spending that money. That will continue in our game plan for tomorrow. At this time I will turn it back over to Hyatt for wrap-up and also then we'll open for questions.

OK. Kimberly, are you there?

Yes, sir.

Could you open it up for questions, please?

[Operator instructions].

We will move first to David Lewis with Suntrust Robinson Humphrey.

Thank you. Good morning. It is great to hear the recovery has gone as well as well it has. I just do not know what we're going to do you start to feel like a 50 year-old, though.

A couple people have mentioned that around here also. We will worry about that later.

OK. Couple of questions. First, on the western slowdown, given the environment out there, would you anticipate that maybe in the second half of the year, you would still have down double digit internal growth?

I do not think do. I don't think it's going to be down double digit. My sense is a couple of things -- number one, the downdraft started really about October of last year. It is a little bit like a wind storm. It lasts for about a year and then there seems to be some kind of surcease from pain. My feeling is that starting into the third quarter will probably see a little lessening in competition. The other piece of it is, is I think we're going to be writing additional new business because obviously there's all kinds of opportunities to show price differential. So I'm not feeling badly at all about the West. It is just a matter of us keeping on keeping on and grinding through it.

Let me throw in my two cents. I tell you, the West has got great people out there. It is an energetic group. We have all the confidence in the world they're going to write a lot more business.

Good. And Cory, let me ask you on the investment income, if you look at the cash and restricted cash on the balance sheet, it was pretty similar to what was in the first quarter. But you have had 50% higher investment income. Is there anything going on there other than rate?

No, remember last quarter we had to borrow $50 million there right at the end of quarter on the acquisition side. So that short-term borrowing is not there. But you have here is more of a long-term cash build up. And that is what is creating additional earnings.

Thanks very much. Good quarter.

Our next question comes from Charles Gates with Credit Suisse First Boston.

Good morning.

Hey, Charles.

Congratulations on your results.

Thank you.

Two questions. My first, I thought you did a superb job of going across the country with some analysis of pricing. If you were to step back, would it be fair to say that commercial line pricing is off year-over-year about 15% to 17,18%?

The number that I think is probably most accurate if you are trying to use some sort of a statistical kind of measure, I think 14.3%, which is the reduction in our average of, pretty much reflects the pricing.

What would have been a comparable number in the first quarter?

I am sorry, I do not know that. I don't have it.

Generally, it would have been less. And like you see further erosion in pricing?

We have seen further erosion in pricing in the second quarter, yes, we have.

It is it basically 1988?

I don't think so, and I'll tell you why. The bottom line is, there are some companies that are trying to hold the line. The other thing is we do not have, even if you look at the combined loss and expense ratios, the 2005 first quarter, 92.8% combined ratio for about 11 or 12 of the largest companies. Even with that, they do not have fat reserves because I really have not been able to replace reserves. I think that lack of redundancy in reserves is going to be a brake on this. I think we're going to have plateaus. Maybe the plateau will start the last quarter of this year, go along for a little while, and as the companies see whether their combined ratios are going up or down, the market could follow from there. I do not think it is as predatory as it was in 1988 or in 1997, 1998. Some place in there is pretty predatory.

This is my last question. Could you characterize the types of companies that are holding the line if you can't identify them?

The national companies are trying to hold the line. The regional companies, many of whom are not publicly owned, they have lower combined ratios and no asbestos or environmental. In the middle market is where this is occurring. When you get into the much larger risks, of which we have a few, then it is a little bit different. In the middle market, the national companies are trying to hold the line.

How you define the middle market? That will be my last question.

It varies between people. We think the middle market is 2500 in commissions to 250,000 in commissions. That's 25,000 in premiums, to $2.5 million in premium.

That was great. Thank you.

Moving next to Adam Klauber of Cochran, Caronia securities.

Glad you're feeling so well, Hyatt. With higher amortization and legal expenses, will you be able to hold your margin compared to last year?

That is a good question, and we do not know the answer yet. It will probably go down a little. We expect to increase our EBITDA slowly as we've always been, and inexorably. We are going to have some additional legal expenses. Lawyers are very expensive, and don't forget the accountants. Our accounting costs last year were $800,000 or $900,000 more than they were the previous year. We feel that that will come down a little bit this year. We're in the process of talking about that with our national accounting firm. It is kind of interesting. We have a double-edged sword. One is prices are going down. And expenses over which we really have no control have gone up. The bottom line is we're better off by having to go through Sarbanes Oxley. We are much tighter and we're really doing a good job. I am very pleased with the changes we made and the people changes we made. The second thing is everyone gets all uptight about the regulatory thing. We're going to be better off from that, too. In the short term we had some expenses and we just take them and go.

To have any sense how the state investigations will wrap up in 2006, or is it possible there will wrap up in 2005?

We have no earthly idea. The wheels of justice grind slowly.

Adam I don't think they are motivated to wrap it up. There seems to be a lot of reaction by different states responding it with New York that make sure there are no issues in their venue. They're not going to provide a clean bill of health until this really has settled down the road sometime.

On last follow up. Jim, in your comments about acquisitions, you expressed caution because the market is deteriorating. Does that signal to was a cease of acquisitions in the near term could be slower than they have been?

The first 6 months, the size of acquisitions we're looking at were larger than on average historically. There's probably more people were saying I have to make a decision in the next 6 months to year, am I my going to ride through this cycle or do want to do something now? I don't really have perpetuation to figure it out. My family doesn't want it or my team can't buy it from me, and I need to do something with you guys. That is happening. Yet we're being cautious to make sure the rising tide of rates the last few years can ride through the next 5 to 8 years. We are paying special attention to the profit sharing. We think it will be there, but we're putting in conditions that if anything happened there, we would not be harmed by the process.

Thank you very much.

Fox-Pitt Kelton's Dan Farrell has the next question.

Could you give me your name please?

It's Dan Farrell. Good morning. A couple of questions on the organic growth in Florida, can you break down the 9% a little bit? How much of that came from increased exposure units compared to new business compared to the impact rates?

I wish I could do that for you, but we're not sophisticated enough to do it.

Could you talk around it generally?

I would say that-it's *expletive* difficult to do. I'd hesitate to give you a guesstimation. I would say this. A small piece of it is due to AP. That's additional premiums on audit, so that's part of it. One thing that makes us a little foggy is that starting in May, which is really June and July renewals, that is when we started seeing this change in the property market. I don't really know how to measure that yet. We're not far enough into it.

But you are seeing an increase in exposure units correct?

We are.

Are using increase limits, lower deductibles. To what extent are those moving around?

What we're seeing is-- let's take the condominium market. A condominium has100 condominium units, it's still a condominium unit, but there were 800 of them going up all over the East Coast of Florida and the West coast. When I say 800, it might be 2000, I do not know. As they come along, we're writing a big chunk of them. In the case of contract in risks, we're seeing that those are seeing greater perils. We're seeing more trucks. In the casualty area, prices are going down, 5% to 15% in Florida, we're also seeing an additional exposure units.

Probably the most extreme I could think of is there room for a client we have. After the hurricanes was about double the year before. Labor force and payrolls for that. There are a lot of moving parts for this. Some lines of business are not going up. Work comp is a regulated rate. Back to the comment on terms, we are seeing some softening in the terms provided by the carriers with respect to deductibles and coverage’s that might have been pulled out of the policy a few years ago.

Just one last question. On the western segments, I know you said you are really pleased with the group you have out there, but have there been any management changes in any of the response to the decline recently?

Yes, there have. We do not mess around. We move fairly quickly.

OK. Thank you. It is good to see you back, Hyatt.

OK Dan, thank you.

Next up is Nick Pirsos with Sandler O'Neill.

Good morning and welcome back Hyatt.

Thanks Nick.

A couple of questions. First on the compliance cost side.

On the what?

Compliance cost, or legal regulatory. I think it said that 18 states have thus far requested information in the quarter. If no new additional states request information, how long would you expect the $1 million expense for legal in the quarter to continue? Is this going to next year, again assuming no new states were to...

It is going to follow as long as they keep it open. We really do not know how long it will keep going. We have to have attorneys dealing with them, and our folks dealing with it so, we just don't know.

Just curious. Of the 18 states, after making initial request, are they coming back for second and third rounds or is it kind of a one and done?

Generally they are not. I mean there is a great big pause. But we've had some additional from the state of Florida and a couple other places. Not a great deal. In other words, there is requests, we get a bunch of information and send it to them, and then it is silent. We do not know what to think. Nick Pirsos: That is what I was trying to see, if we had gotten to the silent point on the 18, that's why I

Hopefully so but I would not put that in your formula.

Okay. On the M&A side, I'm trying to balance between if sellers are still requesting price levels in assuming a certain pricing climate and of pricing in fact is coming down and you will remain disciplined, how do you then start to consider buyback compared to cash buildup?

Here is what a lot of people do not recognize. When you look out across the landscape of 25,000 insurance agents and brokers, that would include programs, etc. The one's who are well run are doing very well and are continuing to do very well because the market has loosened up. Many of those are writing more business now because the market has loosened up.

The bottom line on this is we seem to attract those that are better run because they are a bit enamored and mystified by our high EBITDA margins. As we get into those discussions, part of what is enthralling to them and also to what is that there are some ideas that we have together that to make the combination very pleasant for both.

The question is, what drives acquisitions? There's all kinds of different reasons. We find there are about 3 reasons that drive acquisitions. You have the ownership where a portion of the ownership wants to liquidate and that is the only way to get the money, therefore they come to someone like us.

Secondly is where you have a family operation and there are one or two members of the family who are-- working day, night, and Sunday, and the others are not. That creates the need sometimes to make a change. The third thing is where individuals are very aggressive, they are in their 35 to 45, and recognize that by combining with us that 2 and 2 makes 7 or 8. If they are as good as they think they are. And if there is no kind of conflict between how they do it and what they do with us. So those, when you look across the 25,000 potential acquisitions, there are a lot of them out there. They just seem to continue to blip up.

Thank you.

Next up is Matthew Roswell of Legg Mason.

Could you walk me through the accrual reversal? I mean was that all in the quarter, it was I believe $1 million according to my notes. Was that on a net basis, was...

...Right, well...

Go ahead...

I'm sorry, go on with your other question...

I guess the second question was with Hull doing so well, are we looking at an acceleration earn out payment, do we have an earn out payment coming? If so, how much etc.?

There is a payment due at the end of the first year but it is based upon performance really for all of '05 and into the first part of '06 which there can be a true-up, but it is a true-up can be a 3 year period so it has to grow and then sustain itself over a 3 year period.

So we're not going to see a chunk coming in? There shouldn't be a hit to the numbers from Hull, I guess more I'm thinking on the balance sheet side or to the purchase price adjustment side going forward.

Nothing that we do not expect. We always have a minimum and maximum on our purchase prices. Any earned outs are always just additions to the goodwill and intangibles.

If there is additional payment, that certainly will be justified through increase in earnings over their base of their 2004, 2005 base into '06 before that happens. Right now they are going to target as a matter fact to perhaps to receive additional payment next year at the current rate and which, we're very pleased. That is what we exactly want them to do.

Is that additional payment in the form of restricted stock?

No, it is cash.

And Cory, on the tax scroll?

That is not an income tax, it is a use tax. It is a communication tax. This was put in 3 or 4 or 5 years ago in the state of Florida and was directed toward the telecommunication industry. There was confusion whether it interpreted tax on, like Internet routers or general business. Nobody ever paid attention to it. The state did not try to collect it because there was confusion.

In the spirit of Sarbanes Oxley, basically at the end of the year the auditors and us were talking about it and said it is technically on the books so we think you have to expense it. In the fourth quarter of last year we've accrued $1 million and expensed it in the fourth quarter.

When the legislature came in and they were in the session this year, they addressed it directly and said this was not the intent to charge businesses, so they repealed anything that was outside of the regular telecommunications industry. Therefore, it no longer exists on the books. Again, we had to reverse that out. When the fourth quarter came out in the second quarter. It was $1 million. That would be taxed affected.

General question for Hyatt on employee benefit side. It looks like rates are moderating. Is that because of the sharp increases we have seen over the last couple of years, or is there a change in the market?

It looks to us like the increasing loss costs have moderated. Part of that has to do with changes in benefit plans. And cost shifting. More deductibles, maybe people being more sensitive to that. There is a general moderation really all around country.

Thank you very much. I'm glad you're back, Hyatt.

Thanks Matt.

Nick Fisken with Stephens Inc. has the next question.

Good morning everybody.

Hey, Nick, how are you?

Doing great. Hey Cory, the 14.3%, everything that Hyatt mentioned, for top gun reports, does that include or excludes Florida?

That includes Florida. It includes all retailers. Nothing but retail.

Any then, if I look over what has happened the last 3, 6 months as it relates to contingents, you had some CEOs saying level the playing field. You have stuck by your guns along with most of the brokers out there. Has your opinion on contingents changed at all?

No.

What is your outlook? Do you think we'll get a resolution anytime soon?

Well, I don't know. Based on what we have seen in terms of the response to the various insurance regulators around the United States, they do not seem to be too concerned about profit sharing commissions as long as they are disclosed. They're more concerned about disclosure where there is a fee based business.

One of the reasons is that the regulators recognize that contingencies that are based on loss ratios are beneficial to help the insurance market, which means you have insurance companies that can be more competitive because their writing good business.

And so my sense is that the contingent commission which was used and kind of became a flash word wasn't really understood in the case of the National brokers, where they were getting a fee and then they got what they called contingents -- they were not contingent commissions based on loss ratio, they were commissions that they were getting at the end of the year based on their volume with those customers. That is not the way we define contingents. That is not a contingent commission.

OK, thanks so much.

The next question comes from Jason Busell from Keefe, Bruyette and Woods Asset Management.

Actually its (inaudible). Two quick questions for you. Could you remind us how much of your business or employee benefits?

Last year approximately 82 million [inaudible]. It is going to be more this year, but I cannot tell you. If I had to guess, I would say that this year will be somewhere around 95 million, maybe 100 million.

OK. Has the improved economy offset some of the lower cost in terms of rates?

I do not know the answer to that question. It sounds like it might but I don't know.

OK, that's fair. Jim, did the 3 larger acquisition prospects that you walked away from during the quarter, did those end up with a competitor or any of those?

Actually they are all 3. We understand they're still being looked at by different companies. To our knowledge, I do not think they have been announced. They're still looking at options, opportunities.

I appreciate it. Thank you very much.

It appears there are no further questions at this time.

Mr. Brown, I would like to turn the call back over to you for closing remarks.

OK, actually to answer Jason's question about the employee benefits, the first 6 months we have done $46,285,000 in commissions and employee benefits, so if you double that its somewhere around 92 or something around that.

Well. that concludes our teleconference. We thank everybody for their attendance. We look forward to talking to you all in October and anticipate having some more good news then. Thank you very much. We are now adjourned.

Thank you Kimberly.

Thank you, sir.