Brown & Brown Inc (BRO) 2005 Q3 法說會逐字稿

Welcome to today's Brown & Brown Incorporated third-quarter 2005 financial results teleconference. Today's conference 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 events including financial performance, and that such statements are intended to fall within the Safe Harbor provisions of the security laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made, as a result of a number of factors including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated in this call. Such differences may be material. With that said, Mr. Brown, I will now turn the call over to you.

Thank you very much, Matt, and good morning, everyone. We will follow our normal batting order; and up first is Cory with our financial report. Cory?

Thanks. We had a good quarter. From the revenue standpoint, our total commissions and fees for the quarter increased 18.6% to $188.4 million. That is up from the 158.9 million that we earned in the third quarter of 2004.

As always, we have included in our press release our normal internal growth rate table that summarizes the total growth rates and the internal growth rates from our core commissions and fees. As you know, core commissions and fees excludes our profit-sharing, the contingent commissions, as well as revenues from offices or books of business that we have sold since the third quarter of last year. This schedule also tries to the consolidated statement of income.

If you look at that schedule, for the current quarter our profit-sharing contingent commissions were $2.6 million versus right at $1 million last year in the third quarter. Most of this increase came from new offices that we really acquired over the last two years; and then also we had one carrier out in the West that gave us some nice profit-sharing contingents. So we were pleasantly surprised with these increases. As a projection just for the fourth quarter of 2005, we only expect about 2 to maybe $400,000 of additional profit-sharing contingencies to come in through the rest of the year.

Now looking back at the top part of the internal growth schedule, our total core commissions and fees for the quarter increased 18.2% or a total of $28.6 million of new core commissions and fees. Now of that total, $26.6 million were from revenues generated from acquired offices since third quarter of last year. So that leaves the remaining $2 million of commissions and fees was internally generated organic growth; and that reflects that 1.3% overall internal growth rate. Hyatt will talk about each of the business segments in a little bit.

Now moving on from the commissions and fee line, we had quite a bit more of interest income, since we had more cash on hand to invest and as well as the higher investment income rates during this quarter compared to last year. Our other income was slightly down due to less sales of books of businesses that have kind of gone on routinely.

Now as it relates to our expenses and our pretax margins, our pretax margins for the third quarter actually fell by 90 basis points from the 2004 third quarter. However, 80 basis points of those 90 basis points was the result of $2.7 million more amortization expense in this quarter than last year's third quarter. Of the 2.7 million, 1.6 million of that increase was the result of changing our amortization period from 20 years to 15 years, which was done effective November of 2004. This change alone accounts for 1.4 cents of additional expense. Now the remaining portion of the amortization expense relates to normal acquisitions that were completed over the last 12 months.

So therefore on an apples and apples basis, our pretax margin for this quarter was really only down by 10 basis points, when you consider that $1.6 million of additional amortization expense. Now, additionally, our interest expense increased 50 basis points due to the fact that in the current quarter we have a full quarter of interest expense versus last year's third quarter, when the entire $200 million of private placement that we did back in the third quarter, it was not outstanding for the full quarter last year.

So if you look at our operating profit, which is our pretax income before interest and amortization and the non-cash stock grant compensation, we actually improved that margin by 40 basis points from 35.3% last year to 35.9% this quarter. Now this margin improvement was generated just by slight improvements in our employee compensation benefit line and our other expense line item.

Looking at our income tax expense, we filed our 2004 federal and then the major state returns last month in September. And a result of the normal true-up of the actual returns to the income tax provision provided for at the end of 2004, we were able to reduce our current year-to-date effective tax rate from 38.9% to 38.5%. So for the third quarter of 2005, we ended up with net income of $34.8 million, an increase of 15.6% over last year's $30.1 million.

Our earnings per share was $0.50 for the quarter, which is 16.3% increase over the $0.43 last year. If you take into consideration that $1.6 million of additional amortization expense, our net income per share really increased by 18.9%.

Looking at our nine-months year-to-date results, our pretax margin decreased from 33.1% in '04 to 31.7%. Our nine-month year-to-date margin for operating profit, which excludes that amortization expense and interest expense, increased from 37.6% to 38.1% this year. That is an improvement of 50 basis points. Thus for the nine-month year-to-date we actually had an increase in net income of 16.5% to $114 million. Our earnings per share was for the nine months $1.65, which is 16.2% higher than the $1.42 we earned in the first nine months of 2004.

From a balance sheet perspective, there really were no really significant changes in the quarter. So that really wraps up the financials, and I will just turn it over to Hyatt.

Very good report, Cory, and thank you. Let's first talk about Florida retail. Internal growth up; it's a positive 8.2%. Last quarter it was about 9%. Workers comp continues to be very competitive in Florida. Rate decrease is expected on 1/1/06. Gallagher wants 22%; he is the Chief Financial Officer, used to be the Insurance Commissioner. NCCI I think is estimating 7% to 9%. So there will be some kind of a downdraft.

The other piece of that, however, is that what a lot of people haven't recognized yet is that the four hurricanes last year actually were an economic event for Florida. We are now starting to get APs, that's additional premiums on audit, from all of the construction work that has been going on and continues to go on. In addition to that, I don't know how many high-rise towers are coming out of the ground in Florida today, but I can tell you right here in little old Volusia County I think there are 11 or 12. They're 15 to 25-story towers. So we are looking at booming times, plus the fact that the additional premiums on audits are going to extend substantially into next year. And all of that is good stuff.

Now, let's think about Florida for a moment. There are actually three Floridas as regards insurance. First, Tri-County; we all know that is Broward, Dade, and Palm Beach County. As of right now, as of yesterday -- and the information I am going to be giving you is as a result of a large number of phone calls to profit center managers or marketing managers across the United States, so it is pretty timely.

First of all, Tri-County. Property admitted, flat to 25% up. Now one of the things that you all need to keep in mind when I talk about these numbers is that it takes 90 days and sometimes as much as six months for the message from the brain to get to the toe. So what is happening is that underwriters, except for regional companies, are slowly feeling their way along in terms of what does all of this really mean. So the admitted property, and that is not as much as you might think in the bottom three counties, is flat to up 25%.

Nonadmitted is going bananas; it is going up 50 to 80%. The liability that is connected with these kinds of properties is flat. The other problem in terms of placing the insurance is that there are reduced limits on the front layer. Generally most of these larger lines are layered; and so someone might take 5 or 7 million on the front side, and now they are taking 2 to 3 million. So what that means is then you got to get more layers on top, and it runs the expense up. And the deductibles now are 5 or more percent versus 2% to 3%.

The middle market casualty is now flat to up 5%. That's different from July what it was sort of 10%-ish down. The only area that we see pretty aggressive price competition, at least -- now this is all of Florida, not just Tri-County -- is in fleets. These are monoline fleets, incidentally; no longhaul, but monoline fleets. There are several companies that are going after this business, monoline, at 15% less than expiring.

Let's look at piece two or the second Florida, coastal Florida. Everybody has a little different idea of what the definition of coastal means, but I always think of it as being about 25 miles from the coastline. So if you take a swathe around Florida from Pensacola all the way down around Key West and all the way to Jacksonville, and it's 25 miles thick, it's about 75% to 80% of the people in the state of Florida living in that swathe.

So if it is coastal Florida now, other than Tri-County, then again admitted property is up 25%. Deductibles are going from $1,000 to -- windstorm, I am talking about -- to 2%. Nonadmitted is going crazy. There are E&S brokers who -- and this is something that is interesting -- for the first time we have seen in, well maybe almost forever, where E&S brokers are throwing up their hands and saying, we can't; we don't have a market; we can't place it. There have been a couple of companies that have said, no more property. Not just in Florida, but no more property in the Southeast.

Again, we are even seeing quota share on the first layers in some of this pricing. As I think I mentioned in July, we think there is going to be a crisis in capacity come November and December, meaning that there will be no commercial market; and the market will be the Citizens, which is the state of Florida, which has just asked for a very large rate increase. Of course it is available. It is limited coverage; it does not have business interruption insurance, so there is going to be a lot of piecing and parting to put together coverages that are necessary to fulfill the request of the mortgagees.

Casualty is flattish. Now, this is coastal Florida now. Flattish to down, and 5%; and that is versus 10% to 12% down back in July. There is starting to be a specter, and don't know exactly what that specter means. But in three different areas of the country, underwriters are saying that we're looking at the casualty. I would imagine that in the southeastern part of the United States, that it won't be very long before, if I'm going to write your property I'm going to write your casualty; and here is the price.

We are finding that excess flood is getting scarce as hen's teeth, and that is a problem. Workers comp in coastal Florida is very competitive.

Now let's talk about interior Florida. Okay? Think about it now. That is everything that is inside of 25 miles from the ocean. So it is hard to gauge, but in that area casualty is still going down 5% to 15%. Property on AAA is flat, but the deductibles are going up. All other classes of property are going up 10% to 50%. So Florida, there is going to be -- there is change in the wind.

National retail, that was down. Internal growth was down by 2.4%. It was a negative internal growth, from about flat. I think was up 2/10 of 1% in the previous quarter. So it is very, very difficult for me to generalize, because national retail to us is everything other than Florida or Western. Western is Colorado West. So I am going to pick some pieces and talk to you about it.

Coastal Texas and Gulf Coast, the property is going up 50% to 100%, and some places almost can't get it. Changes in conditions, etc. Casualty is flat; it was down 10%.

Interior Texas. Now I guess interior Texas is 25 to 30 miles in from the coast. If you look at Houston as an example, some companies do consider that as being coastal or Tier 1. Well, I am not sure about that. But we are seeing that anything on the east side of Houston, there are changes in the premiums. The properties are going up anyplace from 30% to 50%. Underwriters are now talking about it -- and this is casualty, now -- there will be a rate change on January 1. It is that specter of we don't know, but here is what we are thinking. Of course we're trying to get out in front of the renewals. The casualty, though, in interior Texas, once you get inland, it still going down 10% to 20%.

In the Midwest, renewals --and it varies, again -- down 5% to 10%. New business, if we're going to get an account away from someone else and if it is not something that has some kind of a stress point, then we've got to be 20% below expiring. That is occurring now and it has been occurring with the regional companies.

Workers comps is very competitive in some states; of course Ohio is a monopolistic state. Again the regional companies are most competitive. You must recognize that in the Midwest the prices never went up as much as they did elsewhere and they're not going down quite as much. But if you look at the pricing for similar risk in the Midwest versus, let's say, Texas or California, you will find that the prices are lower and have been lower all along in the Midwest, because of the favorable underwriting conditions and possibly not as litigious an area.

If we look at upstate New York, workers comp is up 5%, vanilla accounts are down 10 to 20; tove (ph) contractors are flat; and business is kind of usual, as usual. New Jersey, more of the same. It is interesting; recently I have come to have some information that was given to us by or the source of is AIR Worldwide. It is a slide showing the total value of insured coastal exposures. They don't define coastal, but we think it is probably 25 miles to the coast. So obviously Florida has the most values that are insured. And the values -- this is as of 2004 -- is $1.937 trillion of values insured.

Now in '04, you must recognize that since that time, there have been an awful lot of increases in the values of existing structures because of the fact that the cost to replace is going up rapidly, 25% to 30%. So if you look at this same chart, if we had it up to date in '05, I think you would find that the 1.937 is substantially up from that, maybe 15%.

The second state, the state with the second amount of total value of insured coastal exposure, believe it or not, is New York at 1.9 trillion. Of course if you think about it, Manhattan Island is coastal exposed because a hurricane could come right by the Statue of Liberty and it would be blowing down the canyons in New York. The third state is Texas; and it drops off substantially with about $740 million in insured values. Then number five, six state -- fifth state is New Jersey, believe it or not.

So our Company is going to start looking at those exposures. It is my understanding that certain brokers have told me that on Long Island that there are now some companies are looking at the dividing up by regions of Long Island, and separating the total amount of exposures that they want by some kind of a divisional approach. So, it is starting to sink in across the U.S. that there are some potential problems if, as, and when we had a hurricane that came up the East Coast and was like the one that hit in Long Island and New Jersey and up into Massachusetts back in the '30s.

Going on to Western retail, it was a -6.7% internal growth; but that is better than the -10.7 from the third quarter. California is very competitive. Workers comps is down by as much as 40%, shades of 1996. Fortunately, we don't have a lot of workers comp in California. Packages are down 10% to 30%; and large property is down 40% to 50%. Now prices in California went up most, and prices in California are going down most. Bear in mind that these price decreases started the last quarter of last year.

Now in Washington State, property rates again down 20% to 40%. But the specter of the underwriters, meaning the underwriters at our various companies, are saying that they are looking at flat for 1/1 of '06. Is that going to happen? Well, don't know. We do have flat and rising marine prices; and vanilla casualty continues to go down 10% to maybe 25%. The rest of the West, which is Arizona, Nevada, Colorado, New Mexico, is competitive as heck in large cities and less in middle and smaller towns. And we do have a lot of middle sized and smaller towns.

It looks to me like the fourth quarter this year could look a little better in terms of internal growth or lack of in the West, because of the fact that the prices started down last year, the last quarter, and therefore we have a lower base from which to start. So maybe that is a positive.

If you look across the entire United States relative to employee benefits -- now employee benefits is 90 million, 91 million, 92 million of our revenue, about 12% approximately, maybe 11% -- and the pricing on employee benefits is going up 8% to 15%. There is a difference, though. That is, in the last three years as I have reported this on a quarter-by-quarter basis, there have been a lot of changes in coverage. Higher copays, less of this, higher retentions, higher coinsurance, et cetera. That doesn't seem to be happening now, because all of that has been drained out. So we think that the employee benefits is going to get a little boost as a result of that, which is a positive.

Going on to professional programs, we are down 2.6%; that is a negative growth rate. It was 5.7% the last quarter. We would have been flat, but the lawyers' program we moved it to XL as of 9/1; and starting as of 7/1 the existing risk bearer wasn't too interested in writing any new business, so we obviously had a slope down. That will slope back up in the last quarter, and we have expanded opportunities in the lawyer program, which is very good.

The dental program continues to go along, growing 2% to 4% each quarter, which is a positive. CalSurance, the prices -- this is out in California -- on professional liability -- now the professional liability spreads across the entire United States. Prices on that are -- these are insurance agents and a lot of other title agents, real estate agents -- those are flat, those prices are flat.

In our Proctor Financial, which is force (ph) placed insurance for banks and mortgage companies across the U.S., those are flat also. Special programs, down negative growth rate of 1.7%; it was 13%. It is due to two things. One, in partial insurance plan, which is our B2B partial coast cargo insurance, and it is primarily small accounts -- the average premium on one of these accounts, believe it or not, is around $5,000, $4,000 annually. So therefore, if you look at the commission, it is obviously not a huge amount. But we have a huge number of small accounts. Except that we did have two large accounts; those loss ratios got out of control, so we cancelled them, didn't renew them. So we have a 9% downdraft in partial insurance plan because we don't have those renewals. We are slowly in-filling them in, but we're filling them in with accounts that are smaller, which have better loss ratios. Also, Acumen Re, which writes buffer layer workers comps, had a bit of a downdraft because of a pricing change.

Going on to brokerage services now, that is where the action is, and there is a lot of it, and there is more to come. The internal growth rate was up; it was a positive 26% as opposed in 19.7 last quarter. Just all sorts of things happening there. We have, obviously, maybe 40% of our business is binding authority as opposed to brokerage; both are going up. In the binding authority there is a lot of personal lines. Personal lines are going up. So there is all sorts of stuff happening there.

In TPA Services, they are like old faithful; they just keep on keeping on. We were up 10.7 internal growth rate, when it was 6% last quarter. We are now north of 23% on both our TPAs in terms of pretax and that inexorable march towards the 25. We are very proud of our TPAs, because nobody makes the margins that we do. It's because of our very, very good leadership and their assiduous attention to details every day, every week, every month, et cetera.

Katrina and Rita definitely affected pricing in the Southeast in property and have cast an aura on the casualty. There is some casualty change in Florida; meaning it is not going down in some places where it was. And there is this specter in other states, and so 1/1 is going to be interesting.

Now, are you ready? Here is the internal growth rate forecast. It is zero to 5%. So having said that, I'm going to turn it over to Jim to talk about M&A and some carrier reinsurance and further outlook. Jim?

Thank you, Hyatt, and good morning. With an update on acquisitions, in the third quarter of 2005, we announced four new transactions for some 11,500,000 in new revenue Brown & Brown. This includes the Weible & Cahill transaction that was effective on October 1 of 2005. This transaction was led by Scott Penny.

For the year-to-date activity, we have announced 11 transactions this year for some 104,400,000 in new revenue. The 2005 purchased revenue is the second largest in our Company history, second only to 2001. That was the last year that the pooling transaction capability was available.

We are pleased with the operating results of the recent acquisitions and can report that the operating profits of these new acquisitions are at expected levels and the margins are similar to existing shops, profit centers, within Brown & Brown.

The activity level, always a popular question to us, the activity for potential acquisitions is as significant in this quarter as previous quarters. The calm of the lake is belied by the paddling activity going on below the water. In fact, we are very busy in this regard. We continue to look at many quality insurance agency businesses. This quarter, as in prior quarters, we did remove ourself from certain transactions and deals that we looked at; and this is generally due to concerns about sustainability of earnings or cultural fit.

Our enthusiasm for acquisitions remains as high as ever and is a key component of our growth in earnings. We have experienced really no meaningful change in pricing, terms, or approach to acquisitions.

The Palmer & Cay transaction with Wachovia Bank perhaps is outside that transaction. We have noted that the number of agencies that were being purchased by banks appears to be somewhat less, as reported by some of the agency advisory services and M&A services in the country. We have noted there was in recent months, there are three transactions where agencies have bought themselves back from banks; one here in Florida, one in Kentucky, and one in Kansas. Not implying that that is a trend, but that is a rather significant level where some relationship perhaps did not meld, and therefore the agency spun themselves back out private.

With respect to conversation with our carriers as to the impact of Katrina and Rita, the reinsurance outlook, our leadership recently attended the CIAB conference. The consistent message from the carriers was that virtually all layers of their property cat coverage had been penetrated by Katrina and/or Rita. This penetration required reinstatement premiums to be recognized. Then obviously, once those layers were exceeded, all the losses excess of those layers are absorbed net, with direct impact to the surplus of the carriers.

A great deal of conversation was discussed regarding the cat modeling, the different services. Several carriers indicated to us that they were far too optimistic about the P&Ls that was generated by the cat modeling. There was generally an understatement of those losses from what really happened to their portfolio, versus what was predicted to be happening by the modeling firms. That understatement was in some cases as much as 2 or 300%.

For carriers to consistently write coastal property, their message was that they would need to purchase additional layers of reinsurance to protect their balance sheet; and certainly those upper layers of coverage which have historically been at bargain prices would no longer be at bargain prices, especially when they have recently been hit and there is payback involved for the reinsurers to return profits to that layer.

We have begun to experience in the last few weeks significant increases in the excess and surplus lines, coastal property, especially the lesser construction classes. We just renewed a nursing home group that has a lot of frame construction not on the water but certainly near, approximate to the water, in Florida and Southeast. In this case their property coverage basically doubled from this year compared to last year. In fact there are certain deductible on some increased, and with some other coverages that might have decreased.

The property and casualty industry has announced new capital that has been attracted to the industry in recent months. Certainly anticipation of these rate increases and a lack of worldwide property cat capacity. This capacity comes in at a time that it can deal with higher rates, be in the market for two or three years or four years during the need for that capacity. This new capacity certainly will not be inexpensive.

I would also like to discuss with you at this time -- we can't really close this quarter without mention to -- a little to the personal side -- our employees, the four offices in Louisiana. We have offices in Lafayette and Baton Rouge. They're retail offices. These offices report to Tommy Huval. Tommy, his life will never be exactly the same, and has certainly been so hectic the last several months. He is telling me that his brother and family, that they're putting people up in guesthouse and garages and bedrooms, and it looks like a hotel. Those offices, really, Tommy's leadership and others, they are back up operating and frankly did not miss a beat.

Madelyn Cohen heads up the Hull office in Metairie, a suburb of New Orleans. She has done an outstanding job of regathering her team, relocating. She is in Tampa now, using support from the Tampa office, of Hull & Company to continue forward, to write business, to serve her customers in Louisiana.

Geoffrey and Nancy Hughes heads up the Energy and Marine office. Energy and Marine is a wholesale operation, in fact, for the energy and marine business, primarily GL and work comp, to their customer base. They have relocated to Baton Rouge and have shuttle transportation for employees to Baton Rouge from Louisiana.

We are obviously very proud of our leadership and our employees that responded to these losses of their homes and dislocation. They have contributed significant money. We have matched that money to the tune of over $400,000 in this current quarter to be used to help assist individuals with dislocation and certainly rebuilding their homes. At this time I turn it back over to Hyatt for some closing comments, and then we will open the phone for Q&A.

Thanks, Jim; good report. Matt, we are ready to answer any questions if you would open the phone, please.

(OPERATOR INSTRUCTIONS) David Lewis with SunTrust Robinson Humphrey.

Could you give a little more detail on the contingent commissions in the third quarter? I think in the second-quarter call you had anticipated 300,000; so that was a pretty big positive surprise, which is always a good sign. Maybe a little more detail. I know you indicated the California office produced pretty big numbers for you, and is that probably a more -- or a new seasonal type of trend? Or was that kind of a one-off?

Secondly, if you can talk a little bit about any thoughts you have for 2006 contingents, particularly in light of the hurricanes.

David, the sources of the increase were really twofold. The first part where we did get contingents on a couple new offices that have come online over the last couple of years, some of which came from the Hull office. Interestingly enough, we actually got some contingencies out of the Louisiana Hull office. Next year I don't think you're going to see that.

Then additionally, we had one carrier out in the West, it was mainly in the Colorado offices, that ended up giving us almost $600,000 of profit-sharing contingents in that state. So that was kind of unexpected there. So those are really the two sources of it, the acquisition offices and the West Coast.

David, to sort of piggyback on that, here is the real issue. You know that these are not really contingent commissions; they are profit-sharing commissions. We have no way of knowing what the losses are, and particularly the IBNR, so we always have to be a little conservative.

Because in the past, if a marketing person comes in and tells us, from a company, oh gosh, you got a great loss ratio and you're going to get a nice profit-sharing commission; and then all of a sudden at the end of year the IBNR jumps up, for whatever reason, from the home office, and we get either no profit-sharing or a substantially reduced profit-sharing, then we are all upset.

So we really have no basis, no way, of other than just a feel for knowing what those profit-sharings might be. Relative to next year, the hurricanes that have come in so far were basically out in the Louisiana area. Our contingents had been down there already from a couple years ago, maybe three years ago when there was some hurricane activity.

So I think that in Florida, unless this one that is out in the Gulf now has some kind of a problem that comes in, I think that we will probably be okay in terms of our Florida profit-sharing commissions. And elsewhere of course it doesn't basically affect us. So what are we going to have next year? Well, I don't know. Your guess is about as good as mine.

Maybe a flattish starting point?

Yes, maybe that is probably not a bad idea.

Hyatt, one other quick questions. Citizens, if a lot of the commercial business in Florida goes that way, what kind of commission do you get out of that relative to what you were getting? I assume that would be a negative.

I believe it is 10%.

Maybe an average 15?

Well, in the nonadmitted market it may be 7.5.

David, they have also announced some pretty dramatic rate increases in Citizens. Obviously the Commissioner, the CFO, were very concerned about continuing to load the Citizens of Florida with risk bearing and taking a game plan to, with rate increases, hopefully use that as a basis that would attract additional players in the state of Florida.

I think also, when you use Citizens, you have to then go and fill in holes, like obviously the flood coverages and also business interruption. So I don't necessarily view it as a negative at all from an income standpoint. It is a negative, though, from the standpoint of it is a pain in the rear end to deal with them, because of all the things you have to do, the bureaucratic hoops. So that is I think the negative.

Thanks very much.

Dan Farrell with Fox-Pitt, Kelton.

My first question, can you just give me a clarification on your growth target of zero to 5%? Is that for '06, or for the remainder of '05?

No, that is for the remainder of '05.

Okay. Any sense, any thoughts on what '06 might be looking like? Or is it too early for you to say?

Too early, but now that zero to 5 is internal growth rate.

Right, the internal growth rate.

So we don't know what it is going to be for next year. We are -- first cut of budget is due right about now as a matter of fact.

Okay. Can you just talk a little bit about the commission mix within Florida, both on a geographic standpoint, coastal, Tri-County, and inland? Then also just by the lines of business, the nonadmitted property, workers comp, casualty? Just rough numbers if you could.

Well, that is almost impossible. Basically the situation is that our average commission percentage across the whole United States is between 10% and 11%. That is about what it is in the State of Florida. So as the mix changes, you know when you have more competitive workers comp, then commission rates go up. So back three years ago, commission rates were dropping to the 5%, 6%, 7%; and now they're back up around the 8% to 10% range on workers comp.

In the case, I think you heard David Lewis, in the case of the State company, Citizens, that is 10%; I think that is what it is. I don't deal with this on a regular basis, but it is something somewhat reasonable. So my sense is this, is that the commission rates as a percentage, as the premiums rise, probably won't vary that much because of the mix of business. We have a very broad mix of business in Florida.

Dan, this is Jim. In that regard, I think Florida has been reinterpreted or redefined as coastal, except maybe a couple patches of uninhabited forestland up in north Florida. So '05 really was a redefinition by many carriers as to coastal, and a reallotment capacity has already taken place. Issues with Katrina and Rita is going to accentuate that, because the carriers are going to be paying a lot more money for the coastal protection.

I think another issue on that, Dan, is that as the message kind of gets to the toe from the brain, then we -- I have a feeling that if -- that underwriters are going to say, look, we are willing to underwrite and give you 10 million on this particular property of property insurance. If so, if you want our 10 million, then the casualty is something that we also write; and here is the price on the casualty. But we're going to write a package, and we're not going to write it monoline. So that is what we don't know exactly how to measure at the moment.

Okay, great. Thank you.

Doug Mewhirter with Ferris, Baker Watts.

I just have two questions, more conceptual questions. First of all, because there is an impending hard market at least for certain areas, companies, smaller brokers, independent brokers who write business in those companies would anticipate big rate increases and therefore big increases in prospective profits. Would you see them playing a harder bargain, in terms of being -- wanting to sell out? Or do you think their desire to sell out at the top of the cycle would overcome any kind of increase in demand for a takeout price?

Well, first of all, you are anticipating that we're paying a fixed price, and we generally don't. The way we do it is we pay six times operating profit over the next 12, 24, 36 months. So in the case of a 36-month deal, you get an average across the three years.

So if in fact, and this is something we have to do on a deal-by-deal basis, if we thought that there was something about their book of business that would make it blip way up and then blip down, obviously we would have to factor that into our equation. Over a long period of time, we were buying things in the '00, '01, '02, '03 years and prices were going up then. It seems to have worked out pretty well for us, in terms of getting the value that we thought we were going to get.

Doug, you also have -- with smaller agencies, you have unusual concentration with certain companies. If those companies are winners and provide product and capacity to that agency, they are in really good shape. If they aren't, then they are far more harmed.

Okay, thanks. My second question would be in terms of obviously there is going to be -- rates in wind and capacity exposed areas are going to go up dramatically, especially for property lines. Do you see that having any kind of spillover effects in terms of next year in, say, general liability in Peoria or workers comp in Denver (multiple speakers) areas?

That is the $64 billion question, Doug. We don't know about that. I kind of think that what is going to happen is on the very best business -- casualty now I'm talking about -- on the very best casualty business, I think it will be business as usual. Middle business -- that is that business that is just okay -- and the tougher stuff, it could have an impact.

The underwriters are -- and I am sure what is happening right now is in all of the offices of the risk bearers they're trying to figure out exactly how do we handle that. Now one of the things that you also must recognize, in an area like the Midwest, where regional companies have done so well, for so long, you are not going to have a big up or a big down there. Because prices are lower.

And the middle market, the vanilla middle market in the Midwest, is controlled by the regional companies that are privately owned, or mutuals, or they are publicly owned. But there again 2, 3, 4, 5, 6, 8, 10 states and that is it.

So in terms of is it going to increase casualty prices like general liability out West? Well, if you think about out West for a moment and you think about Denver, and you think about Phoenix and Las Vegas, a huge amount of the GL premium there is contractors. If those contractors are in any way involved in the residential market, habitation or residential, those prices are not going down. Those prices are going up. If it is a general contractor not involved in residential, like condominiums etc., then those prices have been going down. Will the contractor segment be affected by this reinsurance catastrophe and the hurricane catastrophe? Well, I don't know. That is just sort of out there.

Okay, thanks for your answer. That is all my questions.

Matthew Roswell with Legg Mason.

Sorry to keep it so theoretical. Question, do you think we're moving, with Gulf Coast and Florida property getting to a similar situation like earthquake in California? Meaning it is generally going to be nonadmitted or in the E&S line. As a follow-up, does that boost growth at the brokerage unit and perhaps put a damper on the retail side?

Well, I think a couple, three things. We have thought and we are saying now, we have thought for really the last five or six or seven years that the percentage of nonadmitted premium in the United States, relative to the total P&C premium pot, will grow. In fact it has grown. We have seen it. I saw some statistics recently, and off the top of my head I think 10 years ago it was 4% and now it is 10% or 11%. We think it is going to continue to grow.

Relative to all of the coastal areas that we talked about, which is Gulf Coast and Florida, I think that there will be some governmental intervention in some of this area. But I think also what is going to happen is that new construction is going to have some pretty substantial caveats about how it is going to be built and where it is going to be built.

For instance, if you look at the AAA buildings in let's say just Florida, we have a program for AAA high-rise condominiums in coastal Florida; it's been in business since 1968 or '69, and to date we have never had any structural damage to a AAA building. So if the underwriting is done correctly, then the leveling of the losses over a number of years has worked out very well. We have made money for our risk bearers.

If you are talking about along the Gulf Coast, let's say, where the elevations are 3 and 4 and 5 feet right by the water, there is going to be I think some very substantial discussion about are you going to be able to rebuild, unless you're up on stilts; or are you going to be able to rebuild unless you meet certain wind standards, etc. So I think you're going to see increased costs in construction. I think you're going to see better construction.

And on the older buildings, the ones that are still standing, of which a lot of them have been cleaned out, on the older buildings that are frame and joist and masonry, they are going to be paying a lot of money.

So does that then have an impact on what the admitted market would write? The answer is, particularly in Florida, and I am not sure about maybe the rest of the Gulf Coast, we're growing so rapidly down here that the admitted market will continue to grow, the premiums; but it will not grow quite as rapidly as it would have were we back in the '80s, when we didn't have any hurricanes for 10 or 12 years. I hope that answers your question.

It does. If that holds, does it put a bit of a damper on Florida retail growth and help the brokerage side and the program side?

No, I don't think so. The bottom line is that there are so many products that we sell -- and for instance, workers compensation, that is 30% of our premium -- so the hurricanes really don't have any impact on that. You can look at the other levels, the general liability, the fleet liability, etc. etc. I don't look at it as being a negative.

According to the most recent statistics I have seen, we have 17 million people in Florida today and in 20 years we're going to have excess of 28 million. That is huge growth and it is -- right now the amount of building construction -- of course it is true across the nation -- but the amount of building construction in Florida that is going on exceeds anything I have ever seen, and I have only lived here since 1937.

Okay, thank you, Hyatt.

Nik Fisken with Stephens Inc.

Thanks for the insight on rates; that was helpful. The one thing I didn't get down was your nonadmitted coastal number for Florida.

You mean the price increase?

Yes.

Well, it varies, but it's any place --

For coastal Florida.

It's anyplace from 70% to 80% up, 50% to 80% up. It is just crazy.

Call back next week.

Yes, and we'll tell you about next week. It is just wild.

Then, Jim, on the M&A pipeline, if you were to -- if you could find a couple factors on why deals are not happening, what would those be?

I think certainly earnings expectations has been a factor there. Where a couple shops we have looked at are coming off unusually high tides, and they believe that the next three to five years the tide is going to be as high, and we didn't -- we really couldn't resolve some of that. That is a piece of it; that is not an overwhelming piece.

A couple two where in fact our philosophy about growth and operating was not there with it. So I think that component would be sticking out there as something that would be the most prevalent.

Okay, Hyatt, if I look at the West Coast, in Q1 you guys are going to annualize the big price decreases. So you get a lift there. If you look at this quarter as an example, your internal growth for BRO would have been 2.5 if West Coast was flat. If I think about that, and then all the comments about rate increases, what is your gut feel on 1/1 renewals?

Well, let's go back and look at the West starting with quarter 1 of '04. Quarter one of '04, West grew internally 5.1%. Quarter two of '04 it grew 9.7%. Quarter 3 of '04 grew 5.6% internally. Quarter four shrank 3.8%. Then first quarter, -4.4; this is of '05. Second quarter -10.7. Then the third quarter is -6.7. So it is kind of a hump.

So you know, you've got California. The nice thing is that we -- our largest exposure to California is programs. We do have substantial, I guess $40 million, of retail. But -- and some of that is not in the big cities, Santa Barbara, Novato, etc. So I don't -- I would hate to try to guess on what the first quarter is going to do. Because we are not going to close on our budgets -- and this is true of every year; it's not just this year. We are not going to close on our budgets until the last 10 days of December. That means that we will know by that time exactly -- well, we will know pretty much what is going to happen January 1.

Okay. So if we look at companywide for BRO, your zero to 5% is for the balance of this year?

Correct.

In light of you being at the Greenbriar and talking to everybody there, no commentary on where you think internal growth could be? Or at least talk about 1/1 renewals?

No, no, no.

Okay, well, thanks so much.

(OPERATOR INSTRUCTIONS) Nick Pirsos with Sandler O'Neill.

Just two questions on the Florida market. First, just in terms of percentage mix, if you could ballpark Florida with regard to workers comp, property, and then just all other liabilities? Is it a third, a third, a third, or what is that rough mix?

About 30%, Nick, is workers comp; maybe at 28. I don't know what the breakout is. You are wanting to say workers comp is a piece, and then property, and then all of the casualty? Is that what you want to break out?

Exactly.

Well, Jim, what do you think?

If you look at comp is just under 30% of the retail revenue. But in that you've got personal lines, which has its own pricing demeanor, given the markets and changes. You have also got the benefits piece. You've got bonds in there. So if you take a number of what is -- plus the influence of property pricing on performance in Florida, property would probably be on the magnitude of work comp. In the case of -- probably in that mid-20s to 30% of the revenue base in Florida for that component only for Florida.

I think one other thing, Nick, is that assuming that we have some capacity, because of our relationships that other smaller agencies would not have, we are going to be getting some business because we can place the property that we would not have gotten otherwise. So that has been the imponderable at the moment.

We do have some programs down here like here like FIU, which is -- we are -- we have been shut down since around the first of July on any new condominium with FIU in Palm Beach, Broward, and Dade Counties. But we are open and have plenty of capacity elsewhere. So we are -- we have got sort of -- and we seem to be at the moment the best admitted market for that kind of business as long as it is AAA and high-rise.

So then we have a couple of other silver bullets in terms of property capacity that is available. One is through Hull, and another is through our subsidiary Braishfield over in Orlando. So there is about 150 moving parts, and I don't see any particular negative ones. I see some positive ones. But the game hasn't been played yet.

Okay, fair. Then just with regard to Florida in terms of what I will just call the regulatory mood, for lack of a better description. You gave some indication as to the rates, NCCI, as far as roughly 7% down versus the Department requesting 20%-plus down. Some of the carriers looking to contract. Allstate's recent requests were kind of denied by a wide margin. Is there a sense of some sort of regulatory backlash? Is this just kind of the normal ebb and flow of the process? Or just your color on that.

I think it is normal ebb and low. There is always some yanking and jerking going on.

It's political season, too.

Yes. There's people running for governor and all that stuff. But it will all work out.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Adam Klauber with Cochran, Caronia.

Acquisitions have over the last couple of years made up a big component of your growth, say over 10% or more. In the last two quarters, acquisitions have been less than average. Hull obviously makes up a big component of this year's acquisitions. Given what seems like a bit of a slowdown -- not of Brown, but you have seen across the sector, many acquisitions in the last two quarters -- also the fact that you have a much larger revenue base now than you did three years ago, is it reasonable to assume that going forward we can look for acquisitions comprising over 10% of revenue?

Well, we don't have a budget or a goal on acquisitions, Adam, as you know. The bottom line is that we're looking for good people who fit our culture and good business that fits our game plan. As you know, some kinds of businesses do not -- we're not able to make the margins in some lines of business that we can in others. So as we go along and we're looking at various agencies and/or programs and/or E&S brokers, we are very careful. We are not going to let the bar down to make some sort of a goal on acquisitions. I don't see today any greater opportunity or lesser opportunity to do acquisitions than it was one year, two years, three years, four years ago.

In terms of larger base, feeding the larger base, that has always been a question. And so when we had $30 million of revenue, which was 1990, the question was asked, well, you know, you have 30 million and you were at 20 million three years ago; how are you going to feed the base? And we fed the base. And then when we were 100 million in 1994, they said, well, a bigger base and how are you going to feed that? Well, we have always fed the base. We don't view size as a negative. We view size as a positive.

We do find that there are a lot of insurance agents who own stock in Brown & Brown and we don't even know them, and they will call us and talk about, well, maybe we would like to be kind of part of your team. So the bottom line is, and I know you find this hard to believe, Adam, but it's kind of business as usual. We just keep on keeping on.

I guess the only thing I'd add to that is that it is always a lumpy quarter-by-quarter. It is something that plagues your model and others in terms of trying to forecast where you think we're going to be next year. It is one of those that we have had some years as low as less than 40 million. We've had a high of about 140, 141 million. So that doesn't exactly go into your model too well. But yet you would not, and we would not, want to set a budget and go out and do something that simply doesn't fit and, therefore, end of the day doesn't create value. So we will keep the game plan.

All right. Jim or Hyatt, follow-up. Given what you have seen out there, are there -- what is the potential for more sizable Hull-like transactions over the next 12 months? Are there other properties like Hull out there that you see as attractive, or is there going to be a fair amount of these smaller several million dollar properties?

Well, you know, Adam, we have never been elephant hunters, and there are some -- to most people, elephants are very attractive. We're not in the acquisition business. We're in the operating business. And I can tell you that it is much more difficult to put together 4, 5, 10, $12 million acquisitions on the front side than it is one at 100 million; because 100 million is 100 million in a hurry.

But the problems with 100 million is you're not talking to the people in the company that are making the money. You are talking to people sitting in an office someplace, and they want to keep it contained. When we are buying these other agencies, the smaller, we're talking to people who are -- on day after the first day, they are going to be out there on our team, slogging through the field and by golly getting it done. And the larger ones you have to go out and sell people on that idea; there is a lot of problems, potential problems.

So that doesn't mean that we would not do one. As you know, the Hull merger was 63 or 4 million, and that is pretty good sized. But there are some larger ones out there. We're not turning our back on larger ones. But we have to be careful, A; and B, we have to be sold on our ability to get our margin right out of the box. If we can't do that then we don't do it.

Thank you. One follow-up. Switching to the topper (ph) of broker to broker competition, it seems like as a soft market or softer market set in, in 2004, leading into the this year, the competition for accounts intensified. One of the techniques to poach or get new accounts was to come in with lower pricing.

Yes.

If you exclude the distressed areas in Florida, maybe some of Texas, where capacity will be an issue; but do you think that atmosphere may change going to 2006?

It's difficult to answer. Here is the bottom line. What we try and do is we try and find a reason other than price to wedge the account away from the existing agent. So we found that where we can find a reason other than price, even though we have to be competitive, then that, those accounts, we have a higher hit ratio on. If it is just price, then our hit ratio is not that good.

But even once you find a wedge -- here is something that was not covered that should have been covered; here is a coverage that we can offer to you that you can't get from your current agent; et cetera -- even there we have to be competitive. But it is not totally a price thing, and in cases we do sell accounts for more money. But it is still a competitive marketplace.

Thank you.

Tom Cholnoky with Goldman Sachs.

I was just wondering whether, with all the changes that have been going on in some of the national brokerage firms, in terms of their focus or lack of focus, I guess, on the middle markets, how much of a change have you seen in the marketplace in terms of market opportunities at kind of the lower end, where you too might come across certain accounts? And whether those opportunities are increasing, are they decreasing, or really no change?

Well, generally speaking, not much change, Tom. The bottom line is that the upside -- the upper end of our commissions generally are 200 to $300,000. That is the amount; so the premium would be 2.5 to $4 million. We do run into some of the national brokers from time to time. Where we find an account that a national broker has and it is a 25 or $30,000 commission, we are all over that one, because our chances of getting it are somewhere around 80% to 90%.

But is this going to be a huge change? Is there something out there where we get an advantage over someone who might be slightly in disarray? Not really. There will be some fallout, but it is not monumental, Tom.

Okay, great. Thank you.

David Lewis from SunTrust Robinson Humphrey.

A couple quick questions. First, Cory, on the tax rate, you have made some adjustments. Should we use a 38.5% rate for both the fourth quarter and '06?

Yes. Right now, yes.

Hyatt, do you care to venture out your internal growth expectations for Florida only for 2006? Maybe a wide range of 4% to 8%?

No, I wouldn't. And the bottom line is this, we are going to do fine, but I don't know what that means.

A lot of moving parts there. Thank you very much.

Gentlemen, there are no further questions at this time.

Okay, thank you very much, Matt, and thank you all. Bye.

That does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day. Now at this time you may disconnect.