Brown & Brown Inc (BRO) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to the Brown & Brown Inc. fourth-quarter earnings conference call. Today's call is being recorded.

Before proceeding, we would like to inform you that certain portions 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. These statements are intended to fall within the Safe Harbor provisions of the Securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated, desired or referenced in any forward-looking statements made as a result of a number of factors, including both 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 discussions of these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated in this call. Such differences may be material. With that said, Mr. Brow, I will now turn the conference over to you.

Thanks, Ashley, and good morning, everyone. We have Jim Henderson and Cory Walker and myself, Hyatt Brown, and we're ready to roll. So Cory, why don't you start off with your portion of the report?

Well, we had a very good fourth quarter to finish off an excellent year. For the quarter, our net income was up 18% to $35.7 million. Our total revenues for the quarter were up 20.7% to $196.9 million, which was up from the 163 million in the fourth quarter of '04. Commissions and fees for the quarter increased 22.5%, which created another $35.7 million of net new commissions and fees.

Drilling down into our fourth-quarter commissions and fee number, our commissions and fees, as we will discuss here, as we've talked before, excludes profit-sharing contingent commissions as well as the revenues from sold or divested business. Now both of those components were relatively insignificant for the fourth quarter of '05 and '04. For instance, profit-sharing contingent commissions for this quarter, fourth quarter of '05, was only $567,000. So core commissions and fees for the fourth quarter '05 increased $36 million in total and of that total, $27.7 million was generated from businesses that we acquired since the third quarter of last year. Keep in mind that the '05 and '04 year were two of the three best years in terms of annualized revenues acquired by Brown & Brown that we have ever had. 2001 was the best year we had and that was the year the pooling went away when we had over $140 million of annualized revenues acquired.

But back to the core commissions and fees, the difference between the 36 million that we did have and the 27.7 that was related to acquired revenue, the difference was $8.3 million. And that reflects our internally generated organic growth, which is a 5.2% internal growth rate and this is an increase over last quarter's internal growth rate of just 1.3%. The specific internal growth rates by business segment were included in the press release and then Hyatt will talk about each one of the business segments in a second.

Moving to our investment income, we doubled our investment income in the fourth quarter to $2.3 million and that's primarily due to just higher yields we're getting in '05 now versus '04. Our other income was only $508,000 for the quarter compared to $3.6 million in the fourth quarter of '03. Again, most of these gains are the result of primarily from just normal sales of books of businesses or offices that are no longer a strategic fit. So the fourth quarter this year, we just had less of that.

Looking at our expenses in the fourth quarter, while our total revenues grew by that 20.7%, our total expenses grew by only 19.9%. And that resulted in a pretax margin of 29.2% or a 50 basis point improvement over the 28.7% margin we had last year in the fourth quarter.

Now the largest single expense line item that we have is employee commissions and benefits. And as a percentage of total revenues, this line item equaled 49.0% of total revenues, an improvement over the 50.4% from last year's fourth quarter. This improvement is consistent with a steady improvement in efficiencies that we have had each quarter this year relative to this line item.

The second-largest line item we have is other operating expenses, which was $13.6 million of revenue versus the 13.2 last year's fourth quarter. And so therefore we had a 40 basis point increase in expenses. One of the larger increases in this line item was another $1 million increase in legal and professional fees and a large majority of that surrounded the cost of the state regulatory investigations of the profit-sharing contingent commission. In addition to that, we also had some increases in our [T&A] expenses as we continue to try to write more business around the country.

Amortization expense accounted for another 80 basis points of our increased cost. And obviously two reasons for that is -- the first one is obvious is that we have more acquisitions. The second one is, as we've discussed before, last year, we changed our amortization period from 15 years to 20 years and that amounted to almost another $530,000 a month of amortization expense. So that resulted in almost a $0.01 additional charge to the quarter and for the whole year, it amounts to almost $0.03 reduction in our earnings per share with that additional amortization.

Now, interest expense was relatively consistent for the quarter; it run at about $3.5 million per quarter.

So those are the major cost differentials. Our income tax rate for the quarter was 37.8%. For the whole year, it's 38.3%, which we think is good on a go-forward basis.

If you look at the full year of 2005, we had total revenues of $785.8 million, which is up 21.5%. Our pretax margin for the year was 31.1%, which is 90 basis points down from the 32% margin we had last year. But similar to our quarterly results, our annual results are comparable, where the 90 basis point differential really shows up primarily in the increased amortization expense as well as the increase in interest expense. Other than those two, we had a general improvement in our overall cost, an improvement in our operating margins.

So our net income for the year ended up being $150.6 million or up 16.8% over the 128.8 million we earned in '04. Our net income per share for '05 was $1.08 versus the $0.93 of last year, which is a 16.1% increase in our earnings per share for the year.

From our balance sheet perspective, we continue to have very strong financial strength, with over $100 million of unrestricted cash. Our total assets now are at $1.6 billion and our total shareholders' equity increased 22.4% to $764.3 million. So we've got a very strong balance sheet and look forward to a good 2006.

So with that overview, I will turn it over to Hyatt.

Thanks, Cory. Looking at the various geographic areas, Florida retail was up 2.9% and that is down from internal growth of 8.2% last quarter. All in all, it was a very, very strange quarter in Florida. I would characterize it as being a market in transition. There is just a lot of imponderability among the underwriters who are trying to -- and these are admitted company underwriters -- who are trying to figure out what the home office wants to do relative to property in Florida and how it will affect the rest of their underwriting attitude.

We did also slightly miss our goals on new business. There was some loss of commissions because of movement from admitted markets to nonadmitted markets. So, there was additional stress as a result of layered accounts, additional stress because of the hurricanes that we have to respond to, of course, to claims.

Now looking at the segments of Florida, really, it is kind of narrowing down to where there are two segments. There's coastal Florida and then there's interior Florida. And some people look at interior Florida as being a 10-mile swath that runs from Orlando through Ocala and North to the Florida border and everything else is coastal. That is not exactly true; that's sort of a little bit of a play on words but it's kind of true.

Anyway, looking at coastal, admitted carriers are still trying to figure out what they're going to do on renewals. We have had all kinds of changes at the last moment because of home office directives and it's creating a few problems for us but we will overcome those things. Prices on nonadmitted property is up 40 to 100%, higher deductibles, same as we talked about last quarter. Casualty is still very competitive; fleet is down 5, 10, 15, 20% sometimes; workers' comp down 7 to 13%. The biggest writer of property including [Wynn], unfortunately, is now Citizens. And that is the state of Florida. And of course if the amount of property including Wynn is more than $10 million, then you have to have 30 days in advance for an application. Applications are being nitpicked, they being sent back and there's a lot of yanking and jerking going on. But all that does present opportunities and that means we will figure out what to do and it will work out. The admitted carriers are -- some admitted carriers -- are starting to write only casualty talking about higher reinsurance costs, etc.

In interior Florida, slightly different. Property is now being viewed by the admitted carriers as not too much better than coastal but if the construction is good then they are staying on and prices on the property piece are going up 5 to 10% and the casualty is competitive, flattish and maybe in some cases down 10%.

There is a lot of discussion about what's going to happen this year, meaning '06. In the past, I think I mentioned this on a previous call, it takes about six months for the home offices to figure out what to do or what they are going to do and then transmit that down into the underwriting offices in Florida. So that means that probably sometime in the neighborhood of 1st of April, 1st of May, we're probably going to see some additional changes.

Relative to national retail, a negative 0.7 of 1% and that is a little different from a positive 0.2 of 1%. And so what you can characterize is it is flattish. Now it varies by region in national. And of course national is everything other than Florida and the West.

Looking at coastal, Texas, Gulf Coast, etc., almost all is E&S, that's 40 to 100% rate increases. Very great difficulty with placement. The casualty, good loss ratio, down 5 to 15; bad loss ratio, they are paying up.

It's interesting, north of I-10 in Houston, if you look at a map, you will see that I-10 sort of in that area runs almost parallel to the coastline. So North of I-10 in Houston, and many markets are aggressive, wanting to write business including the property on packages, etc., and those are down 5 to 10%. South of that, they are really not wanting to write any business and getting off and of course it's going into the E&S market.

Upstate New York and New England, of course that is an area that has been traditionally a very good place for risk bearers and it still is and so the pricing there is down 10% to up 10%, up and down, it's sort of all over the place, now except on contractors. And if it's a tough contractor, then they're going to be paying for it. If it has to do with doing anything with habitational, then it's a different ballgame. And that is really moving now more towards the E&S market.

Then the Midwest, flat to downward pressure in the middle market, vanilla. Contractors are flat. Property is down 5 to 10%. No one ever heard of a hurricane in terms of underwriting there. And of course in New England and upstate New York and the Midwest, that's where the regional companies have huge penetration and of course we write a yard of business with the regional companies.

Out West in western retail, that was a nice upswing, positive 3.2%, up from 6.7. It varies, however. California is still kind of crazy. Prices are not quite as stressed, maybe, depending on who you talk to and the day you talk to them. Workers' comp in some places may be only down 10 to 20% but most down 20 to 40.

Property values are rising. In other words, the amount of insured values on property are going up and the real reason is of course because of increased construction costs. And they are rising by as much as 30%. So property rates are going down 5 to 10, values are going up 30. We're getting a little help there.

Washington State, marine is showing a 5 to 10% rate increase and they are expecting higher rates come April, May. The rest of the casualty and property area is about like it is really in upstate New York; it's 5 to 10% up or down. And the vanilla business is down mostly.

In Arizona, a little different situation. The renewals are flat to up 5%. So kind of different. I would say one thing, you remember that I talked about the fact that in the West and particularly in California, in October of last year was when the big dip started, all of a sudden the prices started down so that this October on renewals, even though there might have been a big dip, it's on a lower base and so it hasn't been quite as -- it has not impacted us as much. So that's good news.

Employee benefits, across the country, obviously, employee benefits is a local business, local and regional business. And across the country, it's up 5 to 15%. We had approximately $88 million last year of revenues of the 785 and employee benefits and that's growing and we are looking to continue to grow that as rapidly as possible.

In professional programs, they just sort of keep on keeping on. We were down a minus 2.3%; we're up 2.6%. CalSurance was flat; that's the largest single piece. Dental was up 2%. Lawyers was down 14%, title [pack] was up 7%. Lawyers, we expect -- and that's because we changed carriers, the reason it's down; there's some underwriting differences -- we expect that probably by July to start to look pretty good.

And special programs, up 10.7% and last quarter was down 1.7. Ephrata, Washington was up 18%; that's public entity business. Partial insurance in St. Louis was down 7% but that is not because of prices, it's because we had to nonrenew some business that had an unfavorable loss ratio. Proctor was up 12% and Public Risk Underwriters was up 5.

Looking under brokerage services, obviously, this is where the action is, up 34.5% and it was up 26%. And everybody knows what's happening in the E&S business and we're very pleased to be a big player in that area and getting bigger. International E&S has been knocking it out of the ballpark and their focused mainly on contractors, etc, but not altogether. Peachtree has been writing lots and lots of property business. Energy and marine is doing very well, even though they had to move their office from New Orleans to Baton Rouge. And Hull will come into our internal growth column on 3/1 because that was the date of the merger in '05. So looking forward to good things there.

And then TPA up 8.9%, was 10.7% up last quarter. Just keeping on keeping on and their margins were up from 22 to 23% so we're very pleased with our TPA's. And now for the most important thing, the internal growth projection is zero to 5%.

So, Jim, I'll turn it over to you.

Thank you, Hyatt. It's always fun to review success and for 2005 the merger and acquisition activity was very successful. We had a great year. We completed some nineteen transactions in 2005, representing 121 million in forward annual revenues. It was a good year. Possibly our best class in the history of the Company, if you look at the earnings from that class of acquisitions and also the talent that has joined us as part of the group of companies.

'05 versus '04, for '04, we had a few more transactions; we had 22 transactions, slightly less revenues in '04. It's 98 million in forward annual revenues for '04. The average transaction size for '05 was 6.4 million. This includes Hull. If you take Hull out of that mix, it was some 3.5 million in average transactions for the year. For '04, the average transaction size was 4.5 million.

On a divisional basis, there's not a significant change in the mix of our business by division. On a forward basis, the revenues will represent some 68% in our retail operations. This is over 100 retail offices and the balance is split generally about equal between two components --brokerage, our wholesale operation, represents about 16% of our revenue base and about 16% representing programs, including the TPA Services in that unit.

In 2005, we also announced the Public Entity business, as it approaches mid-40s on the way to about 50 million in a revenue base, has been elevated to its own region.

2006, we started a very good year in 2006. The announcement of Axiom reinsurance intermediaries. Jay Johnson that we have known for a number of years, Jay and his outstanding team joined us effective 1/1 and we have had a good month, a great start and we're looking for good things from the operation. This acquisition does signal a significant commitment to expand our opportunities in the reinsurance intermediary business. This business on a U.S. basis is about 3.4, 3.5 billion. It's about a $4.8 billion business worldwide.

Talking about the M&A process, the frequently asked questions, Cory, Hyatt and myself, others is what about the inventory, what about the flow and what about the pipeline. And we'd say it's very good. It's encouraging, it's as strong as ever. I would say probably the earnings associated with those entities are probably some of the best that we have seen out there. If you compare this to three years ago, five years ago, the multiples of revenues that we are paying are slightly higher but it's the same multiple of earnings, as in fact many of the targets we talk to have improved the operations. And certainly to bring in an entity that matches our current operations, we need to target an enterprise that's operating plus 30%, 35% plus to join the family.

The M&A process is a little different at Brown & Brown. It's different in that it is more of a grass-roots ground level, bottom-up managed enterprise. The process starts with a local office leader finding an opportunity. There they would then in fact meet with the regional exec that they report to. They would jointly determine if it's something they want to sponsor and bet their posterior on. And then at that point we would engage the M&A team to follow through with the transaction.

This process we have become better and better at. And it always gets back to people evaluation. It is paramount. This is a one-on-one; it's local; it's personal; it's dinner in homes and family. It's common culture, beliefs and values, which determine whether or not it really fits with our Company. And we expect a lot from our leaders. In addition to continuously improving the best margins in their office and the best margins in the industry, our leaders also must consistently seek out the best merger opportunities.

I would like to pay a special recognition to Rich Freebourn. Rich is, in addition to other responsibilities, has moved over and has taken the Director of Acquisitions responsibility. Rich is a 23-year veteran of Brown & Brown. He has a strong financial and operations background. He is everything from a local office controller to regional responsibility to fire fighting, you name it. Rich will also continue to lead our internal audit department of the Company. Rich brings another set of very experienced eyes and ears that comb through and scrutinize acquisitions to assure the ongoing quality of this M&A process.

I would also like to pay special recognition to Tom Donegan. Tom is our M&A attorney. He joined us in April of 2000. He only has now about 100 plus acquisitions under his belt and is just a real workhouse. He is a can-do guy and we really appreciate all he does to help drive that process.

Next I'd like to -- speaking of the M&A process, I would like to pay special note to an announcement recently with Tommy Huval. Tommy is the head of Brown & Brown Louisiana. And he'll also have now responsibility on a broader involvement and the M&A process. Since Tommy joined us by merger, he is a real-life story that he can use to tell to potential merger candidates with Brown & Brown. He believes strongly in our culture and he epitomizes the type of agency owner seeking to join us and to move to the next level.

And lastly by no means, I'd like to touch upon a very significant announcement we made recently in January with respect to the establishment of an Executive Vice President of Leadership Development, and Linda Downs' agreement to move over and head up this effort. This announcement crates this new very important position going forward for the Company. And Linda has been selected to fill the position. She is imminently qualified. A 26-year veteran of the Company. She began in the early '80s as an office from scratch, built that office. Acquired offices and built up some 16 different profit centers under her regional leadership and responsibility. She will retain a responsibility for certain of our offices.

Linda's biggest challenge in this new role will be to expand our recruitment, training and development of future leaders, the mentoring and measurement of existing leaders. Linda's leadership will enable Brown & Brown to find the right kind of people who will flourish in our culture and will expand our bench strength. She is an outstanding leader; she's singly well-fitted to lead this new part and role, and Linda, congratulations on this new responsibility.

With that, Hyatt, I turn it back over to you for a wrap up and I guess we will then move to Q&A.

Great, thanks, Jim. Actually, I have been looking back through my file on the notes where we have had these quarterly teleconferences and I've come to the conclusion that we're really kind of boring because we sort of talk about the same thing every time and it's kind of the same and we just move on and not very cool and suave. But there is one thing we know how to do, we know how to make money. We are expecting to do very well in '06.

So with that said, I will -- actually, we'll open up the phone to any questions.

(OPERATOR INSTRUCTIONS). David Lewis, SunTrust Robinson Humphrey.

Thank you and good morning and congratulations on another fine quarter. Hyatt, can you talk a little more about your outlook for the brokerage division? Obviously, that has been a very successful area for you. Do you see any changes as we go through 2006? And as you look at that, can you give us a general idea of what Hull might be growing at right now since they're going to come on on March 1 and given the fact that half of their business is in Florida?

Yes that's several questions. First of all the brokerage area is a very important area to us and we are going to continue to expand both internally and externally in that area. We are probably going to have 160 to 165 million of revenue this year. Now that's what we're looking at right now. And so -- and it's very profitable.

In terms of Hull, I really can't tell you what their internal growth rate is because we won't know until really starting March so we can compare last March with this March. But they've been growing. So we're very pleased about that.

You know the percentage of the market that is nonadmitted has been growing in the last several years from 2 or 3% to I don't know it's maybe 10 or 11 or 12%. We kind of think that that's going to continue to grow and particularly in the Southeast, where there are some real problems in terms of the property. So it's a very, very interesting area for us.

Now bear in mind that probably the biggest piece of this is the underwriting piece where we actually have a matrix -- an underwriting matrix, and we're representing the Company, it's called binding authority. And that is very reflective of the Brown & Brown middle market, small and a little bit larger businesses. And those businesses don't seem to go up or down very rapidly but they are always growing. And the mass of business that fits into that sector is growing more rapidly than any other sector that we know of other than the property, which is of course explosive at the moment. So not only is that a fast growth area but it is a high margin area. And we and our mundane sort of approach to the world know how to do that pretty well. So we're very bullish about it.

Can you give us an idea of what the margins run out of the brokerage versus --

Off the top of my head, I just lost that number.

One last question, AIG's CEO was talking the other day, yesterday I think, about the fact that they are no longer paying contingents and don't plan to pay them in the future. How does that impact Brown & Brown?

Well, first of all, when they say they no longer pay contingents, they never paid contingents. Who is kidding who? Now they had a deal with somebody or two but they never paid contingent commissions and so we don't even know what that means.

Do you have any outlook for contingents as we look into '06 and whether it is more front-end loaded the first quarter versus second quarter?

Really don't. We're hoping to get more this year, meaning '06, than we did last year but because they're basically hooked to loss ratios, it's very difficult for us to estimate. Although we are going to be looking at them very carefully to make sure that the IBNR that is always assigned, which obviously can have a tremendous impact on how much we get, that the IBNR and the case reserves are carefully scrutinized.

Dan Johnson, Citadel Investment Group.

Great, thanks for taking my call. Two questions on Florida if you would please. Could you refresh us as to roughly what your property mix is in Florida retail? And then can you sort of compare the two hurricane -- or the aftermath of the two hurricanes seasons? How did fourth quarter, the sort of issues that you raised concerning the fourth quarter of '05, how did that compare with what you saw following the hurricanes of 2004? Thank you very much.

First of all, we don't really know what our property revenues are; therefore, I can't answer that question (technical difficulty) out of packages, so it's very difficult for us to pull that out.

Relative to the hurricane this year, we actually had two here. One was a nonevent and the other one was supposed to be a nonevent and that really was an event. It was a lot worse and the damage was a lot worse on the back side of that storm in Dade, Broward and Palm Beach County than anyone could have imagined based on the intensity of the winds. And so now maybe there's a situation where there was some damage that was from the previous year that as a result of this hurricane and it opened up something that had been previously damaged; I don't know about that. But it did impact our offices. And don't forget, you think of Dade and Broward and Palm Beach County and then you think of the Naples/Fort Myers area and we have offices there. But don't forget that our offices all over Florida write account into those areas.

As an example, the Daytona Beach office may have 10% of its revenues in Dade, Broward, Palm Beach County. So it has an impact. Same thing in Orlando and Tampa and etc. So it has an impact. But I think the most unusual piece this year versus last year is that the underwriters, Dan, have -- the directives that they are getting are changing almost on a weekly basis. And where we have had meetings in January on renewal accounts, those -- and decisions, yes, we're going to renew this, no we're not going to renew this, yes, we're going to -- and a lot of those yeses have been now two days and five days before renewals said, no, we're not going to do it. Now that does mean that we can get some extensions in order to get us time to place it, but all that creates some ruffle.

Mind if I just tag onto that, Dan, for companies that have not had reinsurance renewals in this period, you can tell that there is some business as usual and all of -- they're very skeptical about next year. For those that have had reinsurance renewals, in general we would say that there is a curtailment of both capacity and also appetite and a pretty deep concern about their modeling, that they found the models were not correct and therefore they've got to go back and re-evaluate their exposures on what they have and perhaps they really cannot afford or will not buy the reinsurance capacity they had in the prior years.

Adam Klauber, Cochran Caronia Waller.

Hi, Jim. Jim and Hyatt, how are you? Could we go over the acquisition numbers again? First, how much -- and maybe you said this, Jim -- but how much in acquisition revenue do you have going into 2006? And also I missed, how much acquisition revenue did you have in '04 and '05?

Well, you know, the total forward completed transactions in '05 was 121 million and it was 98 million in total forward for '04. Recognizing that you have to determine when they came in, was it front of the year, end of the year? And I think probably from that we can get with you as to the specific announcements as to the effective date and the announced revenues to model that out if that was the question.

Adam, out of that -- the majority of the revenue that we acquired in '05 did come in in the first quarter because obviously that was highlighted with the Hull.

In the fourth quarter, we did have a couple of nice acquisitions, the Weible & Cahill, the Downey and our Carson City, de Arrieta, at around 17 million. So that's going to carry forward, is what you are looking for. But most of our press releases have our estimated revenue then you can kind of look those up.

Anything missing, we can provide to you.

Okay, thank you. And then as far as organic growth, Hyatt, looking at the conditions in the Midwest, Northeast -- and I know Florida is sort of a moving target right now -- but do you think organic should be materially above -- organic actually and retail -- materially above in '06 what we've seen in the last two quarters of '05?

That is a real good question and I don't really know. That's a reason our estimates are zero to 5. What's interesting, Adam, is that there has been change and there are insurance carriers who are being very aggressive and there are some that are being not aggressive at all. So, if the question is, does it look like in the rest of the country that it's business as usual, then I would say there is a slight tendency towards us saying yes. But that's subject to change and that's why we're -- we never -- it's very difficult to prognosticate on what this pricing is going to be, almost impossible.

(OPERATOR INSTRUCTIONS). Dan Farrell, Fox-Pitt Kelton.

Just a little more detail on that -- your organic growth assumptions. Can you talk a little bit about what you foresee for new business growth versus retentions overall? Any color that you can give on that?

Well, we think our retentions are going to be about like they have been. Obviously we're pushing as hard as we can on new business growth. When you have a competitive marketplace, where prices are going down, it creates more opportunities. Now you have the stress on the renewals because you've got to keep your renewals. That's very, very, very important.

But you also have great opportunities for writing new accounts, particularly if you can find someone who kind of is in a little gray area. And we're pushing on that real hard. But will we be able to write more new business in this coming year, meaning '06? Well we hope so. We ought to be able to because we are bigger. But again, we kind of have set a track record of difficult doing what we do and I wouldn't expect any great variation up or down from what our track record has been.

Okay. And then can you just talk a little bit more about the turnaround in the Western segment? It was nice to see it get positive after several negative quarters. Just a little bit about what you have been doing there, some of the efforts? And also is any of that due to some favorable year-ago costs because it's been declining for so long?

Well, number one, we've been working our backsides off to write new business. And of course California is sort of a place unto its own. And so in California, it is going to continue to be I think a pretty damn choppy market.

Arizona seems to be more stable; I didn't talk about Colorado. That is sort of halfway between in terms of the price competitive, it's halfway between Arizona and California.

Up in Washington, we have some books of business that are a little more stable. We have some travel business. The marine business of course is going to be up a little bit.

And then when you get into an office that has a larger department of what we call specialized commercial or custom commercial and those would be accounts with let's say commissions of 2500 to let's say $7500 in commissions, that business isn't as competitive as some of the others because it's not targeted. So, I don't really know what's going to happen out on the West Coast because everybody you talk to, you get a little different answer or you get a little different attitude based on what has happened to them that week. They start feeling real good for a week or two and then they find some real downdraft on an account or they are under severe pressure on a renewal. So it's really strange.

This market is more like -- in California, the market is more like 1996 than any other time. And 1996 is when for a full year, the workers' comp rates went down 40%. Once they went down 40% for a twelve-month period, then workers' comp leveled off and started slowly, slowly to move up again. And the other rates kind of seemed to stabilize -- other prices kind of seemed to stabilize. So I think we're in for some more tough sledding in the West for at least the first six months of this year.

Doug Mewhirter, Ferris Baker Watts.

Good morning, just a quick question about your acquisition program. I realize that it's a very bottom-up selective opportunistic process. But do you have an idea in mind of sort of a total value of acquired revenues for 2006? In other words, would you -- are you kind of thinking that we would be happy if we bought more next year than this year or anything like that?

Doug, yes, this is Jim. We really don't set a goal on the acquisition side in terms of a revenue. To the extent that we do any forecasting, we've set long-term goals is to grow 15% each and every year forever. And so with that there is no real way you can manage the timing of acquisitions. They're lumpy, meaning what quarter, what year. There's incubation process that may be five years, it may be six months in there. So it is important that we have the activity going with the right people, the right players, the right opportunity to be there when that moment strikes the seller they want to make a move.

So I'm not sure really addressing the component of your question but we -- for example, we really don't budget acquisitions in our forward process for '06. What we have is what we budget and we plan to live on.

And so each and every year, we have the record of acquisitions going back really into the '80s and we're certainly going to continue that process.

Doug, I think one thing is that we do have a very structured way of looking at every merger prospect and part of that has to do with chemistry. In other words, do we like them, do they like us and we spend time getting to know people and so that means that there's some situations where it just doesn't seem to work very well. So we look at a lot and offer on a few.

Nik Fisken, Stephens, Inc.

Good morning, and thank you for the boring quarters. If I look at that 160 to 165 number that Hyatt gave for brokerage, if I just take the nine months data that we get so the 99.6 million of adding up the three quarters for brokerage for the last nine months of last year, if I annualize that, I get 133 million. So that would apply like a 22% growth rate on brokerage. Is that the right way to think about it?

That would be on total because now don't forget on brokerage, this year we only had ten months of Hull, okay, because they came in on March 1. So you've got to factor that out. You've got to factor another two months of new Hull for their same store sales comparisons.

I think you need to say that -- and this is sort of off the top of my head -- I think you need to Nik, I think about 135 million maybe as the base, including Hull.

Okay, great. For the first time I went back three years, Florida was below Company average and I heard some talk about rate and some talk about a lower than expected new business quarter. Is that what it was?

Well now if you go back to the third quarter of '04, Nik, Florida only grew 1.6%. So, that was below the -- the Company average for that quarter was I think 3%. So it has happened before but the bottom line though is that there are so many moving parts that it's hard to put your finger on any one single one. It is not something that is in our opinion going to continue at that level. In other words, we expect Florida to do well in the first quarter and the second quarter and so on and so forth.

Nik, there's a lot of moving parts in the fourth quarter dealing with companies that really just don't know their game plan. And so there have been accounts that have been extended or the fact that we -- new accounts we'd like to write but we have got some players that are kind of dead in the water on capacity on property and therefore, they can't. So it is very unusual and probably not reflective of quarters to come.

You guys have in the past been able to look at rate alone by looking at the top gun report to compare home much -- what rates are doing versus units. Any color there since you just went through your annual budgeting process?

Well, Nick, that's why we use the zero to 5%. People feel that there is a way that you can absolutely analyze what's going on in this broad business that we have. We have come to the conclusion that it's damn difficult. So what we are expecting is - and this is a broad brush -- rates are flattened down everyplace except the Southeast and in brokerage. Now we're going to grow some in employee benefits, don't forget that. So that's going to be up. So when you put all those together, it sounds like you ought to be able to synthesize an answer. We just can't do it.

Lastly, if I look at the Hull acquisition, how much better is it doing versus expectations?

Well, it's doing pretty damn good.

We're very pleased. I think the people side of it is something that we -- as we have gotten around to meet the 15 different offices, realize that's really 15 different offices, P&Ls inside that company. But their ability to grow and expand, as a matter fact, they have had two small acquisitions that they have brought on, they have identified and they have completed. And we have in fact as part of our understanding with them, they have the ability to bring in new partners into their platform, which is very, very good. So again, it's probably -- as we mentioned, it is above our expectations and we think that we see that moving into '06 as well.

Again, Nik, I tell you we cannot stress just every time we deal more and more with each of those offices, I mean from top to bottom, the folks at Hull are absolutely the highest quality people and it's just a wonderful group of business people.

I don't want to jump over too -- international E&S in California that came in really the year before, and they just had an absolute kick butt year, representing a meaningful part of an organic growth that we showed, obviously, in '05. And just, again, the match of people and talent and culture with the brokerage piece with Brown & Brown we found a very good fit.

Jim, if you look at that pipeline that you said was very robust, did we have big deals in there or is it mostly these smaller $5 million traditional (multiple speakers)?

It's mostly made up of the latter. There's always some of those big deals you know that it's there, that it's possible that they are kind of testing the waters or do they fit? Those are the ones, as you well know, we are most cautious of because larger enterprises tend to have their own unique culture and feel like when they join, they want to bring a major component of that to us. That can be something perhaps you can't do. So it will continue to be about the same average and if fortune shines upon us, we will continue to find another Hull of the like to include in that group.

Actually, what you are looking to do and everybody else, Nik, is to have us do a big merger because it moves the gauge. And you must understand there's two kind of gauges. There's the top-line gauge and the bottom-line gauge. If we can't get the bottom-line gauge moved, I don't care how big it is, we ain't doing it. And so we're very, very sensitive to reducing our margins. And that means that we have to be very careful. It doesn't mean a large once couldn't happen. But when it happens, we are going to be pretty sure of where we are going to be.

I like the boring gauge.

Nick Pirsos, Sandler O'Neill.

Good morning, everyone. Two questions. First on the M&A side, are there any specific either geographies or classes of business that you are targeting kind of a la the Axiom here in the first quarter?

Nick, no there's not. It's again, it's about the people side of it. We didn't specifically go out and say, gee we want to expand the wholesaler brokerage business. It had to do just meeting with the people and an earnings enterprise that matches so well. So no, it's really not. We would like to expand more in Florida but on retail, for example, but it has to fit in those examples. So you have to kind of take geography out of that if you are going to -- your first criteria is the people mix.

Okay and then second, Hyatt, I just wanted to get a better understanding I think in one of your earlier opening comments is with regard to Florida retail, some is lost business, some is possible timing issues as home offices try to figure out whether they want to be in a certain line or not. I guess the question on that part of the response is if your renewal is December 1 and home office is still debating whether they want to do a line or not, I mean you've still got to renew so I guess the question is, isn't it still lost business or was there something else you were trying to get at?

No, what happens is, Nick, it gets extended, so it might get extended for 30 or 60 or 90 days until we and they can figure out what to do. And there has been chunks of business like that.

Matthew Roswell, Stifel Nicolaus.

Hi, it's actually Meyer. How are you?

What is your first name, please?

I'm sorry, Meyer Shields. I'm going to start -- brief question. Other than Axiom, was there any impact in the fourth quarter from the hard market in reinsurance or does that all show up in the first quarter?

That would be first quarter. And certainly, that's the forecast in the reinsurance arena as companies need to buy more and deeper reinsurance and hopefully that bears out with Axiom. But we will not really see that until '06. It's a 1/1 transaction.

Okay. In light of the general soft market outside of the Southeast, is there any pressure coming from the carriers you deal with in terms of contingent commission plans going forward? Are they trying to change the profit requirements or anything?

No, we haven't seen any of that yet. There has been some discussion about the fact that a few of the companies have only -- they have profit-sharing that really isn't profit-sharing; it's basically based on volume. And there has been some discussion about doing away with those and having only profit-sharing. But we haven't seen that happen yet. So it's just -- there is a lot of discussion going on but it's not at the front side of anybody.

One of the things that the various companies are really looking at is -- and I'm sure that in the case of the companies that are regional companies, they are hoping that national companies -- and they don't think of AIG as being a competitor because AIG doesn't do what they do. They would be looking for national companies to not pay contingent commissions, which would give them a decided competitive advantage in the smaller middle market. And so there's all kinds of things that have to be considered. And the bottom line is the contingent commissions when viewed in the main and as reconfirmed recently by a couple of Ph.D.'s from Wharton at the University of Pennsylvania, it is in the best interest of the consumers. The reason the profit-sharing commissions are in the best interests of the consumers is because it puts the onus on the agent to do front-line underwriting and as a result of that, then, the adherence to safety programs, to safe work places, to getting rid of drivers that have bad driving records, etc., would safeguard the public. All of that flows down through this distribution process. And I think a lot of the people who are saying oh, contingent commissions, which they're talking about backend volume overrides -- they are not talking about profit-sharing commissions, they're saying these are bad. Well, there are several ways of looking at it. But they're talking about something different from profit-sharing contingent commissions. So, we think that you know, the bottom line is that they are in the best interests of the industry and of the consumer and therefore they ought to continue.

Okay, and one last question if I can. You talked about employee benefits growing. Are rates actually rising?

Yes they are and they have been Meyer, for several years. But the rates that are rising aren't rising at the same level. Five to 15% is moderate relative to what two or three or four years ago. Now in the past, a number of years -- for a number of years, there has been a reduction in benefits or a readjustment of benefits so that price is, instead of if there was a suggestion of a 15% increase, maybe it only went up 3%. Well the various businesses have about run out of ability to do that. So we are seeing a little more rise in the renewal in the employee benefits.

(OPERATOR INSTRUCTIONS). Barry Cohen, Merrill Lynch.

Good morning, gentlemen. Thank you for taking the call. I just wanted to -- a couple of points of clarification if I could. One is, could you give me a sense of how big your workers' comp is in terms of your revenues?

Is it Barry, is that your name?

Yes, sir.

Barry?

Barry.

Okay. Barry, the answer is we don't really know but we think maybe in the retail area -- bear in mind that 68% of the Company approximately is retail. So in the retail area, we think it's somewhere in the neighborhood of 20%.

Okay, and how about on the wholesale side?

Well on the wholesale side it's not -- zero, probably.

De minimis.

Yes, it's just not there.

That product really doesn't make its way through the wholesale distribution system.

Okay. Historically speaking, when you do an acquisition and let's say 12 to 18 months afterwards, what is generally the sales lift that usually takes place inside that organization?

It varies and most generally, they do grow. And many if not most of our acquisitions are on a one, two, three earnout and they're getting five to six times the average operating profit over that period of time. So they're going to try to do the best they can both in profitability and in the growth of the top line. But their growth is about in line with the rest of the Company.

And I just wanted to make sure I heard you correctly earlier because I was getting on the call. I think you started talking about California workers' comp rate?

Yes, I did.

And you threw out I think two different hearings. One was 10 to 20% and then there was like I think 20 to 40%. I don't know if I misheard you or I wasn't following correctly?

You heard me correctly. And what you are really hearing is, it depends on who you talk to out there. And so what I do is I talk to our various offices to get a representative kind of report before I get on the phone today and that's what I did yesterday.

And so in certain offices, we are seeing a lessened reduction in workers' comp pricing and it seems like that those were offices where twelve months ago, those prices were a little more competitive. And in those offices where there hasn't been a marked reduction last year, then those are closer to 30 to 40%. It is confusing.

No, no, no, that helps explain it. I appreciate you taking the time out, thank you.

And it also depends on the loss ratio, Barry. If you have got one with a questionable loss ratio, then it's not going to be discounted much.

Greg Lapin, Saranac Capital.

Good morning. You have answered my question. Just to -- the area that I wanted to go in was Florida retail. So if I can sum up my understanding there, it sounds like the new to lost business ratio was down slightly. The impact was from the new side, as you noted that it was little lighter than your goals. But the bulk of the fluctuation was capacity related. And now that you have visibility into the first week of February, the growth rate should probably resume to levels posted prior to the fourth quarter?

Yes, we don't see any reason why Florida is going to do much different than it has. And as I said, in the fourth quarter, there was a lot of stuff going on, but we seem to be emerging from the gloom.

And most of that though is finding replacement carriers, elongated plans and things like that?

Yes, and where we have had accounts that have been extended, getting those settled down. And then there are some accounts that we were unable to quote because at the last moment, the companies that indicated they wanted a quote said no, we're not doing that right now. So you see it's all of that kind of uproar in the marketplace. But that is just part of -- this is the most disruption by a factor of maybe four or five to one in the market in Florida since I've been in the business, which is 1959.

Interesting. Okay. Thanks for your comments.

David Lewis, SunTrust Robinson Humphrey.

Thank you. Cory, I don't want to leave you out here so a couple questions for you. What do we expect for free cash flow to be generated in 2006? And secondly under FAS 123(R), how does the non-cash stock grant comp program work? Does that change at all?

Well the non-cash, yes. We had in the non-cash stock grant column, we had two tranches that hit in the fourth quarter, right at September 30 and then probably right in October. So therefore, on a go-forward basis, we will have new amounts, higher amounts, relative to that. Plus there will be a little bit more -- there will be some expensing of some very small amounts of incentive stock options. So we're going to be running somewhere in the $1.5 million to $2 million range in terms of that non-cash stock grant compensation on a per-quarter basis.

Is that 1.5 million to 2 million more?

No (multiple speakers) --

(multiple speakers) total.

Yes, total per quarter.

Okay.

Okay? And then on the free cash flow for next year, it's whatever we earn.

We expect them to be good.

From a standpoint of depreciation, we probably will be running about $10 million depreciation next year. Yes, about 10 million, maybe 11 million. We should run probably around $34 million of amortization. And as I mentioned the nonstock grant somewhere in the 7 to $8 million range.

What was your free cash flow in 2005 then? Do you know off the top of your head?

It was probably -- well, net income was 150 add that -- you know --

Okay, I will run it through. I guess what I'm trying to get to is you've got 100 million on the balance sheet, whatever you build out gives you the capacity for your acquisitions going forward. At what point are you able to go back -- I think you're still somewhat under-levered. I would assume you would go to the debt markets first?

Well, I think -- to sort of answer that, David, we would expect to be able to generate during '06 the necessary cash to fund whatever acquisitions we're going to make. Now if a big scarf came along, then we'd start looking at other avenues. But at the moment, we have no plans for that.

But we do believe that we have the ability to borrow fairly easily at least another $150 million in debt and the rates are still very good on a ten-year treasury basis.

There are no further questions at this time, Mr. Brown. I'll turn things over to you for any closing remarks.

Okay, and thank you all and have a great weekend and we will look forward to talking to you in April. Good bye.

That does conclude today's conference. Thank you for your participation. You may now disconnect.