Brown & Brown Inc (BRO) 2006 Q1 法說會逐字稿

Good day and welcome to the Brown & Brown first quarter 2006 financial conference call. Today’s call is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements as such terms are defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the Company with the Securities and Exchange Commission. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management’s views only on the date hereof. The Company undertakes no obligation to reverse or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in forward-looking statements information include attaining certain growth goals, changes in the way products are introduced to the market, the recall of significant product by the Company, seasonality, the impact of general economic trends on the Company’s business, the timing and effectiveness of market programs offered by the Company, the timing of the introductions of new products and services by the Company, and competition. These other factors include changes in the rate of inflation, changes in state or federal legislation or regulation, and changes in the general economy.

At this time I’d like to turn the conference over to Mr. J. Hyatt Brown. Please go ahead, sir.

Thanks Candice, and good morning everyone. We’ll use our normal batting order and I’m going to call on Cory to talk about the financials.

Thanks, Hyatt. We had a very good quarter. Our earnings per share for the quarter was $0.36. That’s up 16.3% from the $0.31 earned in the first quarter of 2005. From a revenue standpoint, commissions and fees for the quarter increased 13.8% to $227.9 million, up from the $200.3 million we earned last year’s first quarter.

Included in the press release again is our table that summarizes our total growth rate and the internal growth rates from our core commissions and fees, which you know excludes our profit sharing contingent commissions as well as the revenues from any offices or books of business that we’ve sold since last year.

We’ve also included a reconciliation of that internal growth schedule to the total commission and fee line included in the Statement of Income. And you can see the only reconciling item for the 2006 quarter is the $33.5 million of profit sharing contingent commission. That $33.5 million of profit sharing contingent commission represents an increase of approximately $5.6 million over what we received last year’s first quarter.

Of this increase $2.3 million came from our Florida offices. $2 million of it came from the Hull offices; another $1 million came from our Special Programs, such as Proctor Financial Services, and the rest of it being interspersed among the other divisions. Our best estimate of how much profit sharing contingent commissions that we will receive for the entire year of 2006, based on what we received this year, this quarter, as well as discussions with other carriers, we think it will be somewhere between $37 and $38 million. How this would fall on a quarterly basis, our best guess is that we may receive another $2-$3 million in the second quarter of this year compared to $4 million that we received in the second quarter of 2005.

In the third quarter we’ll probably receive less than $900,000 versus $2.6 million that we received in the third quarter of ’05. And then in the fourth quarter we’ll probably receive less than $400,000.

So, in summary, our total profit sharing contingent commissions will be up slightly from the ’05 year.

Now, looking back at the internal growth schedule, the total core commissions and fees for the quarter increased 13.1%, or $22.5 million in total new commissions and fees. Of that total $20.3 million of revenue was generated from the businesses that we’ve acquired since last year, first quarter. So that left $2.1 million, which was internally generated organic growth and that reflects the 1.2% overall internal growth rate. Now Hyatt will talk about the activity of each of our business segments in a minute.

Moving on to investment income, that increased $1.2 million over last year and it was mainly due to higher income yields in 2006 compared to what we had at the first quarter of 2005. Other income was relatively insignificant. We had less than $0.5 million of total revenue there.

As it relates to our expenses and our pre-tax margins, our pre-tax margin for the first quarter was 50 basis points higher than last year’s first quarter, which ended up being 35.3% for this year. Our largest expense is Employee Compensation and Benefits and this expense improved nearly one percentage point as a percentage of total revenues due in part to our lower cost in our self-funded Medical Group Plan.

The cost of our non-cash stock-based compensation doubled as a result of the implementation of FASB 123R. The largest component of this increase is the fact that we now have to expense the 15% discount that we give our employees under the standard IRS Employee Stock Purchase Plan. Under the previous GAAP rules this discount was not required to be expensed.

The other part of the increase required by FASB 123 is for the unvested stock options. However, since we only have approximately 600,000 shares of unvested stock options outstanding. Out of the total shares we have of $140 million, the expense of this cost -- 100 million shares outstanding, the total expense of this component is only about $110,000 per quarter.

Now, one benefit to us from the FASB 123R is that the accounting costs of our Performance Stock Plan, which is the largest of our group, and that is where we have a 15-year [clip] vesting stock grants that we give to our producer in the [inaudible] leaders [inaudible]. That actual cost will be recalculated, and it will be slightly lower on an ongoing basis.

So, all in all, if you throw it all together we expect the normal ongoing quarterly non-cash stock-based compensation expense to be about $2 million per quarter.

Other operating expenses as a percentage of total revenue stayed constant at 13.4% of total revenue. This is in light of the fact that we had an additional increase in our legal claims and related expenses of nearly $2 million this quarter.

Amortization and depreciation expense increased dollarwise due to the increased acquisitions during the year.

Interest expense stayed constant at approximately $3.5 million per quarter. Our effective tax rate for 2006 is currently expected to run at about 38.6%.

So, to conclude, we ended up with net income of $50 million. And that’s the first time that we’ve had a quarterly net income that exceeded that $50 million mark. And this is an increase of 16.3% over last year’s net income of $43 million.

So we had really a very good quarter. And with that overview I will turn it over to Hyatt.

Thanks Cory on a good report. Let’s move into the report from around the country.

First of all, this is a pretty unusual quarter in the brokerage area. The rest of the country kind of belies and reflects what’s happening, which is the market is softening.

In Florida, our retail operations were up 4.5%, up from 2.9% in the preceding quarter. Casualty, if it's pure Casualty and no Property involved, it’s south 10-12% from prices on 1/1. There are-- companies are seeking to replace non-renewed Property accounts in the Casualty area.

Property is crazy in Florida. We’ll talk a lot about that in terms of the brokerage, but specifically what’s happening is in the front side -- and I’m talking about the admitted companies -- the various risk bearers are trying to determine what their aggregates really are. And they’re trying to determine exactly what the slices of business in terms of Property and in terms of the Construction in terms of the age and so on and so forth. Where is it that they can make money in the current environment?

And so, that’s creating a great deal of anxiety. It’s also creating some opportunities and we’ll talk about the opportunities.

The non-admitted market, of course, is growing. Almost every renewal is being layered and that’s being in the E&S market. There are, in this quarter, a number of extensions. Now, what that means is that February or March where we couldn’t get it all done or the insured wanted us to seek other markets because of price increases, there have been some extensions, which means you’re buying for 30 days or 60 days, which means that the income coming in would be 1/12th or 1/6th of the normal income. So, that will fall into this April quarter.

We are also seeing 70-100% earned, fully earned premium on certain non-admitted placements. And, of course, the reason for that is someone placing insurance and let’s say April 1, and because the price at 3 or 4 times in the non-admitted market they would want to have a pro rata cancellation as of November 1 when we are beyond -- or October 1 -- beyond the hurricane season. So, there are all sorts of changes are going on.

In the habitational area, Citizens -- now, that’s the State of Florida -- Citizens Insurance Company is being engorged with business. The regionals are very aggressive on non-Property and this summer is going to be tenuous even if the wind doesn’t blow.

Interior Florida -- this is something that’s different -- there was a time when the spine of Florida, which would be Gainesville, Ocala, Orlando, Lakeland, et cetera, was considered to be not really exposed to wind. That’s no longer the case.

If it’s habitational in the spine it’s going to be mostly Citizens and, of course, Citizens is very difficult to deal with because they’re the court of last resort so to speak. Even office buildings are very tight. And if it’s glass office buildings it’s not-- the admitted market really isn’t too interested.

We are seeing minimum deductibles in now the 5-10% range, if you can believe that, versus 1-2%. Casualty, of course, if it’s suffered, it’s down 10%. If it’s Auto Fleet, Florida apparently has had some pretty good loss ratios. Auto Fleet could be down, assuming good loss ratios, as much as 25%. Umbrellas are not -- they’re reasonably firm. It’s not following the market.

And we’re starting to see something just now that is going on worldwide, but we haven’t seen the results yet. And here’s what’s happening.

All of the risk bearers are looking at coastal areas, and more specifically Florida where we have over $1 trillion of property exposed in what would be known as a coastal tier and that $1 trillion I think is two years old and so with all the new stuff it’s probably $1.2 trillion.

But in any event they’re looking to see, well, where can we place our capital once we figure out what our real aggregates are. Where can we place our capital at risk and what slice of business are we going to write that we think we can make money at these higher prices and with potential for more windstorms.

One of the things that we’re seeing is that two of the companies who have pretty much shut down for writing Homeowners -- this is not Commercial now, it’s Homeowners -- are now open in places of Florida for writing homes that are $500,000-$1.5 million. All of a sudden we’re seeing that opening in the marketplace. This is going to, I think, occur across the rest of the year in both the Personal and in the Commercial areas.

Moving on to National Retail, again, softening market, minus 2% growth internal versus 7/10th. Competition is heating up in all areas. Now, the regionals are leading the way. And, of course, what is happening is the nationals that are backing away from business in coastal areas are trying to re-up their volume elsewhere, so they’re being more competitive. And so, that means that what we have is prices going south, 10, 12% on an average.

Now, some, if they’re kind of doggie accounts, they’re flat or up some. But if you go from Texas all the way around the coast to Norfolk, northern Virginia, those areas in the coastal area are stressed and so those Property prices are going up and the capacity is going down.

In the Midwest the Property is very competitive. We’re seeing 20-25% reductions in that Casualty -- same. And, bear in mind, in the Midwestern part of the United States the P&C business has always been very, very profitable. Indiana and Ohio are the softest.

Workers’ Comp scheduled credits are showing up in a couple of states. In the northeast, New England, et cetera, New York, New Jersey, Pennsylvania, it’s a little firmer there but prices are down 5-10%. We’re seeing we have a large book of Social Services. That’s 5-10% down. Large developers would be flat. Auto, if it’s Commercial Auto, it’s being very competitive.

Anything along the Gulf Coast, if you look at Louisiana out to Houston, anything south of I-10 is kind of a war zone. It’s just lack of capacity. And if you think about Houston, I-10 runs right along the south border of Houston. So, if there’s a Commercial Property account that is south of I-10, probably cannot be written in an admitted carrier. If it’s north of I-10, as we speak, you’ve got a good chance of writing it, but in any event, very, very difficult circumstances.

And then, the opportunity, of course, to write new business with the softening market is good. And we’re writing a lot of new business nationally. Western Retail is pretty topsy-turvy. Last quarter they were up 3.2%, and you remember the quarter before that they were down 5 or 6. Now they’re down 5.8%. And so, it’s led by California, as you might expect. All states are 10-15% on renewals and going after new accounts.

The California Workers’ Comp, in August of last year started going down 40%. It’s sort of like what happened in 1996. And so, it will happen that way until August of this year, at which time we would hope to see flattening, although there is a proposal to reduce rates by another 14-18%. That’s, well, strange! But anyway, whatever it is that’s what it is.

Nevada, Arizona, Colorado, New Mexico, not as competitive as California. Some parts -- some slices of business in Washington State are pretty competitive.

Professional Programs, 5.7% minus versus minus 2.3%. Lawyers and insurance agents, title agents, soft, but there are some other areas where we’re doing pretty well. Dental is running 2 to 3 to 4% up, which is kind of the old faithful.

Calsurance is having some growth difficulties, but it’s not so much in writing insurance. There is a component of Calsurance called Lancer Claims and the claims count for lawyers and insurance agents, which is a great piece of their business, is down. And it’s been down really for the last year-and-a-half, which means loss ratios are better, which means good things for the risk bearers. But for us, since we’re being paid on volume, it’s not quite so good.

Then if you look at Brokerage, now this is the big really surprise. And how can you go from a plus 34.5% to a plus 3.3%? Well, it is because we have, in coastal areas, and more specifically in Florida where there is a huge concentration of [values], we’re seeing a wind market like I’ve never seen, period, in my life, and that’s been 47 years in the insurance business, so, a long time.

So, let’s talk about what’s happening.

First of all, outside of Florida, outside of coastal southeast, everything else, starting in the west, international E&S that have been growing very rapidly actually was a little down, 1.5%, for the quarter. And the reason is that they are primarily Casualty-driven and Casualty in California is going south and because they are also big into development, Wrap policies, et cetera. There is some cooling in terms of the amount of business that’s available. In other words, development is slowing a bit.

Coming across from California, if you look at Hull offices and our other offices, like ECC Brokers, we’re seeing flattish kinds of growth because prices, particularly Casualty and Property, as long as it’s not coastal, they’re all going south.

Then if you get into the southeast, and more specifically into the coastal areas of the southeast, we’re seeing some very unusual things.

First of all, companies are trying to figure out what their real aggregates are.

Secondly, in Florida a couple of companies are now in runoff that are throwing a lot of business into Citizens. Now, Citizens is the, as you know, is the State of Florida and it is the absolute court of last resort and it is supposed to be the highest rates available. It is also supposed to be a market where if there is an admitted carrier you can’t go to Citizens. In certain places in Florida Citizens’ prices are lower than admitted market, so we’re seeing some movement, believe it or not, away from admitted markets, which is not supposed to occur, but we’re seeing movement into Citizens.

Citizens also has had an assessment of I think 8 or 9% and that assessment is being passed on as we speak and there is another assessment -- that assessment is for ’04 -- and now there is another one that’s for ’05 that the Legislature is thinking about replacing with tax dollars. So, all kinds of strange things are happening.

Okay, so, what is happening? Back in about mid-January, and you must take and bifurcate the E&S business in coastal areas and Florida is all considered coastal. 1) There is binding authority; and, 2) There is transactional Brokerage. They’re two different animals.

Let’s talk about binding authority business first. This is business where we basically have within a certain underwriting matrix the [pen]. And so these are policies that would be 5 to maybe $25,000 of premium, smaller business. And so, starting mid-January companies started retreating. A) We’re not going to write any business that is in the bottom three counties; and, b) And this varies with every company, we’re not going to write any business within 2.5-3 miles of the coast, either the Gulf or the Atlantic, or of a substantial body of water like a lagoon or the intercoastal that runs up the east coast of Florida.

So, all of a sudden there is no capacity there. 40-50% of the applications coming in are-- we don’t have a place for them. And, of course, that means that there are a lot of people if they can’t get into Citizens are going uninsured. By the same token, if on Company A we have, for some reason, a non-renewal in that coastal area, within 2.5 miles, we can replace that one. Well, that’s few and far between because anyone that has insurance obviously is going to try to keep it.

So, there is a substantial reduction as the risk bearers are trying to figure out how are we going to manage our aggregate? How are we going to manage our capital commitment.

Secondly, in the Brokerage business, which is larger, minimum premiums were mid-January $25-$50,000 and now in many cases the minimum premiums are $100,000. And where you have concentrated values, maybe even as low as $50 million of value in any one location, depending on where it is, depending on a few things, we may not be able to fill out. And we -- it’s not just we, Brown & Brown -- it’s we, the entire world marketplace, can’t fill out the line. So, we fill it out, layer it up and come up with maybe 70% of the insurance they had last year.

All of this has created lots, as we call it, lots of yanking and jerking. Now, Peachtree Special Risks, which is doing a large piece of the Brokerage business, does have some business again that is extended. So, there will be some flow in but I wouldn’t say that that is very substantial, but there will be some flow in in the April quarter that would have been in February and March.

So, on a go-forward basis, there are great opportunities in the Brokerage area, but it is waiting on -- we are waiting on the risk bearers to figure out how they’re going to make their commitments.

Moving on to Special Programs, again, we’re doing well there, 13.3% up versus 10.7% up last year -- I mean, last quarter. FIU and Proctor are leading the way. We have then the TPA, which was up 4.1% versus 8.9% of internal growth last quarter. And they just keep chugging along and their margins continue to inch up about half a point, so we are very pleased there. They’re like Old Faithful.

In summation, then, coastal Property capacity is limited and markets are re-evaluating and as that starts to shake out then there may be some very good opportunities. Casualty in coastal areas will be flat if it is written with an admitted Property company. If it’s not, then it’s going to go south. And P&C countrywide will continue to soften.

Employee Benefits, which about 12% of our business is Employee Benefits, that 8-12% continued increase except in a couple or three areas where we’re seeing the possibility of flat. And so, that’s good.

And so, what is the prognostication for internal growth for this coming quarter? It’s 0-5%. And so, Jim, we’re going to turn it over to you now.

Thank you, Hyatt. With all that complexity I’m pleased to give you a very boring report on acquisitions. We like boring.

We were very pleased with the first quarter class of 2006 acquisitions. Year to date we have completed seven transactions with some 24.6% forward annual revenue. Four of those transactions were in the Retail Division that are fold-ins with existing offices at very high margins.

One transaction was the reinsurance intermediary previously announced, Axiom Re. I’m very pleased to have those folks onboard with us. We have one wholesale broker, High Country Insurance Managers, that is now a part of Hull and Company.

And lastly, we have a service sector addition, which was NuQuest Bridgeport (sic - see press release) services I’ll describe in just a moment.

The average transaction size was $3.5 million. This is consistent with prior years as well as the activities for the quarter was generally on average consistent with prior years as well. It obviously did not contain a substantially large transaction for the quarter.

Since an acquisition in the Services Division is unusual, I wanted to maybe provide you some additional detail. NuQuest Bridgeport was a company started some five years ago here locally along with Florida by an individual we have known for some number of years. They are a claims service and technology company dealing with providing value-added claims services to Workers’ Compensation claims.

To settle a Work Comp claim, when a claimant may receive future Medicare benefits, the carrier must seek advance Medicare approval and set aside funds for the future cost of those claims. This company has developed some unique skill set and automation technology to seek the Medicare approval for these claims. The margins for these two businesses will be beneficial to our overall drive to be [forty].

On the acquisitions, a couple of items with respect to talking about pipeline or inventory, and secondly, with respect to pricing.

With respect to inventory, many of you are aware that our long-term track record to identify, acquire and operate agencies with less than $10 million of revenue, we have allocated additional resources this year to manage an increasing number of acquisitions as we grew our overall base. The agencies less than $10 million in revenue is a very target-rich environment. It’s the largest sector of the independent agency system, an area where we’ve had unusual results and finding great opportunities.

With respect to, on the topic of pricing, first of all separating pricing as to revenue and pricing as to operating margins, the improved operating performance overall by agencies in recent years has resulted in an increase in price as a multiple of revenue. However, we have not experienced an appreciable increase in the price as in multiple of operating profit to acquire quality agencies. So, basically, our pricing model remains on target as in prior years.

I wanted to also perhaps close by relating to a discussion on the Property claims, property capacity dilemma. A view of that dilemma, really from the reinsurance intermediary side, now that Axiom is a part of the family and it gives us another view of this series of related events that has caused uncertainty and change in the coastal Property capacity. That chain of events, it starts at the front end with certainly the adverse experience in prior years, A.M. Best looking at impact on Surplus; our regulators looking at the issue.

There is the reduction of aggregates, a command that we’ve seen go out to a number of middle market and larger national carriers indicating they would like to see reduced aggregates in certain zipcodes.

The CAT modeling, seems to be coming in play that the CAT modeling the last two years indicated that their modeling was not correct. And I think embarrassing actuaries is something you don’t -- they don’t get embarrassed again. And so, certainly the new models will result in significantly increased reinsurance capacity needed for the CAT modeling.

The reinsurance cost is very unsettled. As the treaties are coming up for renewal a virtual lack of retrocession support and kind of what we’ve seen as a “wait and see” by some of the new virgin capital as to how they deploy the Property capacity and at what rates. Looking at the very highest rates possible and deploying the capital at that time.

So, all of this has been kind of a “wait and see” attitude that we believe will be settled, will provide opportunities for us, but there is the stigma of in fact the growth that will be there has not happened as soon as we would like.

With that I turn it back to Hyatt and to Cory and also I think we’ll move now into the q&a.

Candice, can you open the lines for questions, please?

Thanks. [OPERATOR INSTRUCTIONS]

David Lewis with Suntrust Robinson Humphrey.

Hyatt, obviously a question on capacity there. Do you think that the insurers really need more clarity from the rating agencies on the capital requirements? And I guess my understanding A.M. Best may come out with some preliminary views on that in June. Do you think that’s the major issue? Or, do you think they’re really just trying to figure where they need to be and how much exposure they want?

And, if they decide to reduce their exposures on the CAT-exposed areas, does that even put further softness in the non-CAT areas.

Yes, good questions. First of all, we are hearing the same rumors you are hearing about A.M. Best, but we don’t have any way to confirm or not confirm those.

Relative to the allocation of capacity, my sense is that particularly the E&S companies, the non-admitted companies, and certain of the admitted companies, they’re more concerned about trying to figure out how you can make an underwriting profit and then allocating their capital towards writing that kind of business.

And frankly, based on some of the things that we’ve seen, there are certain slices of business that even in the last two years, which have been the worst years in the history of the world, have provided a pretty stable set of circumstances.

An example would be, in Hull Special Risk and in a division of Bridgefield -- Bridgefield is Brown & Brown -- and in one or two other areas like in Hull Personal lines, there have been slices of business and we are open in Hull Special Risk and in Bridgefield and in Hull Personal lines for business. And so -- but, the reason we’re open is because they’ve been more restrictive in the past and the identification maybe was a bit fortuitous, but it seemed to work.

So, there are opportunities for those risk bearers who can figure it out. And that’s what’s happening as we speak and they’re sitting around in rooms with lots of charts and graphs and once they make a decision, then we think we’ll be in a pretty good position.

Can you give us a general idea of what percentage of your revenues you’d consider as having capacity problems?

I have no idea, David. I just wouldn’t know.

Okay. And finally, do you think the insurers are kind of looking and saying, “Okay, let’s figure out where pricing is.” Now that they see the capacity crunch they can get a much better rate and that might allow them to have a little more clarity on what they might be willing to accept as a risk?

I’m not sure that they’re going to be willing to accept certain kinds of risks, but I think the ones that are in the category that are more wind-resistant they will be willing to put their money on the line because it’s going to be higher prices. And we’re seeing rates that are 10% rate online, which is pretty darned expensive and then on smaller accounts we’re seeing Property-only rates going from $0.35 to $1.75. That’s a huge increase.

So, there are opportunities here but the people with the capital are trying to figure out how to place it.

Thank you very much.

Dan Farrell with Fox-Pitt Kelton.

Just a couple of questions. I guess just a follow-on to the capacity question. I think you talked about [17]% of capacity [in place]. As more capacity comes online do you see more business being written as we move forward?

Well, that’s the -- if you think about what we’re all about, the risk bearers are about making money. And the way that you make money in a softening market is you look at the distressed areas and try to slice it so that you can get in and write business. And, of course, one of the things that’s happening is that some companies have said, “We don’t want any account, Property account that is older than 10 years.” So therefore, the new construction is more wind-resistant.

Secondly, there are those that are now going to, as regards to condominiums, no renewal will occur unless a) hurricane glass is installed; or, b) in the advent that there is no hurricane glass that there would be shutters, totally shuttered.

So, what’s going to happen is that there are going to be, for the first time, real stringent rules on the kind of property that will resist a hurricane, and then, those risk bearers who figure that out and will -- and know that they’ve got a substantial price, I think there is going to be some availability of capacity that is not available now.

Okay. And then, second question, I think you mentioned that you’ve kind of ramped up your infrastructure to try and handle a larger number of deals and acquisitions. Do you see that type of flow in the pipeline to do that, to do more frequent deals than you have been doing?

Well, Jim, do you want to answer that?

Well, Dan, the opportunities are there. As a matter of fact, do we go chase those as much as we can? The answer is probably not because you’ve had the opportunities there, they have really come to us.

But to fill it out, what we've done is really have our regionals have responsibility for those transactions and support for them, so there is not a tight funnel that they all have to go through. So that we can increase the number of transactions without -- and the total transaction volume in the Company without getting in a bottleneck.

I think though, Dan, to sort of piggyback onto what Jim is saying, we are not going to let the gates down on margins, period.

Okay. And than, just lastly, you mentioned that legal expenses were up about $2 million in the quarter. Is that some unusual items, or do you think that legal is still going to run at a higher level going forward for some time?

I think our expenses are going to continue right now. We keep hoping every quarter it will go down, but until some of these issues are resolved, like Spitzer and the State Attorneys and the Insurance departments until they cease their information flow we’re going to continue to have those costs. Hopefully that will scale down, but we don’t know that, Dan.

Are you stilling getting inquiries from regulators for information? Is that still sort of an ongoing thing right now?

Yes, and Florida is the major one, although we’ve had a couple of others, but it’s slacked off except for Florida.

Greg Lapin with Saranac.

Preliminarily, how likely is it that the FIU Program will get filled with capacity equivalent to last year, or maybe see this program [inaudible].

Greg, I think probably the amount of capacity will go down and the prices will go up and the underwriting criteria will be stringent. And so that renewal is 6/1, and we’re working on it now. And so, whatever it is that’s what it’s going to be.

So they offset each other and probably not have a big impact on your business?

Well, who knows? Generally speaking what happens when you have a reduction in capacity, generally in the short term, meaning one or two quarters, you may have, even though you have increased pricing, you may have a little bit of down draft. But, you see, one of the things that is interesting is that the major concern in reinsurance has been the bottom three counties -- Dade, Broward, and Palm Beach. Elsewhere it hasn’t been -- we haven’t run into any capacity problems. We have been pleased, as a matter of fact, with the way that’s working.

Now, one of the things one must understand is that we have an election coming up in November and one of the issues is that the rates for Citizens -- and this Habitational business -- the rates for Citizens are not adequate to cover the losses, and therefore, they’re having assessments.

The second thing is that in certain areas of Florida the rates for Citizens are lower than the market will make offers, so I would imagine that sometime in the not-too-far distant future, probably after November, you’re going to see some changes in the Citizens’ pricing, which then makes for some changes and opportunities for us.

Bear in mind that we, our Retail offices, write with Citizens. The commission is 10-12%, but a pain in the rear end to deal with because it’s just on and on and on and on, all kinds of stuff that you have to fill out. But it does take business that would be an FIU.

So, there is going to be a reorientation, Greg, and I think that will ultimately end up being beneficial, because the State of Florida doesn’t want to be in the doggone insurance business. And so, they’re going to do things that will allow the marketplace to operate.

Okay. And then my second question, kind of two-part, is how much business are you capturing within your Brokerage subsidiary that has transferred from your Retail operation? And just more broadly the Brokerage growth that you outlined in the first quarter. Are you tweaking that at all?

Okay. Greg, system-wide it may be 15%. In other words, of the business that we’re writing in our Brokerage, various Brokerage offices, maybe 15% is Brown & Brown business. As you know, what we’re -- our mantra, our directive is to the Retail offices, we don’t care who you place it with. We want you to make damn sure that you don't lose an account, so that means they’re going to be searching the marketplace.

Secondly, the directive to the Brokerage is do a better job than anybody else and then you’ll get more business. So that works and has worked very, very well.

The growth of our E&S business, and Brokerage business, is more outside of Brown & Brown than it is inside. And it will continue to be that way we think.

Can you maintain your expectation that you’ve listed, it was in the first quarter, or the fourth quarter conference call in the first quarter?

What was the question again, please?

I think you said that Brokerage may come out to around $160-$165 million.

Yes, yes.

With the disruptions in the market, does that still hold?

Yes, we think so, uh-huh.

Matthew Roswell with Stifel Nicolaus.

Following up on the Citizens’ question, I guess, Hyatt, are you saying we’re going to have to wait until the November election before Citizens kind of starts pricing correctly? And then also, Citizens, do they have enough capital to really provide some capacity?

Well, they don’t have any capital, Matt.

That’s what I thought.

It’s all about -- here’s what is happening. There’s an assessment -- how much is the assessment, 8, 8.6%?

I think it was 6.3. That’s the 2004 assessment that’s gone out. The 2005, which is supposed to be twice as large as 2004, 2005 may be mitigated by tax revenues now that it’s going to be allocated to the issue to help cover the $1.6 billion loss in Citizens.

Yes, and you’ve got to understand also that they are really getting some accounts, from a hurricane standpoint, these are frame apartments and condominiums, and let me tell you, if the wind blows it’s not going to be pretty.

But the answer to your question, Matt, is this. We don’t want to get out in front of any of the people politically because they’ve got an election coming up. But, the reality of life is staring them in the face. And so something is going to be done. And I don’t think anything very substantial will be done between now and November, but shortly thereafter, I think, it’ll have to occur.

So, rephrasing it, essentially we’re waiting on the risk bearers themselves to kind of figure out what they want to do in Florida before things settle down?

Yes. And what is going to happen, we think, is that there are some real opportunities and in those real opportunities everybody is going to have to kind of figure it out and then, I think, because the market is softening elsewhere, there will be some wind at the backs of certain risk bearers to try to capitalize on the higher pricing.

So, this is a very unusual time, Matt, and where you have this kind of uproar there is great opportunities if individual companies can kind of see through the smoke and see where the real fire is and then get to where the best risks are and then price them appropriately.

I guess we’ll figure out who has the best auditing teams. In the meantime, a lot of folks are taking the capital that would normally go into coastal areas and moving that to other parts of the country?

Well, first of all, the regional companies, in most cases, don’t have coastal exposure. Even in the Midwest they’re really not in Florida and they’re not in Louisiana, and whatnot, and so they are making lots of money and so they’re hitting at the soft underbelly of the nationals. And so, the nationals now are responding to that and trying to reposition their business because if they’re non-renewing certain amounts in coastal areas, they want to replace that premium. So that’s what’s happening. It’s a little bit of a feeding frenzy in some places.

And a couple of questions for Cory, if I may. First of all, on the extensions where you had some revenue that sort of trickled out of the first quarter into this quarter, is it a meaningful amount? And then do you then get sort of a big chunk when the policy is actually bound whenever that happens today? Is that the way to think about it?

No, no. I don’t think you should pay attention to too much of that. I mean, you do have some extensions, but it’s not going to be that meaningful.

Okay. And then, I guess, on the non-cash comp, where are we in terms of the next slug of stock? And does FASB 123R actually change when those slugs hit?

It will change just minor on that. The way the PSP, the next big slug will be once we hit the average price of $35 a share for a 20-day average. And at that point in time we will probably reload the PSP grant.

At that time we’ll take the total shares that we grant times the stock price the day we grant it -- we'd presume it would be about $35 -- and then it will be divided by the average number of years. And it will begin to be expensed immediately on the day of the grant on a go-forward basis, whereas right now we only begin to expense each of the parts as it hits the market condition, which is a 20% increase in price.

So, you’ll generally have a little bit lower overall aggregate cost, but it will begin to be expensed earlier. And when we get to that point on the next conference call after that we’ll be able to give you a very definitive here’s the amount that’s going to be expensed.

So, I think we just have to kind of wait for that point in time and I can give you guidance at that point.

Okay, thank you very much. Let’s hope the wind doesn’t blow this summer.

Yes, we’re hoping that too, Matt.

Don [Fox] with [Cinamore] Asset Management.

Yes, my question was answered. Thank you.

Nik Fisken with Stephens Inc.

I guess, just generally speaking, if I listen to the commentary on all the different segments on internal growth, and we appreciate the 0-5 guidance, but just conceptually I’m sitting here thinking how can we ever get better than we just put up at 1.2%? I’d just like to hear from you guys what areas you’re going to get incrementally stronger.

Well, it’s always a good question. The 1.2 or 1.3% is about the bottom of whatever our internal growth has been over a long period of time. And what generally happens when you have softening prices is there is a great opportunity to write new business. Now, sometimes it takes a bit for that pipeline to build up, so we would expect that the opportunities will present themselves.

And so, it’s very difficult, and one of the things that, Nik, as you know, we are very careful about is not giving anyone any unusual expectations that we can’t fulfill. So, if you look at our growth, internal growth, over a longer period of time and you take the average, let’s say over a 5 or 7 rolling-year average, we’re 5, or 6, or 7%, maybe 4 to 7%, depending on which role you’re in, and so we wouldn’t expect that to be any different in the future.

However, in any one quarter, things can change fairly rapidly like they did this quarter. And one of the other things that you must realize is that our business, a great piece of our business, we’re 62% Retail, a great piece of that is pretty much vanilla. And so, vanilla is going to be more attractive in some respects for those people who want to be more competitive.

Now, the bottom line is it’s more competitive from the get-go. In other words, when prices went up the vanilla stuff didn’t go up as much. When prices go down the vanilla stuff won’t go down as much, but it’ll also be very attractive. So, if you then get into our areas like Brokerage you’re seeing that we have opportunities in coastal areas that haven’t yet been filled out or fleshed out. And in other areas, if the economy, let’s say in California and in the west, started to go south our growth out there would be less in the E&S area.

So, it’s kind of all over the ball yard. And so, for us to say, “Yes, we’re going to be able to do in this area, like in Programs we’re going to grow 5%”, we don’t know. And so, what we are is we’re going to just keep on keeping on and whatever our record in the past has been we would expect it to be duplicated in the future, however that works out.

So, your gut feel is Brokerage in Florida getting better.

Well--

The others we don’t know.

Yes. In Florida I imagine it’s going to get a little better.

There is a component in the Programs area that’s just market and product driven that we constantly look at in terms of growing that sector. And there is some that have some headwinds in their face that we’re definitely working on there to flatten and maybe turn those. So, each of those pieces we tend to work on from bottom up.

In the Retail area a major thrust on inventory in the case of driving new business sales. That’s something we’ve always done. So, but you go back really to identify those that may have some particular issue about their product or distribution of the carrier or environment and go back in and make sure you fix those.

And how about the impact from Hull now that it's included for a full quarter?

It wasn’t included for a full quarter. It was included for one month.

For the June quarter, now that it’s included for a full quarter, is it growing meaningfully above BRO average?

Well, if you look at Hull, the bottom line is that they have certain pieces of Hull that are growing -- Hull Special Risk, Hull Personal Line. Then you have other pieces like the operation in New Orleans that was Personal Lines that is shrinking, although, frankly, it's not shrinking as badly as we had expected. It’s doing pretty well relatively speaking.

And then you have Hull around the country and where it’s pretty much middle market stuff, and which it is, the vanilla stuff, that has grown a little or flat. And then there are some Specialty operations, like one out in Colorado that does leasing companies, and that one right now is sort of on the cusp of growing a little. So, it’s all over the ball yard. And for us to try to say that Hull is going to grow x or y, it’s damn difficult.

So, if we included them for a full quarter for the last couple, would it have been positive or negative on internal growth?

Well, if you put them in for the last quarter of last year it would have been positive. If you put them in for the full first quarter of this year it would probably have been about the same.

And Cory, what exactly is going on with this legal?

Well, we just haven’t expensed the legal costs as we get the bills. And we get the bills as our attorneys up in New York have to answer questions and handle litigation like the multi-district litigation. And so, it just goes -- the expense goes in line with the activity level.

So, we’re up $2 million year on year based on [inaudible] data calls. Is that safe to say, or are we just kind of -- are we trying to resolve something?

Well, we’re trying to resolve all of this and it’s just as expenses come up.

Do you sense the overall activity level has increased or decreased?

No, I mean, I think if anything it seems to be slowing down, but you just don’t know. I mean, it’s really just in the legal attorneys trying to resolve it.

Okay. And just so I’m crystal clear, there’s not going to be a real flush of revenue once these capacity issues get resolved. Is that correct?

Well, we don’t know that. If you want to be optimistic the answer would be yes, there would be. If you want to be pessimistic the answer would be no, there wouldn’t be. And so, we don’t know. But the conservative approach would be your assumption.

Bob Glasspiegel with Langen McAlenney.

I was wondering if we could go through what the contingent payments on acquisitions were in Q1 versus a year ago and how the $107 million in sort of one year maximum, as outlined in the K, has changed in the quarter.

It’s the $107 million? The [inaudible] are based on the operating profits of the acquisitions we’ve done. And part of that is that I guess you’re looking more from the 10-K the last quarter I assume.

That $107 was your maximum for one year and in your cash flow statement I think when the Q comes out will give what was paid in Q1 versus a year ago.

Right. And all I can say is that’s just based on their operating profit. We are -- a typical scenario is to take 6 times the operating profit, so whatever they do earn, on a 3-year walk-forward basis, with adjustments during that 3-year period. And so, keep in mind now that one table that shows the maximum earn-out, that is if they hit the actual maximum, because almost on every acquisition we have a minimum and a max, so part of the acquisitions don’t hit the maximum and some of them do hit the maximum. But what that table does reflect is it’s [inaudible] on everything. So the cash flow statement though does reflect simply what was paid. And whatever shows up there is the fact that they made the operating profit they needed to.

On your original question, was it the impact of contingents on the earn-out?

He’s talking about paying out the people that we’re buying from, not the profits.

Right. Do you have that number for the first quarter? We’ll have to wait for the Q.

Yes, wait for the Q. I don’t have it right handy with me right now.

And I guess if I were going to extrapolate from what we’re seeing in underwriting companies, it’s 82 combined ratios with 4% written premium declines. Do these acquired brokers profitability look better or worse with incredibly underlying profitable business they produce for underwriters at smaller volumes. Which is more important?

That’s sort of a conundrum, the question. Obviously, we don’t want to buy anybody with a bad loss ratio. If you have bad loss ratios all of a sudden you’re going to be non-competitive and they are not going to be doing much business and the renewals are going to be real tough. So, what we want are agents who have profitable books of business and a little more niched and a niche could even be a journalist, but a journalist with a substantial market penetration in a particular community.

So, we would prefer to have companies that are very pleased with the agency and the agent and that are paying a nice profit sharing commissions because when we’re getting profit sharing commissions we’re going to be more competitive on new and renewal business than we would if we’re not getting profit sharing commissions.

Bob, the underlying profit sharing in an acquisition company we’ve acquired we value the profit sharing commission on a little different basis than we would sustainable, ongoing core revenues.

And it would be tied more to what?

It would be tied to the longer-term performance of the profit sharing from that entity. So, you may be looking at a longer-term average of what is sustainable because sustainable earnings is a very key component to the valuation of what can you do, not only just over one year or three years, or even a longer period of time.

Adam Klauber with Cochran, Caronia.

You mentioned the markets in national western were softening. Was the softening more pronounced say in March and April compared to January and February?

I would say in the west January, February and March were more pronounced than we had expected. You can always count on the Midwest being-- it’s going to be-- it’s going to be very competitive. The northeast still is, and that includes Pennsylvania, it’s a little more firm. So, we were surprised about the west, Adam.

And what can you do to fight that softening tide in those markets?

Write more new business.

Okay.

Pretty simple!

Yes, it is. In the E&S non-Property, what’s the [inaudible] environment non-Property E&S?

The non-Property E&S the Casualty rates are going down about like you would find elsewhere. Now, we’re talking about-- first of all, you get into binding authority for Casualty and binding authority Casualty is smaller accounts, so that’s generally 5-10% price erosion. If you are looking at the Specialty lines, let’s say MedMal, MedMal is flattish to down a little bit. It’s not wild and crazy, although it’s -- there is a greater interest in writing MedMal today, so you could say the market is more open.

If you get into the D&O area we are writing in probably more private company D&O than maybe many of our colleagues and competitors because we’re in that middle market. And that area is kind of flattish, down a little bit.

Then, if you get into Umbrellas, certain areas of Umbrellas are flat and certain areas they are being a little more competitive, and particularly flat if it’s over a large fleet.

Could you go over Citizens, what’s their commission structure there compared to dealing with a normal carrier?

Well, it’s a little less. Well, I should say a little less. It’s 10-12%, as I understand it. I think it varies a little bit with where we are, et cetera. But, if we were writing with an admitted carrier it might be 15%, so it would be a little less. The premium, however, would be more, so maybe the amount of commission might be the same or a little more.

The problem though, Adam, is this. a) There is just huge amounts of information that has to be sent. If it’s less than $10 million of insured value, then we fill it out and email it in and we do not have binding authority. They don’t bind. And what can happen is we can assume it’s covered and all of a sudden a week later we get something back saying ‘no, it’s not covered because you didn’t fill out this block, or we want this additional information.”

So you have to work well in advance, and then, if it’s more than $10 million, $10 million or more, then we have to submit, and there are all kinds of back and forth, so it is a harrowing experience. And so, many of our Retail offices in Florida avoid it, sending business to the Citizens for that reason, but the other reason is that in these hurricanes the response on claims has been just bad because they don’t have the [inaudible]. And so they have to go out and buy the services and so everybody else is using, in some cases, outside people, so it’s been -- it’s just not been good at all.

And so, the cost of handling that business in terms of our staff is much more expensive than if it’s a regular, either admitted or E&S market.

And one final question. You mentioned that contingents for the last three quarters will likely be lower in comparison to 2005. If I understand correctly, it sounds like options expenses are also higher compared to last year. Is it possible, given those constraints, that the margins, EBITDA margins are going to be going up for the last three quarters?

Well, good question. And the answer is we don’t know. We have a tendency to have margins go up and so we don’t-- it’s hard to estimate, Adam. We’re not anticipating them going down, but they might.

But you’ve got other things going on too, just like we’ve mentioned that our medical costs is going to be lower we expect on a quarterly basis and then hopefully some of our other expenses will be a little bit less. As our revenues grow, if you’re able to keep the expenses in line, then, as a percentage of total revenue, they decline. So, here this has been a very, very difficult market this quarter for us and yet we were still able to improve our margins.

Stephen Peterson with Citadel Investment Group.

I was wondering if you might just briefly re-visit the comments you made on the high-value homes in Florida and you thought that there actually may be some increasing capacity to insure, I believe, the half-a-million to $1 million homes in Florida. Did I understand that or did I misunderstand that.

No, you understand it, Stephen. $500,000 up and then we’re thinking to $1, $1.5 million, $2 million homes, of which [inaudible]. There seems to be a lot more than there used to be. And there are a couple or three companies that have in the last really 60 days opened up in certain areas of Florida. And so, that was kind of a breath of fresh air.

Now, I think what they have done is they’ve done what everybody else is trying to figure out in the Commercial area. They’ve kind of sliced and diced the market and looked at their aggregate and then looked at the hurricane losses that they had and the $500,000 to $1.5 million homes are generally better built and maybe newer. So you put that together and then you start looking at the geography and there are opportunities there. And the homeowners’ prices are going up.

Have you seen carriers who have traditionally not targeted these kinds of homes?

No, they are carriers who have traditionally targeted those kinds of homes.

Doug Mewhirter with Ferris, Baker Watts.

Just a quick question about the market in Florida. Do you think that the upcoming round of reinsurance renewals in June, do you think that might help break some of the log dam and give those companies some more data points to figure out where they want to put their chips down?

It’s possible. And I didn’t get -- what was your name again?

Doug Mewhirter from Ferris.

Oh yes, Doug, sure. Yes, I think the answer is yes, but I think probably the more important piece though, Doug, is for the risk bearers to determine where they think they can slice their business to make an underwriting profit even if there is some [inaudible]. I think that’s the more important piece.

David Lewis with Suntrust Robinson Humphrey.

I have a hypothetical question. If capacity in the first quarter, and if you got the rates that you did on the business you were able to write, would your organic growth have been up 2, 3, 4 percentage points more?

Well, it would have been up and if we could have written all that has been offered to us it would have been up 9 points and just how much that would be, David, our economists don’t know. It’s sort of feast or famine and right now, what’s happening is that there is a constriction, sort of like the hose. There is a whole bunch of accounts flying down -- flowing down this big hose or pipe and then when it gets down to our brokers the pipe shrinks and it’s only 40 or 50% of the five that it is back upstream. That’s what’s happening to us.

Now, if that constriction opens up, then good times are here.

Sure. On the business you were able to write in coastal Property, what was the rate online average? I mean, is it up 50, or--?

It’s all over the place.

That Construction class and location and all, David, the only place. But if you look back to 1992, ’93 and if you look at the growth in premium and values post that storm it took a while for in fact the rate structure to be in place and the capacity to be in place, perhaps no different from here. I was talking to one division, they were saying in mid-’05, 2005, they began to get some degree of stability to the market after 2004 only to have the 2004 five storms disrupt the capacity again.

So, there is going to be really a few quarters there to sort out the new markets, the new capital, the new play, and what we’ve done historically is we’ve done as good or better job than most finding those new opportunities and we’re looking forward to that.

I think one thing that is abundantly apparent, when Wilma came through and came in on the west coast and came across through Broward, Palm Beach, it came abundantly clear that older construction did not fare well with a class 2/3 storm. And the bottom three counties you have the best of worlds and the worst of worlds. You have the most new values and you have the most old values. And so there is going to be definitely, at least in those three counties, a bifurcated market. And if you happen to be the owner of one of those properties that is in the frame and it’s older than 1990, then it’s not going to be real pretty. If you are an owner above that, then it could be okay.

Sounds like the old properties go to Citizens.

Well, it’s not a good-looking thing, whatever.

Gentlemen, it seems we have no further questions at this time. I’ll turn the conference back over to you for any additional closing remarks.

Okay, well, there are no other closing remarks and thank you all very much and we’ll go forward. See you, I guess in July. Bye. Thank you, Candice.

Thank you. That concludes today’s conference. Thank you all for your participation.