Brown & Brown Inc (BRO) 2006 Q2 法說會逐字稿

Good morning and welcome to the Brown & Brown Incorporated earnings conference call. Today's call is being recorded. Before we proceed, we would like to inform you that certain information that will be discussed during this call - including answers given in response to your questions - may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance and that such statements are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those certain appreciated or desired or referenced and any forward-looking statements made as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

Additional discussion of these 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 performances and those actual results and events may differ from those indicated in the call. Such differences may be material.

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

Thank you, Candace. We have Cory Walker and Jim Henderson and myself; and so we will open up with Cory.

We had an excellent quarter. Our net income for the quarter increased 20% to $44.4 million. From the revenue standpoint, our commissions and fees for the quarter increased 12.8% to $217.4 million. That is up from the $192.7 million we earned in the second quarter of '05.

As shown in our internal growth schedule that is attached to the press release ,our profit-sharing contingent commissions for the quarter was $4.6 million or $600,000 more than the 4. -- $4 million we received in the second quarter of '05. We received a little bit more profit-sharing than we expected in the wholesale brokerage and the program division.

Our best estimate of how much profit-sharing contingent commissions that we received in the third quarter of this year should be around $900,000 compared to the $2.6 million we received in the third quarter of '05. In the fourth quarter we will probably only receive around $400,000.

So if you exclude the profit-sharing contingent revenues, our total core commissions and fees for the quarter increased 13% or $24.6 million of total new commissions and fees. Of this total, $11.8 million of it was generated from businesses that we acquired since the second quarter of last year. So thus, the remaining $12.8 million of revenue was internally generated organic growth, which reflects a very nice 6.8% overall internal growth rate.

Moving on to other revenue items, our investment income increased by $1.4 million due mainly to the higher interest income yields in '06 versus '05. Our other income, we had really less than $500,000 of revenue there.

As it relates to our expenses and our pretax margin for the quarter, our employee compensation and benefits as a total percentage or percentage of our total revenue improved to 46.7% of total revenues. And that is from 48% of last year's second quarter. This improvement was due to higher commissions and fee revenue on businesses that did not have a corresponding variable compensation cost comp on it.

Additionally our medical insurance cost increased at a lower percentage than our revenues grew at.

Our next line item of non-cash stock-based compensation increased as a result of the new FASB 123R as we discussed in the last quarter. Our other operating expenses as a percentage of total revenue was 30 basis points more in the current quarter and 13.6% of total revenues from last year's percentage of 13.3.

There was a slight increase in our T&E expenses and our data processing expenses; however, one of the bigger differentials was the fact that last year's second quarter benefited from the reversal of $1 million accrual from the State of Florida Communications Act that was repealed by our State Legislature in April 2005.

Our amortization expense is higher, due to the acquisitions we did in the first half of this year. Our interest expense for the quarter is down slightly mainly due to the payment in April of a $35 million note related to the acquisition of Hull & Company.

Then from an income tax standpoint, there was no significant change in our anticipated effective tax rate of 38.6%. That should be a good number on the remaining two quarters of the year. We did have a cumulative true up of our deferred income tax liability accounts of about $1.1 million.

So for the quarter our $44.4 million net income was up $7.4 million or 20%. The trends just discussed for the second quarter really are very consistent with the trends for the six months year-to-date. And as such I won't go through a line by line explanation there by just saying that we're very pleased that our earnings per share for the first six months of this year are $0.67. That is up 17.5% from the $0.57 we earned in the first six months of '05.

So with that summary I will turn it back over to Hy.

Great report, Cory. Relative to Florida retail had a very good quarter up 15.2% internal growth versus 4.5%. Looking back all the way to year 2000, the best quarter we ever had that was better than that - and we only had one quarter in Florida retail - was the third quarter of '02 when Florida retail grew 15.3%.

Property is the name of the game with win. Every new and renewal is at the very best challenging. We do have -- Brown & Brown does have a large and knowledgeable presence in Florida; and our ability to solve problems is driving the revenue increase, both new and renewals. We are for the first time experiencing Citizens Insurance Company full on and what that means is that for many many accounts, the only market for win is Citizens, which is the state of Florida.

Citizens has changed the way they do business. We have been struggling during the first quarter and into the second quarter with finding people that we can actually talk to. We now have been reasonably successful. We have a much better game plan as on how to deal with Citizens and of course Citizens is being [inundated]. They just have more business coming to them than they can possibly handle.

For the Citizens account and the Citizens only is available for habitational, which is homes, condominium, apartments and certain ACLS may qualify. Now any account that has 10 million in values or more is A rated - which means that when the application is sent in, we don't know what the price is. And they - Citizens - will then apply actuarial tables plus some other stuff and come up with a rate. It is much higher, obviously, than it has been.

The capacity of outside of Citizens, eligibility is very very tight. Casualty prices have changed a little. Casualty is flat. Workers comp is down - 8, 10, 12%. Interior Florida is still getting some new capacity on certain accounts. Large - we are writing a larger number of accounts, again in Central Florida and around Florida, because they're problem solving in the local office.

Casualty down in the center part of the state - Orlando, Ocala, Gainesville, etc., etc., Lakeland - casualty accounts in pricing is down around 10%. That does not apply in the coastal area. We do see a few companies now starting to be entrepreneurial. Again we have more capacity and more means slightly more for homes from -- and these are two national companies that are writing -- actually three, that are writing large homes. More than half $1 million of values, and they are writing them along the inner coastal. They are writing them along the ocean. They are writing them towards other areas in Zone 1. And that is a little new and different.

We have seen a couple of situations where a national company says, "Okay. We want that account. But that is very unusual. And what we're seeing is that many, many commercial accounts are being renewed with either no windstorm or 25 to 50% of the former wind cover. That's kind of unusual. And there are no favors being given in Florida.

What that means is if we have an account that has been with any company for 15 years and has been a profitable account and they decide they are going to get off the win and we try to impose upon our long relationship, the answer is no.

Going on to national retail. Did a little better there. Minus 2.2 versus 2.5. If you look at Georgia north to Long Island and Brownsville to the Panhandle, Florida is different now. You'll find that in all Tier 1, it's just tighter than Dick's hat band. Higher rate deductible, lack of capacity, etc. We are even seeing capacity by zones now in New Jersey and New York. What that means is and it goes all up the coast that wherever companies have -- they have divided the coastline into zones and they look at a total amount of values that they are ensuring and when they hit that value level, that is all.

And if they've got more than that value level now, then they are going to nonrenew enough to get back to wonder that exposure is.

Once you get just inside of Tier 1 - and I'm talking about going up the coast, Georgia, South Carolina, Virginia, South Carolina, Delaware, etc. Once you get inside then you have very competitive pricing on cash like -5 to -20%.

Houston, out in the Texas area, is kind of an anomaly. It is 50 miles from the coast. The companies have been tightening their very substantially -- the wind availability is, in the last 90 days has just gone -- it's dried up. Basically the state windstorm pool considers that South of I-10 which kind of runs through the southern part of the city, South of I-10 is Tier 1. Companies though are now considering that all of Harris County which is - as I understand it all of Houston - is considered for them for underwriting purposes Tier 1, when in fact the state pools doesn't apply Tier 1.

And therefore there are accounts that are going either without coverage or they are having to go to surplus lines and that capacity is drying up as we speak. Casualty renewals are down to 10 to 15% there. A new work comp law is in effect which allows employers to elect networks. And so if you say, "Okay, we are going to use the following network of doctors, hospitals," then you are going to get a 10 to 15% discount on the premium. And that is driving workers comp premiums down. It is possible - it just maybe may be possible that casualty, it's starting to flat in the Houston area.

Moving over to Lafayette, Louisiana. Lafayette is sort of right where I-10 comes across and anything South of I-10 in Louisiana is Tier 1. Nonadmitted win is the only thing that is available if it is available South of Tier 1, but the Citizens Insurance Company - the state in Louisiana - it's not limited to habitational.

In other words they are writing both habitational and commercial property. Therefore people are not going without insurance, although they just -- the assessment has just now been placed across all properties with property policies and it's 18% of assessment. Don't know whether that is right or not.

The rates at Citizens are ISO rates plus a load. And Citizens is not writing any course business income so there are some wraparounds. There's all kinds of things going on in terms of adding coverages to Citizens. Casualty is flat so -- and workers comp is down 5 to 10%.

In the Northeast, it is kind of all over the place. The regionals again are driving the market in the Northeast. Same thing in the Midwest. We are seeing some kind of horror stories in the Midwest, relative to renewals on -- well, manufacturing comes to mind where the manufacturing has light products exposure.

We saw one that we were going after where the renewal, where the expiring price for this manufacturing outfit was 268,000 on the package and we wrote it for 115,000 and there was another quote for 113,000. So that is Midwest.

In the Western region, we are doing better. -2.3% versus -5.8, California is still kind of crazy. Workers comp now has been going down 40%; but that's going to stop as of 1st of September. But there's another 14 to 16% because of rate decreases. So Cal comp continues at a downdraft.

New construction wraps are drying up as projects are not moving forward. There are some projects, they are smaller and there is more competition on those projects. Quake is up 100 to 115%. That is all across the Western part of the United States. But if you look at [vanilla ]packages in California, most places they are down 10 to 15%.

In Seattle, standard markets are -10 to 15, maybe 20. Marine is flat. Quake is the same as California. Moving to Phoenix, a little more stability there. Flat to down 10%. Denver down 10 to 15. Work comp, very competitive.

Moving into professional programs, about the same as last year - last quarter -5.4% versus 5.7, -5.7. Small lawyers and insurance and title agents is soft and down a little. Title agents is actually not as much business because there's less closings. The real estate activity affects that.

The good news is that our dental program did grow to 6% this quarter which is the first time -- that's the largest growth -- that's the largest internal growth in the dental program in maybe ten years.

CalSurance programs are under pressure. And special programs were up 19.4 versus 13.3. Strong growth led by Proctor, which is our [fourth] place business home office in the Detroit area. FIU - which is a condominium - plus PRU, which is public risk, and PSRG. PSRG is large (technical difficulty) lawyers and, interesting, we have been writing more large law firms and prices seem to be stable there.

In the brokerage area, up nicely from 3.3% last quarter at 13.4. Coastal property, everything I've said about Florida and all the coast you can say that about brokerage. It is a same thing. It is wild and crazy. Lesser limits remain operative and almost all cases. Caps drying up.

Now there was some lag from core Q1 and then it's pretty much caught up because extensions just really aren't being allowed today. Umbrellas are down 10 to 15% and of course, again, in international as we are seeing less even though international interest is growing we are seeing that the number of wraps is less and the wrap activity is less and prices are down on smaller construction wraps.

The TPA continues to chug along up 3.9% as opposed to 4.1%. They are doing very well. Margins are continuing to move up. U.S. IS is now at 25% which is very good. London capacity - Pal and Gemini were in London in the middle part of June. We are looking to see what kind of capacity there would be because we can use all that we can find. And we found some consternation and some wide eyes.

First of all the Wilma loss development is much worse than expected in South Florida. There is basically not much if any new aggregate available in South Florida. Most syndicates are full. The Tampa Bay area also, because of the modeling, shows a huge concentration.

Going up into Georgia, South Carolina, North New Jersey, New York - the aggregate is tight. Some syndicates will be able to write some net lines but that is small. $250 to $1 million and not much help.

We have been able to, in a couple of our brokerage areas, Hull special risk is doing well. They have some additional capacity and also [Brachfield] has got some additional capacity.

In summation, we are seeing some capacity start to creep out of its bunker as summer drags on. And that means geographic picks and construction picks that geographies seems to be more prevalent in terms of picking than the construction.

Employee benefits continues to rise 5 to 12%. And we are expecting that CNC will continue to be softer and I'm going to hold my internal growth projection until after Jim. So, Jim, it is all yours.

Very secret. Thank you, Hyatt, and good morning.

I wanted to cover a couple of comments about acquisitions but prior to that to talk about a couple of initiatives that involve, really, our most valuable asset and that is people. The ability to acquire is in fact direct proportionate to your ability to have [VIN] strength and talent to take on new acquisitions. The two initiatives on people - first with respect to Brown & Brown University.

Tom Pinwall and Power Brown have led an effort, to develop an extremely effective in-house sales school. The measured results of the graduate of school -- graduates of the school are appreciably better than the nonattendees of this program. A measurement of this success can be reflected, or it is reflected in our top gun sales report or in-house reporting sales [organ].

This year we have noticed an increase in the number of top 10 -- top 100 of the top 100 producers and the increased number that our recent graduates of the Brown & Brown University sales school. We have had some 130 sales professionals to complete the school. And in addition we have sent 21 of our retail profit center leaders to this school.

The profit center leaders attending the school is a part of a process of training the trainers. Our goal is to send an additional 500 producers to the school over the next four or five years. We continue to broaden our recruitment program. New individuals out of college, and also some individuals in their 20s and 30s with some degree of experience of coming in and teaching them insurance with sales aptitudes.

We are very pleased with this new talent base. We continue to develop and also, likewise, pleased with a new mentorship program.

With respect to leadership development, in January 2006, we announced a promotion of [Linda Downs] to Executive Vice President of leadership development. Linda and Laura Simon have assembled a class curriculum of the most proven components of our very best profit centers into a two-day intensive training class.

We have completed three sessions involving retail offices of approximately 15 profit center leaders per session. The sessions are held on Fridays and Saturdays and are taught by regional executive leadership including Hyatt, myself and our corporate leadership team. The feedback has been very positive from the attendees.

Each class reviews a matrix of operating data of our most proven systems and departments and offices to constantly improve margins and to grow the top line. We stress the importance of a discipline adherence to an established system of making money.

One of the aspects that we've spent extra time to review is the fact that we expect our profit center leaders to be sales leaders. They need to be in the sales process. They need to be a center of influence. They need to be in the community, they need to bring in accounts. They need to, in fact, get their hands dirty. They need to be handling accounts to be on the line with their fellow sales professionals.

We plan to have all 150 of our profit center leaders attend this program. We believe this process will bleed our culture deeper into the fabric of the community.

Now with respect to acquisitions, comments are -- we really -- it's business as usual. We have completed 12 transactions for about 32 million in the first half of 2006. The pace of acquisitions for the six-month period is consistent with other six-months periods from prior years. The timing of transactions cannot be scheduled and creates lots in revenue growth.

We have often described the process as like fishing. Sometimes they are biting and sometimes they are not. There are different components that cause a seller to postpone or in fact to pull the trigger on the transaction. Our standards of acquisition remain the same. We are looking for great people with sustainable high-margin operating clients.

We have also mentioned, at times, we really have no budget for acquisitions. I would say that our inventory continues to be very favorable with prior years. The number and quality of opportunities we talk to, still, we're very very encouraged on acquisitions.

Probably out of maybe every ten acquisitions we identify that is a prospect, the hit ratio is probably about two to three of those ten. We probably make offers on maybe about three of them and in fact maybe close probably two plus of those.

We continue to pay for delivered forward earnings. The formula has really not changed in the 25 years plus we have been in this, the acquisition mode. And competition, I would say really, there's no appreciable change in competition from either from banks or from other agencies.

With those in mind I turn it back cover to Hyatt for closure of the -- his comments, and then open the session for questions.

Thanks Jim. To sort of piggyback on what Jim is talking about, as you notice, our pretax margin in the first six months has room from 30.9% to 32.1. All of this comes about as a result of a constant communication of how to do things better.

The PCL - Profit Center Leader - schools which are Saturday, Sundays, and I can tell you when you are in one of these for eight or eight-and-a-half hours where it is interactive. Everybody has a part. Everybody is making reports. It is staccato in the way it is delivered. And it is all about how to do things better.

We have a responsibility, we - the leadership of this Company - to enhance every single person in the Company. And that means that we will all be able to run faster and jump higher. In fact, we recognize through matrix that we have devised what the real opportunities are in retail, in brokerage, in programs and in TPA in terms of margins and those margins are not discussed.

But I can tell you they are a lot better than what a lot of people think is available for the future. We are always looking to the future.

So this training thing - unlike many who have professional trainers, we feel that those who make it happen are the ones who understand how to really be good teachers. So that is why all of us are doing it. I can tell you, it's a lot of fun but it is also very, very draining.

So we are -- this education program and enhancement program will continue to be -- flourish and Linda and her staff, Laura Simon, have done an excellent job on gathering information and putting together a syllabus, and organizing and then participating in these educational programs.

In addition to that, we are honing our measurement devices so that -- because we are a meritocracy. We must be very very attentive to the compensating people on the basis of their ability to rise, and recognizing that, we have to be very objective in our measurement system. All of which is part of being a meritocracy.

Having said that, now for the estimation on internal growth. Are you ready? Zero to 5%.

Okay, Candace. Would you like to open it for questions?

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

Good morning and thank you. Hyatt, I know you don't track this in any great detail but maybe gut feel or just rough terms how much do you think of the 15.2% of retail organic growth came from rate increases versus new business? I don't know. Is it 50-50 or can you give it any guess?

Well, it would be a guess. I would imagine that it's probably -- you see what is happening is, is on renewals we are getting increases but then there are some rules that have no win. And so all of a sudden you have a downdraft or a flattish.

So if I had to guess, I would say probably maybe 60 to 65% would be rate increase; and the balance would be new business but that would be strictly a guess.

I understand. That's helpful. Refresh my memory on the commissions out of the E&S side and the Citizens side versus traditional. And is more of the business going to those other nontraditional players?

Yes, more business is going and of course, there's a huge amount going to Citizens. Now Citizens - the repackage commission is 12% but it is not paid on all of the premiums. And I can't exactly explain to you how they figure that out but it is less than 12%. And of course our normal package commission is 15. So it is a little less.

And assessments and pass-throughs are not eligible for the -- .

Yes and I don't know exactly how to categorize that. Then, on the A rated stuff, I'm not sure exactly how that is and then, of course, on the non-admitted paper generally, again, that is seven to maybe - maybe - 10% depending on the circumstances and maybe as low as 5 depending on how difficult the placement is. So yes there is at the retail side, there is some hurt going on there.

That's helpful and finally, Cory, can you give us any guidance on what the stock grant comp might be in the third and fourth quarters? I know it bounces around a little bit. Is 2 million a good starting point for a quarter?

No. I think there's a lot of estimates going into that. So it would probably be running at a total cost for the year of somewhere around 5.2 to $5.5 million.

And that we should kind of take that and evenly split it in the third and fourth quarters?

Yes.

Thanks very much.

Dan Farrell with Fox-Pitt Kelton.

Good morning. Just a couple of quick questions. Firstly, you talked in the first quarter about the lag in business and the extensions that you saw in business in the first quarter. How much of an impact that have on your 2Q growth in terms of benefit that you saw?

We don't really know. You see what happens is, is that if there was an extension in January it might have been until February. And so generally it's a 30-day extension and so how much was there extended in February -- I mean excuse me in March that got dropped into April, we don't know, but whatever it is there aren't any extensions now.

Okay. Then the comments that you made on Wilma development. Is that a trend that we've seen emerging in the second quarter?

Yes and it's not just in London. It's elsewhere.

Thank you very much.

Nik Fisken with Stephens Inc.

Good morning. How did we end up at 0 to 5?

Well that's the way we ended up.

If I look at Florida at 15, why is that going to go down?

I didn't say that.

Okay. So -- ?

See, here is the situation. If you are not sure what it is, then it's 0 to 5. So that is the answer to your question and so that is the only answer.

Fair enough.

You didn't expect us to give you any other answer than that, did you?

No. I actually won some money off Fred this morning.

Cory, can you give us the details on that 30.1 million other Op expense, please. I didn't get it down fast enough. (MULTIPLE SPEAKERS) You said it was a year on year benefit from last year.

Last year, we had 25.9, $180,000 and included in that was a $1 million credit that came back from reversal of a tax accrual because they did away with that communications tax that we had to accrue for. So my point was, is that that number last year was a little bit down because that was an unusual item. So you take that out and the cost structure really weren't -- there weren't really any major significant changes into this quarter from last year. Our T&E was up a little bit and our data processing expenses were up and those are just kind of minor changes. But there was no significant changes in the basic percentages.

Just to clarify on the tax rate as well, you said 38 6 for the rest of the year?

Yes, 38 7. 38 7 is probably closer.

Adam Klauber with CCW.

Good morning. Could you give us a view on the carrier perspective coming into this year. Most carriers will take advantage of the hurricane activity throughout the country. Not just the wind exposed. Now when you talk (indiscernible) and wind exposed areas, I guess, what's their appetite?

What are they telling you as far as their appetite for business?

Adam, there's not much appetite. And you're thinking about, I presume, the admitted market now, are you?

Yes.

There's just not much appetite. What's happening is this, is that the admitted market is looking carefully at each and every renewal as to whether that's a renewal they want to renew, based on the wind exposure that they already have in that geographic area and the construction and any losses they might have had in the past.

So, it's pretty much right, just -- it's kind of dried up, to be very frank, in Tier 1. But we are starting to see a little thing here and a little thing there, where people are saying, well, maybe I can write this and I can write that and --

But the real effect, Adam, is that the admitted market is trying to reposition its premium volume elsewhere in the United States and that is part of what is forcing the pricing down.

Right, so when you talk to carriers about non-wind exposed areas that are pretty aggressive as far as wanting premiums?

Yes. Very aggressive. Very aggressive.

Now it sounds like some people are starting to bite a little. Is that more Bermuda, London or is that more onshore capacity? Who is taking a little more risk?

It's a little bit of both but at the moment it is more onshore.

The Bermuda, London pricing of course is much higher. Prices are much higher and so, therefore, the admitted market is constrained to some extent by filing. And so what's going to happen is - in Florida as an example and Florida would be worth the greatest amount of stressed benefits because it's the largest state with a big wind exposure.

What is going to happen is there will be a special session of legislature to hopefully try and correct some of the problems.

Adam I guess that we are past the time the companies can deal with some of the shock therapy on their loss development, the Cat modeling, I think some of the shock that is seen there is maybe to realize those are a reaction; and probably today we companies know more about their capacity than they did three months ago. Certainly six months ago.

So at least you've got an answer. Maybe three months ago you could not even get an answer.

Okay. Jim, a question on acquisitions. Throughout the industry maybe over the last 12 months, it seems like we've seen a lower level of acquisitions than we saw a couple years back. And in particular, it doesn't seem like we are seeing a lot of mid to larger size property. I guess I categorize that as maybe 25 to 100 million.

You are not seeing many of those deals come up and get done. Why do you think that is?

I guess some of the players that was driving that, in the case of banks and I think some venture capital money the last several years, I mean they went out and they pulled a number of those properties together; and I don't know that their results have been as great as perhaps, say, with forecast. That's my own view of some of that.

We never really been part of that particular song. We've been after a lot of fold ins. Our transactions average around 5 million. Occasionally we do a larger opportunity that really kind of fits.

So in terms of our keeping cadence with the overall market, it's just really probably not the case. So we've -- the earnings, a quality of acquisitions, opportunities continue to improve. Just the owners realize that earnings really does set the value.

So I don't know that certainly our activity is necessarily reflective of the entire industry. Because sometimes that is influenced by venture capital money that may have a different ultimate end game.

Can you characterize your pipeline? Give us just some indication of how much is retail versus wholesale?

Good question. In the first half of the year, we did three brokerage transactions. A program and an -- a retail and not out of line with our composition of our Company. It is not really out of line with current opportunities that are before us.

I would say that we have talked about additional fold-in opportunities because they do take time but they are just amazingly accretive. So I think that is one area we are going to continue to focus on. They are very safe, the earnings, day one, you are not dealing with cultural issues.

So that is something that we think we want to spend even more time looking at opportunities to fold in to existing locations. But really no change in mix between programs, brokerage, and retail.

Meyer Shields with Stifel Nicolaus.

Good morning. I was wondering if you talk about whether -- you talked about how the initial capacity starting to sort of creep out of the marketplace. What does that tell us about the underlying reinsurance market, if anything?

I think the reinsurance companies are backed up by retrocessional support and that market, as we understand it, has just completely evaporated. So for a reinsurance company to put up $100 million backing to a primary company, they don't have the backing to do it and therefore it is just not there for that.

Then the mentioned in the case of the Cat modeling is where the concerns about what are the P&L's? I think that is being reviewed. Causing some concern and, right now, I think because the experienced companies have delivered some bad news to their boards, so they are playing safe. They are getting down to retention. They feel like they can really manage their retention expectation in the next year or so.

If we have no new hurricanes, I think that money will continue to come to the market because the returns will be extraordinary if we don't have hurricanes this year, which will attract probably offshore capital. We do see that capital, though, has a difficult time deploying itself to retail and to wholesalers, let's say, in the mid market.

They can participate in the large, larger accounts. But to supply new capital to the middle market is much more difficult there. So we really see some improvement, slight improvement in capacity play deeper in this year if we don't have hurricanes.

And if we do, then, it's a brand-new ballgame.

That's helpful. And if I can change topics briefly, are you seeing any place changes in the personal auto business that you produce?

You know, that is very subject to geography and in my travels around to the various offices in the last about three weeks, I have been up-and-down the Eastern Seaboard. The pricing on automobile insurance has not come up so that means to me it's not going up and down. It's probably status quo.

Thanks so much.

Dan Johnson with the Citadel.

Thank you very much.

Just one question. You've mentioned construction spending. Construction activity a couple times in the last few conference calls. Is there any way to put your arms around sort of broadly how much of your business is likely influenced by national construction activity?

I don't know about national. I guess you're thinking that as the country goes so goes every region, and every state, which is generally true but we don't break it out. We don't have a breakout as to how much of our business is construction.

Obviously, we have a lot of contractors insured. Many of our contractors are small and middle-sized contractors; and there has been a lot of activity. The hurricanes have created a lot of additional business for our people that we insure around the Southeast that has not occurred elsewhere.

But the bottom line is, Dan, I can't, I wouldn't have a way of telling you 15% of our business is directly cooked to construction.

Do you have a sense as to if it's mainly tied to more homeowners versus commercial construction?

I think it's probably in the West where you have the wrap project. I would call that mostly dwelling-driven or habitational-driven. Elsewhere I think it's all across the board. But, again, you come to Florida and there has got to be a lot of individual and condominium source of projects.

Thank you very much.

Julie Coe. Philo Smith.

This is Julie Coe from Philo Smith. I'm wondering in terms of the growth that you're seeing, is there an ideal balance that you would like to achieve between organic growth and growth of acquisitions? Or do you even have a preference?

Sure. We have a preference, Julie, but the the problem is our preference doesn't matter. It doesn't matter. Whatever it is, that's what it is. We always have set a goal of trying to have 7.5%, if we could, internal across a ten-year period. 7.5% and 7.5% from external acquisitions.

So that is where we would like to be; but sometimes we can get there and sometimes we don't.

Right. It is what it is. Okay. Thank you.

Ron Bobman with Capital Returns.

Good morning. Congratulations on doing a nice job.

At Brown & Brown University are you referring to it as hurricanes or hurricanes?

The hurricanes are from Miami. The hurricanes are those things that come in and blow around.

Thanks. I had a couple of questions. I wonder if you would talk about (MULTIPLE SPEAKERS)

Just going to talk about them.

Would you discuss at all -- you obviously, because of your national footprint, you can see how claims are being handled in the wake of Wilma in Florida and in contrast how claims are being handled in the Louisiana area in the wake of Katrina. So could you talk about sort of the state of repair and may not looking for specific carriers being mentioned but would you contrast at all how claims are being handled fairly and equitably and the state of repair work that has been done?

Then, I had a couple of other questions.

Yes. And it's a really interesting question because there is a difference. Prior to 2004, every time there was a hurricane in Florida - and don't forget I have been in the business since 1947. Excuse me, for 47 years since 1959 - and so always before, when a catastrophe occurred, the companies came in and brought in just reams and teams of adjusters. And their idea was to get the claims paid and get out of town.

Therefore claims were generally overpaid. Since in those days there was plenty of capital and things weren't quite as competitive, it didn't matter because there weren't that many hurricanes.

That changed after Andrew. That still happened in Andrew pretty much in 1992 and '93 when they were being paid. But then in '04 and '05, it's a whole different ballgame. That is why this loss development thing is such a problem because companies are not bending over and paying claims that they don't think are rightfully covered.

So there has been more anxiety; and there has been more difficulty in the settlement of the claims.

Now can I tell you how many what percentage of the claims are not closed that should have been closed? Well, no, I can't. But I can tell you there are a whole bunch of them that are still open. As claims stay open longer, they don't get better. They get worse.

And that's in both regions, Hyatt?

Yes. All along the Gulf Coast.

Perhaps Florida may have because of its frequency of hurricanes, issues between flood coverage and wind coverage - which is a major issue in the courts in Louisiana. I think Florida has gone through so many sessions of that is that, today, that is a more established understanding of that coverage, many to our buyers and certainly conveying the opportunity to buy flood.

As we understand it, there's quite a lack of [really] flood coverage in Louisiana in many cases that would provide benefits that one would expect.

Then a couple of other questions. Hyatt, you mentioned two and then you upped it to three national writers that were selectively or looking at high value homes. I think you were talking about Florida along the coast.

I was.

I'm sorry. Could you say who those were?

I don't think I'd rather do that. But you know all of them.

Could you describe at all any insight into what is going on in the Florida workers comp market? Rates, levels, competition?

It's very competitive and prices are going down. There's a rate decrease in effect; but it's -- and of course, loss ratios have been pretty good. So it is very aggressive. There is lots of companies seeking new workers comp [monolines].

Five to ten, ten plus?

Ten plus.

Thanks a lot and best of luck.

(OPERATOR INSTRUCTIONS) Kenneth Billingsley. BB&T.

Good morning. I have a question regarding commercial package in Florida. Would you say that commercial package capacity has shrunk in Florida?

You better believe it. It's admitted commercial property and a package or in any other form is really really scarce. So when we can get a renewal of an existing policy with an admitted carrier, we feel very good.

You made a comment earlier that, on the casualty side, rates are fairly flat. That sounds like there has been an increase in capacity of people wanting to write the stand-alone of the casualty portion. Is that the case? And who is that? Where's that coming from?

No. The casualty prices were going down, prior to really it started to change, end of the first quarter, end of the second quarter. What is happening is that since there -- if a company has the willingness to write the property renewal, they are saying "Okay, I'm not going to reduce the casualty. If you want to buy your casualty for less from somebody else, go ahead and do it and we won't renew it." And you are going to pay four times more for your property. So it's a no-brainer.

And that is why the casualty is flattish.

But you're saying, you don't believe there has been an increase in capacity of just stand-alone casualty?

Well I mean there's plenty -- well, heck, I mean someone -- first of all if the property is nonrenewed and it goes into Citizens or it goes into a nonadmitted market. Then there has never been a lack of capacity for casualty. It is just available.

So in those cases, there would be more price competition. But for some reason or another, it doesn't even seem to be that competitive at the moment in those areas.

Thank you.

There are no further questions of this time.

Thank you very much and we will talk to you all at the end of next quarter. Thank you. Thanks Candace.

Thank you. That does conclude today's teleconference. Thank you all for your participation.