Brown & Brown Inc (BRO) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to today's Brown & Brown Inc. conference. As a reminder, 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 indicated to fall within the Safe Harbor provision. Actual results or events in the future are subject to a number of risks and uncertainties and may materially differ from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

Additional discussions 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 performance and that actual results and events may differ from those indicated in this call. Such differences may be material.

Speaking today will be Mr. Hyatt Brown, Chairman and Chief Executive Officer; Mr. Jim Henderson, President and Chief Operating Officer and Mr. Cory Walker, Chief Financial Officer. With that said Mr. Brown I will turn the call over to you. Please go ahead.

Thank you very much, and good morning everyone. Cory would give the financials please?

Certainly. We had an excellent quarter. Our net income increased 15.8% to $40.3 million. On the revenue side our commissions and fees increased 11.2% to $212 million. That is up from $190.6 million we earned in the third quarter of '05. As shown in our internal growth schedule, our profit-sharing commission for the quarter was $2.1 million or $500,000 less than the $2.6 we received in last year's third quarter. We expect less than $400,000 of profit-sharing commissions in the fourth quarter this year. Excluding the profit-sharing contingent commissions our total core commissions and fees for the quarter increased 11.4% or $21.2 million of new commissions and fees. Of this total 11.5 of that revenue was generated from businesses that we acquired into the third quarter last year. Therefore, the remaining $9.7 million of revenue was internally generated organic growth, which reflects a nice 5.2% overall internal growth rate.

Our investment income increased by $1.8 million, which was due both the higher interest income yields and higher investment balances in '06 compared to prior year. And then of course our other income was less than $200,000. As it relates to our expenses our employee compensation and benefits as a percentage of total revenue improved to 47.6% of total revenue from 47 to 49.3% last year's third quarter. This improvement was due to higher commissions and fee revenues on business that did not have correspondent variable compensation cost component.

Additionally, similar to the previous quarter our medical insurance costs increased at a lower percentage than our revenue increased. Our other operating expenses as a percentage of total revenue was 50 basis points more in the current quarter than moved to 13.9% to total revenues compared to last year's 13.4. We had slight increases in our travel and entertainment expenses and our data processing expenses.

Amortization expense is slightly higher due to acquisition completed last year. Our interest expense for the quarter is down slightly due to less outstanding debt balances, and then there was no significant change in our anticipated effective tax rate for the year. So for the quarter our $40.3 million net income was up $5.5 million and at that 15.8% increased over last year's third quarter. Pretty much the trends that we just discussed on the quarter basis hold through for the year to date, and so we will bypass going down the year to date numbers. But just summarize by saying that our year-to-date earnings for the first nine months of '06 was $0.96, and that is a 17.1% increase over the $0.82 we earned in the first nine months of '05.

From a balance sheet perspective, we got good cash position, got over almost $63 million of free cash available. And with that, we are also working currently on a $200 million line of credit deal that when be in existence for about three years to where when we borrow off of that line, it will turn into ten-year money. So we probably will expect to complete that deal sometime in the fourth quarter.

So with that financial overview, I will turn it back to you Hyatt.

Thanks, Corey. Good report. Going to Florida retail grew internally 15.3%. That is about the same as last quarter at 15.2%. Property has called down just a little. Some rate increases are mitigated. Some standard carriers are picking and plucking and writing selected accounts here and there. Condos and apartments are pretty much Citizens. That is the state of Florida unless AAA and hard glass or shutters. We continue to write new accounts, quite a number of new accounts because of our wind market knowledge and we are also finding and I don't know whether this is an aberration or not, wholes in some coverages. Which seem to be a little more -- they seem to be cropping up a little more regularly.

The property J.U.A., which was just enacted about 30 days ago, which is basically limited to $1 million of coverage. It is helpful on certain kinds of accounts where there is a small piece of property that would fit, which would allow us to write the rest of the account against somebody else and these are accounts that are $8 to $20,000 in commissions. So that has been somewhat helpful. Work comp markets are coming on very strong; like gangbusters, as a matter-of-fact, and we are bringing out-of-state companies who have never been in Florida before are coming in. There is a rate decrease that is suggested as of January 1. I think NCCI was at 13% reduction, and I think that the state is looking at 15. So somewhere in that neighborhood.

If we have a casualty account without property prices will be down 5 to 15%. Inland marine is the vehicle that we are able to do some property values that can't be written under, what you might call a more regulated form. Property in the bottom three counties, there is a huge focus on property, buildings, that are younger than 1995 or else it goes to Citizens or else E&S and maybe not at all. And that is true, that younger than 1995 is true in other areas in Florida, but it is not quite as prevalent.

Monoline auto is very competitive even in prior to date, 10 to 30% decrease, as a matter-of-fact. Regionals are writing selected property. We are running into something that I've never seen before where on commercial buildings mortgages are being paid off. These are just here and there, rather than pay the wind premium. And benefits is coming along nice at 6 to 15% is what the increases on those premiums are and we are getting many BORs on new accounts.

National retail did well. It was a growth of 9/10 of 1% up from a negative 2.2. Oklahoma, Arkansas, Louisiana, Texas, 15 to 20% unless coastal. Houston consistent casualty pricing but trending lower; property is tight. Most of Houston is Tier 1 by underwriters but not subject to wind pool coverage above I-10 so there is still a problem there. Work comp is very tight. We are writing new accounts out there in workers comp where there is a provision and a state law that if the client and the employee agree to use a network then there is a 12% reduction in the premium which is pretty nice, and we are selling that concept. Wind pool in Texas is 3 million versus by comparison 1 million in Florida. So layers are a little easier to get on top. We also think something of course this is an aberrational thing where a regional is now come in -- this is a committed paper -- writing habitational property. Never seen them do that before nobody and nobody else is doing it in admitted paper at the moment.

In New Jersey, New York, Pennsylvania, renewals are 10 to 15% down. Carriers are coming after and they are coming in after X dates and they are willing to back date. We haven't seen that in a while. Exposure units on contractors are dropping in the Northeast as a result of a little slowdown in construction. There is some coastal restriction going on, and I'm thinking now about New Jersey and Long Island. But that restriction is generally within one mile of the coast. Workers comp is tight particularly in New York City area; upstate New York, however, clean accounts could be 20 to 30 to 40%. This is clearly a capacity transfer upstate New York. Benefits 8to 9% up, and we are writing a goodly chunk of them up there too, as a matter-of-fact.

In the Midwest its a mirror image of last quarter, very competitive on good accounts, contractors in the Chicago area are still somewhat firm. In the western retail we still have some work to do out there. We're down about 4.5% versus a negative 2.3%. I just spent all of last week on the road with Ken Kirk in the West, and it is the most competitive part of the country and led by California, of course. Crazy pricing. Colorado, New Mexico, 10 to 20% down on renewals. But that is not every renewal. It is just certain renewals. Two new markets for middle -- I would call it middle market aviation, and what I am really talking about is in private jets, $3 million of hull value to $40 million at hull value; these two new markets are and they are A+ or A++ are writing at 25 and 30% below current rates.

Employee benefits in the West it varies of course by the state, is 5 to 10% down and flattish a little bit. And we are doing well in employee benefits. The regionals are very aggressive. In California the workers comp, which was -- now there is a down swoop out there of 40% for all of this last year up until August/ September. That is slowing and its down maybe in the 20s now, which there has been a rate decrease in addition, and there is still competition and there are people that are giving credits and so on and so forth.

The construction reps, there are two or three new competitors in construction reps, and those prices are down some. And there is not as many construction projects going. So things are moving back a little bit there. Quake is still up 100 to 150%. Med mal is shrinking (indiscernible) I'm thinking now more of individual doctors as opposed to hospitals, down 10 to 25%. In the marine area, upper Northwest hull and P&I is flattish, one of the few areas we are seeing flattish. Nevada not quite as competitive as California accounts, they are vanilla accounts, 10 to 15%. If you got you got a hairy construction account, though, it could go up.

Employee benefits doing well there and the average rate increase -- and what we are seeing on employee benefits and this year we will end up with about 92 or $93 million in employee benefits, maybe 11 or 12% of our total, something like that, but we are seeing a diminished rate increase, which is good. In professional programs doing a little better, minus 1/10 of 1%, and that is better than the -5.4. Dental and cal insurance were up. Dental continues to chug along. Title Pac, they write title agents earn commissions insurance. They are down a bit due to the real estate doldrums. And the place that we are really seeing a lot of competition is in lawyers. And anything where a law firm is 10 to 11 lawyers and up we are seeing 20 to 30% reduction from all kinds of markets. We are writing a lot of new lawyers, and we are writing them at lower prices.

In the special programs up 9.8% versus 19, Proctor is down slightly versus a big up in Q2. FIU increased not quite as great, and Ephrata, out in Washington did very nicely. In brokerage up 5.6% versus 13%. Transactional property is very robust. But hull binding authority and other binding authority is flattish to down. There is movement in the small and middle accounts to [admitted] markets. And personal lines did not have the growth that we had in Q2.

PTA services up 10.8% from 3.9% and over a 25% margin. They are really, really doing very, very well. We always say PTA services just a keeping on keeping on. If you look at the annualized growth for 2003 their growth for the year was 7.9%, in '04 was 16.6%. And '05 its 9.2%. And so they still continue to do well, and it looks like they're going to have a robust Q4. So that is kind of a battleground.

So Jim, would you like to talk about M&A?

Thank you, Hyatt. And good morning. I would like to start by extending a very special welcome to Brown & Brown for the employees of Delaware Valley Underwriting Authority and to Apex Insurance Services. DVUA has a 22 year plus history providing outstanding wholesale property casualty services up to the Northeast. DVUA and Apex was a transaction completed in the third quarter and was effective October first of 2006. Bob Cohen, the leader of the DVUA team, Bob has come with us. He is a veteran and highly experienced leader in the field. We're very pleased that he will be joining the Hull & Company regional leadership team of Mike Riordan and Bob McGrew. The five DVUA offices extend the geographic reach for Hull & Co. to the Northeast and complement the existing 18 offices of Hull & Company on a national scale. The DVUA acquisition increases Hull & Company forward revenue base to retain revenues to some $95 million plus for '06 going into '07. This component and other components of our excess and surplus lines operations increased the revenue base within Brown & Brown for brokered services to a run rate approaching $180 million for approximately 19% of our forward revenue base.

Apex Insurance Services, the sister company of DVUA is a great fit to the existing Brown & Brown public entity businesses. Karl Snearer is a recognized leader in public entity insurance and adds exceptional new talent to our organization. I would also like to repeat from our release the comment of welcoming Paul Vredenburg back to Brown & Brown. His responsibility is to source acquisition opportunities on a national scale for all divisions of the company. Paul is a CPA. He is our former director of acquisitions and has the additional experience as a professional with a national insurance consulting firm. So Paul will be solely dedicated to searching new opportunities and building a national database to hot prospects and to tell our story.

One of the questions often asked about what are some of the new trends that we see in the merger and acquisition market activity? I only maybe have a couple comments. One is we do tend to see today there is venture capital money that's out there chasing larger deals and seems to have replaced banks as perhaps being one of the most aggressive acquirers of agencies. This would generally be agencies north of, say 15 to 20 million, $25 million in size. Secondly, the soft market does seem to have had some impact on the number of acquisition amount of activity. The expectation for soft market can encourage some agencies to consider sale at this time rather than waiting for the next hard market.

Lastly but perhaps most important, I would like to give you a brief update on our leadership development initiatives. We have completed five of our eight plan leadership development classes for our profit center leaders held here in Daytona Beach. This program is an intensive two day session, incorporates the best ideas from our best leaders and best offices. The program is taught by our senior leadership including Hyatt, myself, Cory and our other leaders.

Lastly, our Brown & Brown national sales school continues to produce measurable positive results from the participants. We're looking to expand this school from the retail offices to other divisions of the company. With those comments, Hyatt, I turn it back over to you for comments and open for questions.

All and all we're very pleased with the quarter. We are bullish on the rest this year and next year. We think it is going to be good times, not easy at all but never is. And we are just feeling good. And oh I almost forgot, our projection on internal growth is zero to 5%. So now, Audrey, would you like to open up for questions?

(OPERATOR INSTRUCTIONS) Dan Johnson, Citadel Investments.

Thank you very much. Two questions, please. Clarification, Hyatt, on the comments under national retail. I had caught something around 15 to 20% down in less coastal; was that just a purely a property comment for national retail? (multiple speakers)

No, it's not. That is what the market is and where we are going out to get new accounts, it may not be that on every renewal. But if we are going to move an account from another agent or broker, that is what the market is.

In order to get someone to move that is the sorting of pricing they have to be able to see and you are seeing that?

Yes, we are seeing that.

Okay, and then in Florida, help me a little bit with the workers comp marketplace. It sounded like it was you said going gangbusters and now in the second comment as we've recently seen the news from Florida that they're looking for a 15% rate decline. And so it is going gangbusters on a unit basis and then it just starts to (indiscernible) the 15% headwing or is there something else that helps offset the 15%?

What is happening is that there are -- it is apparently a profitable market for risk bearers. And as a result of that, more and more insurance companies are jumping into the act, and the existing companies are becoming more competitive in various and sundry ways to dividends and loss sensitive plans and you name it. So we are writing a lot of new business, and so still we have the -- we are looking into a 15% or thereabouts rate decrease. Now the rate decrease, that is an average. And so does it apply equally? No, it doesn't, so there will be some classifications that will be flat, some that will be up, some that will be down more than 15. But generally speaking that is what we're looking at.

And finally, the VC money that we talked about I understand a fair amount of that is in the wholesale, or interested in the wholesale marketplace. Has it been enough (indiscernible) to move transaction values?

I don't think that has happened. I think there is definitely money out there in the wholesale market and some programs, as well. Not so much perhaps in the retail, but we've not seen any appreciable VAR changing. The model, too, is going to fit for some people. It's not going to fit for everyone because VC money there is always a next step and how you figure out what the next step is going to be.

I think in addition to that there is something else about VC money. That's short-term money. They want to make a bunch in a hurry and roll on, and they are not too concerned about the people. They are just concerned about the profit margin. So if someone is looking to sell and get out and liquidate and go to the beach, that's one thing. And so they have an uphill battle from the standpoint of their reputation for what happens after the day after. So it all works out.

Thank you very much.

David Lewis, Suntrust Robinson Humphrey.

Thank you, and good morning. You made some brief comments that the Florida property market was starting to loosen up a little bit. How much of that have we actually seen relative to the first quarter, and I know you were just some meetings at the Greenbriar. Do you care to share any thoughts of what came out of that and specifically do you think that the lack of hurricanes would actually loosen up the market further as we go into '07?

I think what I said is it has calmed down just a little bit. And what that means is that there isn't this huge angst at the moment. However, the loosening, if you want to use that term, which you used would mean that there are a few accounts that admitted markets are writing on a pluck basis, meaning they are going to go and pluck them, and they are looking and looking and they are going to be in the spine generally of Florida. And they are going to be very well constructed and they are going to have light occupancy. Now relative to the fact that we didn't have any hurricanes this year, that obviously is very positive. And so what I think that means is that if there is some additional catastrophe reinsurance that is available in coastal areas, I think that there could be a slight loosening. But what we have is the largest amount of construction coming online that we know of in Florida would be the condominiums that are under construction but not yet completed. So they might be two months from completion or a year from completion.

Now those condominiums and they are very large values, do have hard glass or shutters. And therefore they will be available for our FIU program. That's a positive. By the same token, in the case of FIU, they are not able to renew some of our existing accounts because they don't have hard glass, and they don't have shutters. So they would be available at a later time, and there are a lot of the condominiums that are putting up shutters, and that will give them the opportunity to get lower rates. Now of course they are going to the Citizens. Now there are some ways of additional deductibles with Citizens that makes it a little more palatable for some of the accounts.

But still in all, if you look across the landscape of Florida, the property market is really, really still very, very difficult. I don't look for it to change much, and next year don't forget that someone who writes a policy in December, let's say, they have to go all the way through June, July to August and September and October of next year with that policy. So they're looking into next year. But by and large the way the market is, it is beneficial to us, David, because we have such a broad base of knowledge and it is spread across the entire geography, and there are geographic differences in Florida. And so we have the market knowledge to be able to put that to work. So that has been positive.

That's helpful. Any general things that came out of the Greenbriar meetings and as we look into 2007 are you going to likely hold with your zero to 5% internal growth expectations?

Actually I sit down in the morning before these calls, and I think about that zero to 5 and every time I think about it I kind of like it. And so I don't expect that's going to be changing. And as regards Greenbriar, it is sort of the Greenbriar, and there were lots of conversations about the fact that the market is softening and then you hear insurance carriers who are saying that they are pricing their rates are only going down 3 or 4%. But of course what they don't tell you is the fact that if you have an 85 or an 80% renewal retention ratio, they are going down 2 or 3 or 4% on the accounts that they kept.

Now if they took the accounts that they didn't keep and could find out what the price, the rates were on those that they did not keep, you would see a different set of circumstances. And so it is a mixed market, but generally speaking the risk bearers are making a lot of money. And so other than the coastal areas, they are going to put the pedal to the metal.

That's very helpful. Thank you.

Dan Farrell, Fox-Pitt, Kelton.

Good morning. Can you talk a little bit about your acquisition strategy and just with Paul's addition to the team, just talk about his role. And then you mentioned you are going to try to deploy more resources to sourcing acquisitions. Can you give us some more specifics about what you're going to try to do in that area?

This is Jim, and good morning. Paul's return gives us a very experienced set of eyes and background in terms of our model and telling our story to go out and just a chance to see additional people and to build a database to probably go through more opportunities than we have before. So if you look at keeping pace with acquisitions as being anywhere from 8, 10, 12% of our revenue base, again, we don't really set a target. It is really based on opportunity and circumstance from the quality that we see and do they fit long-term. So this allows us to get more in the pipeline, and to review more as we grow to complete more transactions. They are definitely out there and available, and I think we've had maybe some luxury in the past that so many transactions would come to us, that we didn't have to really go scouting. So this is not a departure from that. We still get a lot of opportunities from internally from our leaders, people they know and insurance companies that know that their operation fits with us, and therefore we are able to go and identify a fit, a mutual win-win and move forward. So this is just the resources to -- if the opportunities are there -- to up the ante in terms of the number of transactions that we can handle those and continue to move forward.

Okay, great. And one other question. Can you talk a little bit about your results in the retail segment outside of Florida? I guess particularly Western. You have been having some difficulty and obviously some of that is driven by the market conditions. But historically outside of Florida your growth has legs Florida. What do you think you can do there to pick that up going forward?

The bottom line is this, is that what our goal is is to clone Florida in every state where we are, and that takes time. You must understand that we didn't get to where we are in Florida in five or six or seven or eight or ten years. It has been a long Safari. And so the same thing. We do have advantages now that we are, we have a substantial base in several areas of the U.S. for which we are able to grow leaders. And the growth in the retail area is truly all about leadership and finding the right people and getting good people on board. And we've been doing very well. Now out West we have very good people; one of the problems is that the market out there is kind of wild and crazy. So I would imagine that next year would be a better year for us out West.

Great. Thanks, guys.

Ken Billingsley, BB&T Capital Markets.

This is a follow-up question on I think something David asked a little bit earlier. We're seeing that some of the underwriters are reporting record earnings, even some favorable reserve development. Yet the reinsurers commented that they are looking for raised prices on 1-1. Could you handicap your thoughts on their success on doing that?

As to whether they can raise prices?

Their ability to push that down. I understand your comments talking about how they are going to have to hold the burden all the way through 2007 hurricane season. But what they do with 1-1; but what do you think of the ability of them putting pressure and raising rates and 1-1

I think they are going to try, but the jury is out, and I honestly don't know what's going to happen. You got a feeling on that, Jim?

Kenneth, I think from talking to a number of the carriers is at point where reinsurance transaction, the cost of it becomes prohibitive and the Company resorts to additional retention, in the fact they are just offering less limits. So the reinsurers, even though they want to certainly cure some of their issues of '04 and '05 in a hurry, there is a level which that can be done. And so I am not certain that they can impose those restrictions on the carriers as they wish. So the favorable results that the direct carriers are having is remarkable and bodes for certainly looks like additional market softening.

There is certainly comments about this last quarter because we've had no major hurricane results from property that perhaps we had got even better case for very good results in the fourth quarter this year. So we are not betting that the reinsurance market is going to come in and offer significant new capacity on the property side. And as you are well aware, there are issues about Sarbanes. There are issues about modeling. There are issues at A.M.Best they have got to get around. So no significant change in the posture that we've heard.

And the last question is regarding contingents just in general, '06 is obviously shaping up to be a very good year for underwriters. How and when do you see that positively impacting your bottom line? Would that be more of a first quarter 2008 event, and where do you estimate that could be as a percentage of overall commissions?

We don't make any estimates. It is almost impossible to figure out the profit-sharing because every company has a different contract, and we have different contracts with various offices. So each of our officers contract directly with the risk bearers. It is not something that is done corporately. So to try and figure out what those loss ratios will be and how it fits into the equation that they use is just very difficult. And of course the other thing you must understand is that it is not just paid losses. It is IBNR. And so you start throwing that stuff around, and it can substantially affect loss ratios. So we don't really know about next year. It would seem like it ought to be a pretty good year, but having said that, we don't know.

And without predicting the size I mean obviously it should be better than maybe four basic current results. On a timing basis would you expect to see more of the results come in the first quarter of 2008, though, being that --

Not more than normal. The largest number -- see they start coming in in February, March, April, May, June and some don't go, don't come in until late in the year depending on what their contract says. But the largest amount does come in in the first quarter, as you can see from our numbers.

Kenneth in fact our multiyear result, too.

And I guess the final part of that question is are they willing to pay a contingent on performance for business that maybe is only been on the book for just a few months, business written in the fourth quarter? Is this more of an 18-month process that they look at this?

No, it is based on earned premium. So obviously if you wrote something in October there would be a certain amount of earned premium in that quarter. But then don't forget then they also are going to stick in an IBNR number, which sometimes is we think unreasonable. So the to try to quantify how that is done, you would have to really look at each of the (technical difficulty) and there is probably well, we get profit-sharing from I think 161 companies last year, and every one of them is a little different.

And that profit-sharing that comes directly to corporate?

Actually, no, it comes to the individual offices. And so what we have always felt is that loss ratios are really something that the local office has the ability to write better business. So if they are writing better business, then they can be more competitive because they are writing profitable business. Therefore the companies will have the ability to give them lower pricing on new and renewal, and they get profit-sharing on top of it. So that is all controlled at the local level. On occasion companies will try and push us to have several offices in one pot, so to speak, and we have done that from time to time. But we don't like it because again, it gets away from our decentralized structure and from the fact that we believe the leadership at the local level is where the profits are made.

The last question on that then is, the profits that are generated even at the local level, are those split within that agency, or are the profits pushed back up to the corporate side?

The way that works is that the revenue generated by contingents goes into the overall goals for that office. And so generally speaking what that means is if the office is above a 25% margin, which most all of ours are, then something like 7 or 8% would go into a pot, which is the profit center bonus. And the profit center bonus then, is distributed by the profit center leader, and the profit center leader then at the beginning of the year would sit down with his or her managers, let's say personal lines manager and employee benefits manager and a small commercial manager and a bond department manager and a large commercial manager and they each have a P&L within that profit center. And so the way that the profit center bonus is determined is an equation that is the same across the whole system. So everybody knows what it is, and then the leader would say okay, if you make your goals for the year, including the contingents, then in fact here is the amount of the pot that would come to the profit center, and you will get $12,000. If you are 95% of your goal, you will get $5000, and if you are below 95% you get zero. So that is the way it is done.

Thank you for your time.

Adam Klauber, CCW.

The wholesale program bounced somewhat back and forth between second and third quarter. They had a very nice second quarter. Still strong in the third quarter but came down from 2Q levels. Which one do you think is more realistic?

Damn good question. We don't know. They are doing well. And there is some movement in the smaller area, meaning in the binding authority area, Adam over to admitted markets. But we have a lot of other slices that are moving up. So it is such a moving sort of target that I hate to even say. I would say that somewhere between the two is probably about where we might end up for the next quarter. We don't see anything that is negative or an unusual positive that is not already there.

As you been talking to some E&S markets, do you they think they will have more capacity to write property -- wind exposed property next year compared to this year where they were very constrained?

Well, they are talking about that, but there are several particular problems and t has to do with the cat reinsurance market, etc.. So we are hearing some positive things. But until we see them willing to put it on the line, we don't believe it.

Okay, so it is sort of wait and see what happens the next quarters.

That's correct, it is iffy.

And following up on a question with profit-sharing profitability, we've noticed that claim accounts and a number of lines are frequenting the number of lines continue to be very favorable. Are you seeing that sort of across the board, and do you think that is a continuing phenomenon?

Well, we are looking at the same thing you're looking at. You're looking at the reports of national companies, and they are all combined loss and expense ratios look pretty dogone good, in the low 90s, and some of them are even in the '80s, 89 and so on and so forth. That has never before been done but we never before had Sarbanes-Oxley. That is the reason they are as low as they are. If they hadn't been that low I think, I mean if it had not been for Sarbanes-Oxley I think there would be a little different look on some of these reserving techniques.

But having said that, again, we assuming that our business reflects those national trends, then our companies are and our various offices are making nice profits. Now one of the things that has happened is that over the years our loss ratios have been a little better than most of the large public land brokers because we are not in the C business, and we are not in very much in the Fortune 1000 where the pricing is just beaten down to the lowest number. Inasmuch as we are sort of Middle America, our loss ratios look pretty good.

Thank you very much.

Meyer Shields, Stifel Nicolaus.

Good morning, all. Question I guess. Are you seeing any shift of the business you're placing moving more towards national companies than from the regionals?

Exactly the opposite. The regionals is where the play is in the middle market. They are the most competitive. Now the nationals are trying to now become more competitive in certain areas, and they are in the West. And in some places we are seeing them in the Northeast. But generally speaking the middle market is really a regional play. Now when you get into the multistate and the large accounts where the prices are being cut really substantially, then that is more of a national company playground.

Okay, that is very helpful. And I wonder if you can talk a little bit about the recent performance in your strategy for your own reinsurance brokerage.

Effective January 1 we acquired Axiom Intermediaries, and if Brown & Brown rate it was part of our operation, we folded into that component. And they are doing fine. Their revenue margin base is at expectations. The market right now there is a little bit of headwind. As I mentioned before, there seems to be a good bit of retention option going on with the carriers where in fact reinsurers may be prohibitive and therefore retention is the outlet. We have had some new business. We've written. We're pleased with that. We have also been able to recruit to new producers that have proven track records that fit very much into our culture and so we remain very uptick about that business unit. Likewise, we are introducing them to our MGA operations to see if they can help add unit value capacity to those operations internally. So it is a good fit with people. So we are moving forward.

Okay fantastic -- I'm sorry -- can I ask a last question? Hyatt earlier mentioned that personal lines growth dropped a little bit from second to third quarter and I was hoping to get your thoughts on why.

Personal lines growth and I guess I did not make myself clear, that was the personal lines that was included in Hull and that is the nonadmitted paper. And there have been some changes in some of the capacity levels in Florida and along the coast all the way up through New Jersey. And that is the reason for that mitigating growth pattern.

Thanks a lot.

[Julie Ko], Philo Smith & Co.

I have a question that is an extension of something that was addressed earlier. You've been seeing some nice organic growth rates overall, and that has been nice and consistent. And I am wondering if you can give us some more detail on who is bringing this in? For example, within Florida who exactly is bringing this in? And have you been doing anything differently to sustain these levels, any sales-driving initiatives in place?

No. When you say who, do you mean -- do you want to know individual people? See, for instance in Florida, again back to the way we are set up, each office in Florida and each office elsewhere has an individual leader. And the leader is responsible for the results of that office. So the leader also happens to be a sales-oriented person. So each office has been doing what everybody else is doing.

Now, one of the things that we have in Florida that is pretty helpful is we have a system where all of our marketing departments are hooked together by e-mail. So as something happens in, let's say, Tallahassee that is good or bad, it goes on the system and everybody has access to that around Florida. They have access elsewhere, too, but it's just not as meaningful because the Florida market is different.

So that is one of the advantages that we have since we cover the entire state with offices who are right on the ground at the ambient air level, then when something good or bad happens, we know it statewide. And if it is something that we can then use to our benefit, which generally it is, that makes us very competitive. That is one of the reasons we are writing lots of chunky new accounts.

So it's not an individual. It is just the fact that in this turbulent marketplace, our presence and our systems give us a competitive advantage.

Okay. Well, this isn't something that has changed in the recent past; this is a system that you've had in place, so it seems to be working better than it has.

Well, it works better in turbulent times, and this is very turbulent. When you have a more halcyon outlook, there is not these perturbations that go on that make for opportunities.

Okay, great. Thank you.

Nik Fisken, Stephens.

Good morning, everybody.

How are you?

Great. How are you doing?

Good.

Doing a little better than Bobby Bowden?

Well, I think so, but you have to talk to Cory. He is a Bobby Bowden guy here, and he is the one that has got the plan for Bobby.

We just take the Gator approach and say there's always next year.

That's right. Cory, why were the contingents 1 million higher than what you thought?

Well, mainly because we have absolutely no idea what contingencies are going to come in. We just kind of go by what the trend was in the previous year. It is a very inexact guess.

Then just so I'm crystal clear, on the Florida comps being so strong, that is the units you talked about?

Yes. What I was talking about there is the -- when I'm saying strong what I mean is there is lots of players who are willing to do strange and unusual things in order to get business. That's what I'm talking about.

And then on California specifically, you said it's the most competitive? And what perspective is that?

That is all perspectives, workers' comp, GL, auto, you name it; except for quake.

Okay. And then if you look at the rates today versus when you announced the June quarter and the March quarter, would you say rates are most likely a little more competitive today versus those in past couple calls?

I'm not -- maybe a little; a little maybe.

But pretty close to flat?

Yes, it has been a competitive marketplace, Nik, as you know. And so what we are seeing everyone -- here's what happens. When we have sales meetings, you always hear about the horribles where all of a sudden someone has cut the rate by 40%, and we've seen some of that stuff. But again, this is pulling out of context, so you have to kind of mitigate your thought process and then start asking about, well, what about this renewal and what about that account you wrote. And when you get into all that, then you kind of get back to reality of life.

Perhaps in some liability lines, Nic, I think the competition seems to keep ramping up.

And the last question is if you look out into '07, how would you compare today versus a year ago when you were looking out into '06 from a pricing standpoint new sales, acquisition opportunities, kind of summing it all up?

Well, I would say that from a pricing standpoint we felt last year if you remember, last year about October Wall Street decided that the pricing on P&C was going to probably go up because the reinsurance rates were going to force it up. We didn't think that was going to happen. So when we looked into next year we thought -- meaning this year which is '06, we thought rates were going to go down but we did not think about the well, we didn't think that the capacity transfer would be as rampant as it was. And so we also didn't think that the prices on property in Florida were going to go where they were. So we were kind of one was worse and one was better if you want to look at it from that standpoint. And in terms of mergers and acquisitions, Jim, you want to talk about that?

I think there seems to be a bit more activity out there not especially in retail. That seems to be about the same but with respect to programs and the wholesale side, there is a lot of opportunities that we are seeing. And we are trying to scout out more of those. But in terms of the deal, if you are going to get down to what its going to take to do the deal, there is still similar economic transactions as last year and the year before. And you spend a lot of time beyond the financial side dealing with the people side, about what about tomorrow, what about compensation systems, what about opportunities, what about mergers, fold-ins, leadership and the like. So there is a little blurb on, I think it is on Hyatt's wall which is like "things that more likely are today than they have ever been before."

That's right. And that is a direct quote from Dwight D. Eisenhower in 1953, and it's absolutely true.

That's a spark of wisdom, Nick. You got any other questions?

I'm done on that note.

Audrey, we can only take one more question because we got a board meeting at Hull in Fort Lauderdale, and we have to be there at 12 o'clock, and the President is coming to town; they are going to shut the airspace down at 1:30.

Actually that was the last question. There are no further questions.

Great. Thank you, all.

That does conclude today's conference. Thank you for your participation. Have a wonderful day.