Brown & Brown Inc (BRO) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Brown & Brown Inc. conference call. 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 intended to fall within the Safe Harbor provision of the Securities laws.

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

Additional discussion of these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated in this call. Such differences may be material.

Speaking to date 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 now turn the call over to you.

Thanks Peter.

To sort of update the information that Peter had, Jim Henderson is actually Vice Chairman and Chief Operating Officer and Powell Brown is here and he is President of the Company. And of course, Cory and I are here and so that everyone will know Jim Henderson actually is in [Cutter] today. Now there's two Cutters that I know of. One is in South Georgia and the other is in the Middle East. He happens to be in the one that is in the Middle East.

Jim is the Chairman of the Board of Trustees of [Embry] Aeronautic University and he is over there on some aeronautical business. So he will be coming in and he's on the line now. He will be coming in to talk about the M&A landscape in a moment. So with that.

Good morning, Hyatt, and everyone. Good to be here.

Hey Jim. I am going to now turn it over to Cory.

Thanks Hyatt. We had a good quarter thanks to our increased profit-sharing contingency income and our $8.8 million pretax gain from the sale of approximately half of our investment in the Rock Tenn Company.

Our net income for the first quarter of 2007 was $59.7 million; and it was up 19.4% over last year. Correspondingly, our net income per share for the quarter was $0.42. That is up 16.7% from last quarter of last year.

From a revenue standpoint, commissions and fees for the quarter increased 7.7% to $245.6 million. That was up from the $227.9 million we earned in the first quarter of '06.

Included in the press release is our table that summarizes our total growth rate and the internal growth rates from our core commissions and fees. In the first quarter of this year we received $44.1 million of profit-sharing contingent commission, which represents an increase of approximately $10.6 million over what we received in last year's first quarter. Of the $10.6 million increase, $3 million came from the retail division, $5.7 million came from the Wholesale Brokerage division and $1.9 million came from the National Programs division.

Our best estimate of how much profit-sharing contingency revenue that we could receive for the rest of 2007 is between $3 million to $4 million. And how that would fall on a quarterly basis, again, our best guess would be that we may receive around $1 million in the second quarter and that is compared to $4.6 million that we received in the second quarter of '06.

Third quarter, we should receive a little bit more between $1 million and $1.5 million versus the $2.1 million we received in the third quarter of '06. In the fourth quarter we will probably received less than $0.5 million.

So in summary, I think -- we think that profit-sharing contingency revenue for the final nine months of '07 will be a little bit less than what we received in the final nine months of '06.

Looking at the internal growth schedule, for the first time since we've been officially tracking internal growth rates, we have had a negative internal growth rate. It was -1.8%. Our total core commissions and fees for the quarter increased 4.1% or $7.9 million of new total conditions and fees. However within that net number was $11.3 million of acquired revenues. That means that we had $3.4 million less commission and fee revenues on a same-store sales basis.

If you look at all of our 160+ operations, you can look at three operations that on a combined basis accounted for over $7.8 million for the negative growth in commissions and fees. Those operations are 1., our Florida Condominium Program with Florida Intercoastal Underwriters -- FIU. They had $4.4 million less commissions and fees than the $8.7 million that they earned in the first quarter of '06. Our international E&S subsidiary in Los Angeles had $2.2 million less commissions and fees than the $2.9 million they earned in the first quarter of '06.

And this operation provides Property and Casualty products to our Residential HomeBuilder industry primarily in Southern California and the Southwest U.S.

Then, thirdly, our Hull & Company wholesale brokerage unit had $1.2 million less commissions and fees, primarily from their Florida and Special Risk operations. If you exclude just the FIU operation from the internal growth schedule, all of our other operations essentially had a slight positive consolidated net gain -- internal growth rate of about 1/2 of 1%.

If you exclude Hull which was the other operation that was impacted by the government intervention in Florida, that excluded would give us about a 1.27% internal growth rate. Then, if you also add in the final international E&S, all the rest of the operation on a combined basis had a 2.64% internal growth rate. But Hyatt and Powell will talk about the individual business segments in a minute.

Our investment income increased $9.4 million which is due to the $8.8 million gain from the sale of approximately half of our investment from Rock Tenn Company. As many of you know, Hyatt's older brother Worley who is now the (technical difficulty) was the CEO of Rock Tenn Company from 1966 to the mid 1980s.

Brown & Brown accumulated 559,907 shares of Rock Tenn, going back into the '60s and '70s. The stock has traded in the $12 to $15 range for a number of years. And in January of this year when the stock was trading in the $33 range, the Board of Directors decided it would be prudent to liquidate about half of our investment. We currently still own about 284,000 -- not about -- 284,907 shares of Rock Tenn. And we may sell some or all of those remaining shares in 2007.

For Other Income, we had a total of $1.4 million which is primarily just gains from the sales of a few books of businesses. As it relates to our expenses and our pretax margin, our pretax margin for the first quarter of 2007 was 37.9%. However if you exclude the Rock Tenn Company gain, our pretax margin was approximately 35.8%, a 50 basis point improvement over the prior year's first quarter of pretax margin of 35.3%.

Excluding the Rock Tenn gain, employee compensation benefits increased 70 basis points to 44.4% of total revenue. That 70 basis points represents approximately $1.7 million of net additional average cost. A large share of that was due to a true up of payments into our 401(k) plan for employee matching and profit-sharing contribution.

Non-cash stock-based compensation costs was (technical difficulty) in the first quarter and is a good reflection of the expected normal quarterly run rates in 2007. We expect that 2007 annual costs to be in the $6 million to $6.5 million range as compared to the 2006 total annual cost of about $5.4 million.

Operating expenses as a percentage of total revenue -- again excluding the Rock Tenn gain -- improved approximately 60 basis points to 12.3% of total revenue. That 60 basis point improvement represents about $1.5 million of additional net average cost savings and was principally due to lower net Errors & Admission claims and reserve balances, an improvement in our collections of accounts receivable bad debt, and that was slightly offset by an increase in legal fees.

Amortization depreciation expense on a combined basis is consistent with last year's first quarter. Interest expense increased approximately $100,000, reflecting a net increase in borrowings from the first quarter of '06 which includes the additional $25 million that we borrowed in December of 2006. As a reminder, in addition to our current $101 million of unrestricted cash, we have an additional $175 million available line of credit from the Prudential Insurance Capital Market Groups in which we may borrow those funds for a long-term ten-year period.

Our effective tax rate for 2007 is currently expected to run between 38.6 and 38.7% rate. So, really to conclude, our net income ended up being $59.7 million which is a 19.4% increase from last year and with the exception of a few operations that were hit extremely hard by unique market conditions, our folks continue to grind out their operations with a three yards and a cloud of dust discipline.

So with that, I'll turn it back over to Hyatt.

Thanks Cory. Good report.

Going to Florida retail. It's a wild and crazy place here in Florida. Citizens is now the most competitive win market in Florida and in any places and on many risks. Reductions in premiums are between 10 to 30%. Lots of movement in retail. As regards FIU rates they are coming down in the mid-20s. Underwriting guidelines, of course, at FIU are more stringent than last year.

Now these went into effect on 6/1 of '06 and so what those guidelines were is basically, can't write any new or renewal business that doesn't have either hurricane glass or shutters plus the other structural requirements. So we have been nonrenewing a lot of accounts because they are older buildings and had not yet had the opportunity to put in shutters, of which many are doing at this time.

The Citizens rate reductions are greater outside the Tri-County area. Now Tri-County is (inaudible) Palm Beach. 75% of FIU's business is in Tri-County. Citizens is offering two different policies. And this is for habitational now. They will be bringing in on 6/1 the JUA which is for other commercial properties.

But currently they are offering a wind policy and a second policy that is fire and basic perils, excluding wind and hail. The FIU revenues for Q2 and are going to be about the sign as they were for Q1. This is our best guesstimate and that would be about $4 million. FIU will be reducing prices on existing policies by endorsement because of the expansion of the Florida Cap fund. That's the good news.

And as you know I've reported that some -- an extra layer or a higher up layer is available at about 25% of the current market for that reinsurance layer. We are, as we speak, in Bermuda and in London, negotiating the reinsurance renewal for 6/1. We look to have -- we anticipate that the capacity will be in good shape. Pricing is still negotiating.

We do find that there are a very large number of new buildings coming online, all of whom are eligible for FIU because of the new construction standards. So that's good news. Nonrenewals, these are accounts that we have not renewed since 6/1 that now will be having shutters, will have the opportunity to come back into FIU as those shutters and as that construction is completed.

Casualty Statewide is softening. It's down 10 to 15% unless it is hooked to some kind of property and then you're not sure. Nonadmitted property, there is much more capacity and, of course, prices are changing. Prices are going down and prices are going down in some respects in a little different way. An example is, let's take a risk that last year we had $7.5 million. The risk [bought] $7.5 million of win on a TIV of about $100 million. So the price for that $7.5 million was Ex.

This year on renewal they are able to get 25 million for the same Ex. In other words, the price is the same. But you figure out what the rates are if you are buying 25 versus 7.5.

We are seeing E&S markets, lower-than-admitted markets in some places. Older buildings in Florida must have new routes if we are going to write them in an admitted market or even in some nonadmitted markets. The umbrellas, there are new programs coming into Florida that are very competitive. Construction exposure units are down in many places. Any place from 5 to 15%. And we are seeing -- and we've seen this once before, several years ago but this just seems to be a little more virulent.

We are seeing a number of cancel and rewrites midterm on property which, you know, as prices are going down six months into the property into the policy term be canceled and rewritten. Employee benefits in Florida, up around 8 to 12%. Moving (technical difficulties) retail, it's a negative 7/10 to 1% and that's a little better than a negative 1.7% last quarter.

And so it's -- around the country, it is different in different places. The thing in New Jersey, P&C rates are down 5 to 15%. Really good risks are down 20. If you are going to rest an account away from another company, particularly if it's a (inaudible), it is going to be 25 to 30.

Property-oriented risks are the most price competitive. Umbrellas are very soft. Social Service agency price decreases are much more moderate. Condo is very soft. Regionals and Nationals are going toe to toe. Nationals, much more competitive on new business and renewals. And that's the reason that when you (technical difficulty) reports of the Nationals on what their price reductions are it's only on the businesses they renew. It does not include the business they do not renew and it does not include the business that is new new.

New York City area, still the prices are more firm. In New England and upstate New York habitational apartments, a little more restrictive than the broad market. Market -- the contractors, it's down, they are down 15 to 20% across that area unless it is a tough contractor, meaning they're in a tougher business.

But some companies and this regards contractors are willing to eliminate exclusions that, for no additional charge, which is a way of being more competitive. One of those exclusions which is a pretty substantial exclusion is the care, custody, and control (technical difficulties) being eliminated by some companies at no charge. It's a way of being competitive without price reduction.

Georgia and South Carolina, middle market, 10 to 15% down unless it's the Atlanta area and then it's a little more. Coastal property, there is more capacity. There is a win pool expansion geographically in South Carolina. Package commissions are up, in some cases as much as 5% in that area. The construction risks are down a negative 5 to 10.

The workers comp, this is unusual -- the only state I know of. Workers comp in South Carolina is actually going up 10 to 12%; and employee benefits is a positive 5 to maybe 10%.

Texas continues to be soft 15 to 20 down that we talked about before is still there except on property on the coast and that is flat. Also malpractice is flat. in most cases. Workers comp is down. Of course one of the reasons it has gone down a little more is that now all of the carriers have these networks in place. And, initially, if you had a network in place it was to be a 10% reduction. Now some companies are moving that to 15.

In Louisiana of course, Citizens -- their state company -- does write name perils for all properties across all of Louisiana. Now they are very limited, however. They have in Louisiana $2 million per location and they have a coinsurance and a participation clause. So coinsurance, the minimum is 80%. So what that means is is if someone had a $10 million building and they decided, "Well, I'll just buy $2 million from Citizens and I can't have more than $1 million loss", the bottom line is the 80% coinsurance clause would probably give you a 20 on -- using that example, a 10 million value -- about a 20 to 25% recovery of your loss.

In addition that there is a participation clause it is not practicable to the Citizens in Louisiana to layer coverage. So these are really small properties, and small have occasional risks. The other buildings, etc., properties are E&S and admitted, some admitted, I-10 was the forbidden line and if you knew if you are looking at the geography of Louisiana and you are driving I-10 you come through Baton Rouge and you go all way over to Beaumont, Texas and south of that was the forbidden area for admitted markets to consider writing property. And it is now moved north about 15 or 20 miles to U.S. 190.

Baton Rouge, however, has -- does have some healthy property market and the casualty is a little looser on underwriting and rates down maybe 5 to 8% and workers compound buy to -- you know.

In the Western retail it's still the most competitive, by far, in the U.S., matched only by maybe a couple places in the Midwest where rates didn't go up as much in the Midwest as they did in the far West. We had a negative 7.5% internal growth versus a negative 8.4% in the last quarter. In Phoenix the rates are down 15 to 25%. That is a noncat area, new construction etc., etc. D&O is down a negative 10 to 30. Even personalized believe it or not in the Phoenix area, which is 4 million part of maybe 6 million -- in the whole state -- people. Personalized and sort of this is a generalization is down as a result of rate filing 7 to 10%.

The good news is that workers comp is becoming more competitive and what that means is the State Fund has been the writer of maybe 90% of the workers comp. And all of a sudden and this occurred six or seven years ago -- five or six or seven years ago, other companies are coming in to write coverage. These are private companies coming in to write coverage and we are now writing business out of the fund where we are getting commission where we previously marked.

In Las Vegas workers comp is down 10 to 15%. Good packages are down 25 to 30%. Again non cap place. There are higher commissions being offered in many cases. Employee benefits is up 10 to -- 8 to 10 to 12%. The construction (inaudible) of course there are your of them being written are down 10 to 30%. Out in Seattle, a little more stability there. P&C rates down maybe 10 to 15, maybe 20%. When I talked last quarter I indicated that marine rates were flat. They are now moving down about 5%. Tribal businesses are a negative 10 and employee benefits is 5 to 10% up.

California is really hard to explain -- California. First all it's a very large state. Secondly the rates are just all over the map. New companies are coming into the market. There's sort of an ebb and a flow. California has killed off a lot of companies in the past and so companies are coming in and doing some strange and crazy things. 10 to 40% depending on loss ratio is what packages and other casualty coverages are going for. And in some cases, loss ratios are really meaningless. The quake is still firm and workers comp is going down 7 -- on 7.1 around 10 to 11%.

I think we are getting close to the bottom of the pit on workers' comp in California. Professional programs, up 1.5%, was up 6/10 of 1% last quarter. Small lawyers is -- those prices are going down 12 to 15%. And a small loss lawyer firm is from 1 to maybe 10 or 12. Middle size lawyers, that's 10 to 75, those are going down 20 to 25%. Our CalSurance operation in Los Angeles, which writes a lot of professional liability around the United States, they are flat. So they have replaced whatever reduction in price they've replaced it with new business. The (inaudible) program grew about 4% this year.

Pricing on dentists is down 2 to 3%. We now have about 28 or 29,000 dentists. We are the largest carrier, the largest writer of dental coverage, the average premium on a dental package premium is $2500 to $3000.

In Special Programs that's where FIU is, it's a negative 16.1% and it was a positive 14.7% and the large decline was FIU and that's about a $4.4 million reduction. AFC posted a 29% increase which is good and Acumen Re also had excellent quarter. Public Risk Underwriters also grew by 19.1. So I'd like to ask Powell to talk a little bit about the brokerage.

Thank you Hyatt. Starting West East as Hyatt alluded to property, specifically earthquake, continues to remain firm in California and up the West Coast. Casualty, specifically residential contractors, were seeing up to 40% premium cuts. That would be made up of declines in exposure units and rates. Rates are down 25+% in that area. There were also seen expanding coverage, i.e., defense outside the limits.

Casualty other than residential particularly in the middle part of the state, large casualty over $100,000 in premium. Intense pressure on those prices, down 10 to 40% in terms of rate reductions. Coastal property, we are seeign 20 to 30% rate reductions. Bigger accounts are buying more limits for the same premiums as last year. And as Hyatt alluded to earlier, we list a number of accounts have done this but an example would be where the primary $2.5 million limit was renewed this year, for the same price, with $10 million of coverage. So four times the amount of coverage for the same price.

Capacity is coming back rapidly and we are seeing, depending on the part of the country cancel and rewrites are (technical difficulties) because of the pricing benefits. In Professional Liability, the admitted market is becoming very aggressive in certain areas, coming back into that area could be lawyers, could be other things. Over $100,000 premiums typically are down 10 to 30%. Under $100,000 would be slightly less than that.

And our binding authority operations across the country you see in a market like this, where you are trading renewals back and forth, the premiums are coming down, that you write a new account and you lose an account and you write a new account and you lose an account. Casualty is down 10 to 30% in the West and the Midwest. Just trying to keep the standard market at bay.

The big gainers -- meaning those that perform very well and brokerage this month would've been Braschfield this quarter. Braschfield and Peachtree Residential Construction countrywide continues to be a challenge because the economic impact and the rates are coming down very substantially. And we see one of the opportunities with some of this additional capacity is in certain segments of the Hull business.

We believe that that capacity will allow them to write some more new (technical difficulties) coming quarters.

I'll turn it back to you, Hyatt.

Okay. EPA services (technical difficulty) 9.6% and that was better than the 3.6% internal growth last quarter and they just keep plugging along and doing an excellent job. One thing I would like to mention that we haven't talked about is, is that as these prices are going down, you must recognize that we are writing additional coverages for accounts.

We talked about the fact that there is a zone of reasonable best in the past of amount of dollars that businesses and individuals will spend on insurance. And as prices go down we are obviously selling new lines of coverage. So there is some fill in the holes here that is very difficult to quantify.

Now I would like to ask Jim to talk a little bit about the M&A landscape. Jim.

Thank you, Hyatt. Good morning, again, from downtown (inaudible) Cutter.

The first quarter of the year year-to-date is has been a very busy one from an M&A standpoint. We have had 10 transactions that we have announced. The four annual revenue for those transactions some $46.1 million. All of the transactions year-to-date were in the retail division of the Company. Not particularly planned but it happened that way. This isn't our core strength and we are very pleased in fact to continue to move forward on the retail acquisition side.

There's average about $4.6 million per transaction which is similar to prior years. There's a broad geographic spread from West to Northeast to the South (inaudible) concentration. The largest transaction was in the Midwest Retail Shop with some $18 billion in revenue and the smallest was the book of business involving some $400,000 with a fold in to an existing office.

Interesting class for '07, early '07. Approximately 1/2 of the revenue from the acquisitions involves employee benefits -- underlying employee benefits business, that a pleasing element of that is that we are not seeing the price reduction on employee benefits that we are experiencing with the Property & Casualty industry. At this point we have well over $100 million plus in revenue throughout the system from employee benefits and obviously very attractive margins.

With respect to comments on the M&A market, the -- due to the downcycle we are seeing opportunities that M&A on discussions that perhaps otherwise may not exist but for anticipation of the price decrease. The softer market does create a defining event in the minds of some, that's looking for a timing to pull the trigger because of perpetuation opportunity for leadership. And certainly we are seeing a lot of discussions, lot of activities going on at this time (inaudible) to drive activity.

Other than the larger deals, meaning deals $25 and $50 million and over which we did not complete any in this period, we are [not] experiencing any particularly direct competition from the venture capital or from the hedge fund money. Obviously, there has been some acquisitions with existing public brokers with this capital. But for the smaller transactions, we have not encountered any direct impact or pricing or competition from this group.

The deal pricing is similar to prior years on this class of business, the under $5 million to $10 million. On the earnings basis, this is probably a little bit higher on the top line revenue due to the margins that have been generated by the entity joining Brown & Brown.

We're very pleased that five -- all five, as a matter of fact of our retail leaders, those -- the regional presidents of which there are two and three executive vice presidents, regional leaders. Each of them had an acquisition in '07. It was a very broad-based participation which helps drive the number of transactions that we can complete at a given time. The acquisition team, we are very proud of them. Paul [Veddenberg] continues to lead the effort in sourcing acquisitions and is doing an outstanding job in opening new opportunities since in this role this past year.

So all is well. We as Cory mentioned we are positioned from the cash standpoint to continue the M&A activity. We will continue to pick the very best ones that really make long-term operating sense and hopefully track those into Brown & Brown.

So with that, Hyatt, I'll turn it back over to you for closing comments and then for questions.

Thanks, Jim, for your report.

Looking to internal growth rate. Q2 and Q3 are going to be tough quarters for us. We are suggesting the internal growth is 0 to 5% excluding FIU and further governmental intervention. The legislature is in session in Florida and there are bills, some of which would have an effect on us. Don't know what's going to happen at the moment, but whatever it is, we will handle it, and we will emerge through on the other side stronger and better.

This is the most unusual set of circumstances that I have seen since I have been in the insurance business; and it was really brought about -- it is the ultimate result of having a plethora of hurricanes in Florida in '04, '05 and the consequent market reaction and the potential of having another huge hurricane that would come in with the increasing total values that are insured in Florida. And so everybody is very, very concerned about that. Of course the shift to FI -- to Citizens is also a concern of the Legislature because if, in fact, there is a bad blow or two then everybody in Florida is going to be -- who is a policyholder including automobiles and otherwise -- are going to be upset. So there are some strange situations going on down here.

So having said that, Peter will now open it up for questions from whoever would like to ask a question.

(OPERATOR INSTRUCTIONS) David Lewis, SunTrust Robinson Humphrey.

Can we talk a little bit more about Florida and the impact? Clearly Citizens picking up share down there whether they want it or not, but I'm not quite clear why you've seen the negative results that quick. Because legislation didn't pass until what? February. So this has been a quick transition. And are you losing business totally that is going direct to Citizens or are you just getting a lower commission?

Well, no. There are several pieces to that. First of all, before the Legislature got in the act, Citizens issued some rate reductions based on mitigation credits. Some of those mitigation credits since that time have been changed again. So an example of that would be that there was a mitigation credit of 30% on high-rise AAA construction condominiums, if you had a concrete roof.

Well in the base rate for a AAA, high-rise, concrete field building the base rate anticipates a concrete roof. This emanated from the fact that there was a credit given to homeowners who had concrete roofs in Florida. That is a right and reasonable mitigation but it was then somehow or other got (technical difficulty) and it was extended across to the AAA high-rise condominiums. So that started really the 1st of January.

It has since been been changed again but they can't get the computer to spit out the new numbers until May 1. That's just an example of what is going on.

In addition to that, David, as you know, there was the largest -- one of the largest bankruptcies in Florida where Southern Family in July of last year went down and there is a huge amount of business -- both condominiums, the structures themselves, plus a lot of a huge number of Personal Lines that are thrown on top of Citizens.

So they have just been struggling to keep their nose above water. And so a lot of quotes have been coming in up or down or sideways. And sometimes you get two different quotes. Two different agents get two different quotes from the -- on the same condominium. And it has to do with just a lot of different reasons.

So having said that, that has -- we are writing business and more and more business in our retail offices through Citizens. The Citizens commission is about 12%; on Personal Lines it's 8% and it will carry down a little bit on some condominiums. So it's a little less or about the same as we have been getting except that it's on substantially lower prices. And we have seen situations where Citizens -- and I can think of one down in the Fort Myers area where the best price that we could find any place for this condominium was $110,000 and Citizens and we wrote this with Citizens was $18,000. Obviously an error.

But and -- but it is going to take awhile for all of those things to be rectified. In the meantime, the condominium people are very happy. So the greatest impact on our operation, obviously, is FIU. A lesser impact on the retail and then also some impact in the area of Hull & Company.

So what has happened you put that on top of the cancellation and rewrites where price is going down, and money is being given back -- premiums and therefore commissions. And it is all, it's just -- really it is like a maelstrom.

So we are working through it and then you put on top of that the fact that dealing with all of this change is very, very expensive. Dealing with the Citizens is much more expensive than dealing with a regular company like FIU or with an E&S company. So you put all that together and that's what happens.

So on a rewrite, does that mean that you have to credit back the carrier for that commission and then --?

It's not credit back to the carrier. Credit back to the client. So if you had a premium, let's say, of $100,000 for Condominium A and it was -- had been -- it was three months into the policy and it was rewritten at $60,000, then the pro rata of that premium would be given back in the pro rata of the commission.

Okay. And will Citizens correct some of the pricing errors, do you think, as they get computers that in order and therefore that make KeyView acceleration of commission at some point once that's concluded?

Don't forget you have got the free marketplace working and so agents who are trying to get business that have been unable to get business are not unhappy with having a Citizens quote that's wrong. If it's low. So therefore they are not going to say anything and Citizens isn't going to say anything because they don't know about it and you have the Governor waving the banner of saying reduce prices, reduce prices, reduced prices. And of course prices are going down regardless of what's happening to Citizens.

They are under legislative -- they are under a statutory decree to by January 1 of '08 to certify that their rates are actuarially sound. Now there is a bill in the Legislature that the Governor wants to have passed that would set that off until January 1 of '09. And it had passed the Senate unanimously but it has been sidetracked in the House, and the Governor -- according to the paper this morning -- was very upset at that.

So, David, what you must understand is that you have got an understaffed company, not because they aren't trying, it's just because they had been -- so much is been dumped on them with the most difficult market to handle a condominiums apartment and Personal Lines. In the case of the Personal Lines, those prices are also being reduced.

So there is just a huge -- this is a huge amount of detail and they are doing their best. I really feel sorry for them. They are good people. They are -- we are working with them very closely and have developed some close relationship so we can get some things done. But it is going to be -- it will be all the way through the first quarter of next year before I think they really do get their arms around.

That's significant mispricing if it went from 110,000 to 18, but anyway, thank you very much.

[Caroline Spears], Foxx-Pitt Kelton.

It's actually [Dan Farrell].

It's just a couple of questions. In broadly speaking you said 2Q, 3Q remained top. Can you talk about when you think the comparisons or the dislocation start to get better? Is that maybe a 4Q event? And then in terms of comparing second quarter versus first quarter, do you think it's more challenging, less challenging, the same. And then just maybe you could put a couple of numbers around it in (technical difficulty) said revenues will track about the same as the first quarter. What were the year ago revenues for FIU in 2Q?

Then last point it feels like Citizens will also be ramping up their commercial offering. Is that another leg of competition or impact as we go into 2Q and 3Q?

The answer is yes to all of the above and we don't really know. Here's the bottom line. We frankly were surprised. We didn't really recognize just what the difficulty was with Citizens in terms of their internal problems. Forget the changes that have to do with the Legislature and the government, etc.

We really didn't quite recognize just how serious that was. So that really took us by surprise. We don't really know what the situation is going to be and I would hesitate -- I can tell you that Q2 and Q3 are going to be tough. So by Q4 we think things will start to straight out.

Now having said all that bear in mind that the cancellations and rewrites are probably all going to come about in the next quarter, which would be Q2. And we also will -- we -- our retail offices are figuring this out pretty quickly and of course we are not doing it in a vacuum. Other people are figuring it out too.

So you have got to recognize that the retail insurance agent is out there trying to get as much business as he or she can and the price is a big big factor. Now coverage is something else. One of the disadvantages that you have in the case of Citizens is that they are going to write limited coverage and it's not going to be a very broad policy.

So many condominiums would prefer to have the FIU policy because it is much broader and they've had them for years. So my feeling is that FIU is going to be within a competitive distance that, from Citizens on many of these accounts that they will be able to write. But until that is done, it is not done.

So and the other issue that you talked about is the fact that the JUA which is now a separate joint underwriting facility for Commercial Property is going to be brought into Citizens. And assuming that it is going to be brought in like the Louisiana JUA was brought into Citizens out there -- which is now Citizens -- then it will not have a large impact on us, other than we will have some impact with some of the Hull or some of our binding authority business.

And so all of this is yet to be determined. One of the things that has started to happen in the House of Representatives in Florida, there are a number of representatives that are starting to talk now about the fact that they are very concerned about the financial viability of Citizens when it has a deficit, currently. I read something in the paper this morning that said it was a couple billion dollars but I don't know whether that is accurate or not.

So over a period of time, sometimes government doesn't get it exactly right on at the instant time, but over a period of time it does seem to work itself out. So I think that both the marketplace and the government will probably settle out by year-end. Now if we have a serious hurricane in Florida this summer, then you've got another set of circumstances.

So I wish I could be more specific but there's just about 1000 moving parts; and generally speaking when you have this kind of a marketplace it's good for the retail and not so good for the wholesale, until it sort of flattens out and we can -- we know where we are going. So that's why Q2 and Q3 are going to be tough.

That's a lot of helpful information. Just to get back to the quick numbers question. Do you have the year ago second quarter revenue for FIU?

I think it was about $8 million and so I think we're expecting about $4 million.

So that's a good thing (multiple speakers) (inaudible). Great. Thanks, guys.

Meyer Shields, (technical difficulty) .

-- having a federal government bailout are about zero. Now if we had four or five hurricanes down here, there's a little different situation. But I don;t believe that you are going to have Citizens across 50 states bail out one state on, let's say wind, when they are not going to bail it out on quake in California and some other things. Now flood coverage which is a national coverage. There are floods all over the United States, but you don't have too many hurricanes in Missouri. So I just don't think so.

Do you think that the Governor of Florida recognizes that?

I think the Governor is trying his best. He is riding a huge wave of popularity. Not only is he reducing insurance prices but he is also going to roll back real estate taxes and possibly replace it with sales tax. So I mean, he has got all kinds of very positive ratings and so he is going to go forward.

That's helpful. If I can shift direction a little bit. Have you signed any agreements moving from standard commissions to the supplemental contingents?

Supplemental. Well, now, the companies that are under the -- agreement with (inaudible) Chubb and Travelers are the two and, I guess, Zurich may be the third. Chubb has come forward and what they're doing is they are just guaranteeing an amount of dollars to be paid in by (technical difficulty) based on your last three years' contingents. In the case of Travelers, they are -- I think what they've done is they have contacted each of our offices and they are giving them this year the opportunity to take either the lost ratio-based contingent profit-sharing or (technical difficulty) flat number. And I think our offices are opting to the lost ratio which is the better thing for the business.

And it incents us to write more profitable business and therefore incent our clients, our customers to write to have more safe workplaces, etc. So those are the two I am familiar with.

One last question, if I can. Setting aside Florida and I guess the Southeast, is there an increasing tendency among carriers to give binding authority to the brokers or agents?

No. Not in retail. The -- what you're finding -- I think you might be sort of mixing apples and oranges. In the wholesale area, we have too components. We have transactional which is like a regular broker and then we have binding authority, where a company -- an insurance company would give the matrix underwriting authority to an office. And I guess, Powell, we probably have 20 offices that are doing binding authority across the country. Right?

Yes.

And maybe a little more. That's a very good area. It's a more stable area but not in the retail. One of the problems about retail -- retail agents have never seen a risk they didn't love and insurance carriers know that.

That's actually good news. Thanks so much.

[Al Coppercino], (inaudible).

Thank you. My questions were already answered.

Nick Siskins, Stephens.

(technical difficulty) hear you very well on the comp. You said it went up 43.7 to 44.4. I didn't hear why.

On which one?

(multiple speakers) on the compensation expense.

Yes on that part, the majority of that came from -- we had a true up of our 401(k) contributions for employees that was underestimated at year-end and when the final reports all came out we had to adjust a little bit more of our profit-sharing. So that added $700,000 $800,000 for additional cost.

So, Hyatt, just so I'm crystal clear on this, what surprised you on FIU?

Well, it wasn't just FIU. We were surprised that the -- what the condition of the marketplace was. When we started seeing these mitigation credits coming out in January and Citizens we knew there was a question of whether they were right or wrong but no one wanted to do with them. No one wanted -- because the Governor was talking about reducing prices and etc. etc. The second -- and so what happened was that all of these credits then were starting to be issued on quotes and the quotes then were substantially below FIU. So when on that started happening and then when the Legislature met in January and forced additional price reductions, it just cascaded. So it just happened so rapidly.

Then the other thing is is that when FI -- with Citizens trying to implement all of these changes, it's just very difficult. You get all kinds of different quotations and have. Now that's starting to settle down, but there's some strange things going on.

And then so -- where do we stand on hitting our 15% earnings target?

Well, don't know. We still have all those goals, but it's pretty obvious that this year is going to be a very difficult year. We are up 16 so far. So we go quarter by quarter. So the answer is, don't know.

Last one I've got on contingence, Cory. You said it's going to go (inaudible) it was about $7.6 million. And you are going to say it is going to basically half. And why is that, given the lack of hurricanes last year?

First of all, that estimate is nothing more than an estimate because it is just people sitting back and kind of looking at their list of where they got things, what carriers paid them contingencies in the last nine months, last year compared to whether we got it this year or not.

So part of it is that we got a lot more in the first quarter because there was a lack of hurricanes. So I think the tendency is that most carriers were able to complete most of their calculations probably a little bit quicker. So that may have impacted, had a little bit more come in in the first quarter of this year versus last year where they are coming off a loss year and they had to figure out their IBNRs and all that.

So overall we are going to be up. Last year, we had a total of 41 and we are probably going to be at 46 or 47 so, overall, it is up as we kind of guess because of lack of (technical difficulty).

[Keith Alexander], J.P. Morgan.

I'm calling with just a couple of questions on acquisitions. First I am wondering, how or do you expect increased private equity in this space, increased competition for acquisitions? I'm trying to get a feel for how comfortable you are that the current acquisition activity can be maintained?

The private equity business, they are really interested in the bigger chunks. We have seen one, I think, case of it coming -- someone coming down to about $12 million to $15 million, but -- and that was on one that we actually closed. And there was an interest but it was not -- it wasn't a very effective interest, I guess I should say.

So the private equity people are not looking at the lower -- the smaller businesses like we are. So I don't think it is going have much effect if we are talking about something that is 50 to 500 million and you have a whole different ballgame.

The other question I had is are you guys seeing continuation of competitive trends and pricing habits of insurers as well as buying habits of clients? And if so to (technical difficulty) waiting to further increase its base commission?

That sounds like you just read that question. Did you do it again?

I'm sorry. I am just trying to get a feel for how pricing is changing.

On acquisitions now? Are you talking about on acquisitions?

No. On policy.

On policy, okay.

And how that is impacting base commissions?

Commission rates.

Yes.

Okay. Well (multiple speakers)

Did you say price is increasing? Was that the comment?

No. What he is saying is that if prices are going down what's happening to commissions? So if the commission rate stays the same then it goes down, commensurate with the price decrease. If we sell additional coverage which is that's the point I was trying to make. In many of these cases (technical difficulty) have seen the rate go down by 15 to 18 to 20%. We may have sold additional coverage that got some of that back.

Now, in addition to that we are seen in some cases -- this is not across the board but we are seeing in some cases additional commissions of 2.5% to 5% on packages and certain other lines. So I think does that answer your question?

Yes I think so. Thank you very much.

[Jonathan Grassi], Piper Jaffray.

I guess we are looking as we progress through 2007 in your acquisition focus, obviously we know you are going to take advantage of any attractive opportunity you see. But do you have any line of business or region that you're focusing on?

No. As Jim mentioned when he was discussing our acquisitions, and it just sort of happened that about half of our acquisitions or half of the revenue generated by acquisitions was in employee benefits. And we are seeing more employee benefit opportunities and that's an attractive area to us.

We had last year about $94 million in employee benefits, part of our total of $878 million. So we are not really focused on any geography although we very much like fold ins. So if we can find a fold in to an existing location that is very good. But we are really more interested in the people.

Is the employee benefits pipeline still pretty strong as it was that you saw in the first quarter?

Jim do you want to comment on that?

I think that acquisitions as Hyatt mentioned. you tend to look at the people side of it and so we really don't target a class of business nor a particular geography. As we are growing and we continue to look at more more opportunities, because we are in new areas, we have a lot of our leadership is focused at acquisitions. That's a part of our culture. So you start with a people side down and so if they are in the benefit area that's great. If they generate the type of margins that's the type of business that can join us that there is compatibility, then those factors really drive it as opposed to some strategic -- involving geography or niche.

So we -- the last, mid last year we have stepped up the activity probably to prospect more on acquisitions and that is getting more in the pipeline and we have done this with Paul Veddenberg and some of the individuals supporting him. So this is something we feel certainly (inaudible) flow is out there and nothing we ever budget that we are quite comfortable with a current level of acquisitions. And that really can increase if we find the right people to be part of the Company.

Thank you. Real quick on the floor to retail side which should -- the internal growth rate was up 10.4% year-over-year. And I think that -- for our numbers showed that was the highest it has been in the past three years. Was there any --?

No. No. That's not right, Jonathan. It's been -- the last couple of quarters it was 15%.

I'm just talking about first quarter.

Oh first quarter. Well okay. It was 4.5. Then it was 6.7 and then it was 7.7. So the answer is yes.

Yes but that but I think you have to really look on that internal growth. It's probably more important to look on a sequential basis.

Okay.

You see, the second quarter in Florida retail -- second quarter of '06 is 15.2. Third was 15.3. Fourth was 15.1 and now it's at 10.7. That gives you a little trend.

Okay. We were looking at it year-over-year so that helps. That's all I have. Thank you.

David Lewis.

Two quick follow-ups. One for Hyatt. One for Cory.

Cory, if you didn't have any additional acquisitions in the second quarter of '07 do you have any idea what the acquired revenue amount with the in the quarter? I guess I'm trying to figure out what came in during the period versus what will fall off. So that's one.

Then, Hyatt, I wanted to know if I am reading this correctly. It sounded like you were even though more pessimistic on the pricing declines outside of Florida than maybe you were in the fourth quarter. Is that accurate or would you say the declines are relatively steady?

I would say that in some places they are more virulent than they were in the fourth quarter and I think you will -- if you've read the release that was about last of the last day or two by the Council of Insurance Agent and Brokers, it reflects the same. So it is a little more virulent.

And Cory.

David, I would use about $12 million.

So the second quarter with any additional would be $12 million area?

Right.

Thank you.

Nick Siskins.

You don't have much debt and your stocks been flat going back a year or so and now it's $26.00 today.

Yes you know the -- I know your question and the answer is no.

You're not going to buy back stock?

No.

Why not?

Because we can invest it more and get more return by acquiring.

But if you look at -- you know this business better than most everybody. Pricing is going to get better at some point. You don't have much leverage at all. You could probably do both buy companies and buy stock back and I was wondering why we wouldn't do both? Since your balance sheet could support it.

Well if we couldn't do the most important one which is to acquire, then we would certainly consider acquiring stock. But we would expect that we will be able to take all of the money that we make in substantial borrowing and invest it in new acquisitions. That's the bottom line.

But you don't feel like you can do both?

Well if you use it all up in one, you don't have anything left for the other, do you?

Well if you took on debt you wouldn't.

Well we've already got debt and we've got a line of $175 million and we have about $101 million of cash that is available. So we got -- let's see, what is that? $280 something million and we are going to be making money during the year. So, if the rest of year if we had another let's say 75 million, then we would have a pretty good chunk of money available and there's always opportunities, Nick. And so we just -- as you know, we have an abhorrence to buying back stock. I know that you like that idea. We don't.

We are about growing our business and quite frankly long term we don't think the $175 million plus our current cash plus our cash plus (technical difficulty) is even enough there. So until that [philosophy] changes we would never buy our stock back. We just think there's too many opportunities down the road. It's just a matter of getting the right one.

There are no further questions.

Thank you all very much and thank you, Peter, and we are now adjourned. Bye.

This does conclude today's conference. Thank you for your participation.