Brown & Brown Inc (BRO) 2007 Q2 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 of the information that will be discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance, and that such statements are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those 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 today will be Mr. Hyatt Brown, Chairman and Chief Executive Officer, Mr. Jim Henderson, Vice Chairman and Chief Operating Officer, Mr. Powell Brown, President and Mr. Cory Walker, Chief Financial Officer. With that said, Mr. Brown, I will now turn the call over to you, sir.

Thank you very much. Good morning, everyone. We're coming to you live from the [KBM] atop a rocky assortment overlooking the Columbia River Gorge, where we are having a meeting of our Board and giving them the opportunity to visit our Ephrata, Washington public entity office. And so with that, I will turn it over to Corey for the first part of our report.

Thanks, Hyatt. Our second quarter was remarkably similar to the first quarter results. The largest differential in our net income growth for the quarter came from selling all of our remaining investment in the Rock-Tenn Company for a pre-tax gain of $9.8 million. Our net income for the second quarter of 2007 was $52 million, up 17.1% over last year. Correspondingly, our net income per share for the quarter was $0.37, up 15.6% from $0.32 in the second quarter of '06. From a revenue standpoint, commissions and fees for the quarter increased 11.7% to $246.6 million, up from the $220.8 million earned in the second quarter of last year.

Included in our press release is our table that summarizes our total growth rates and our internal growth rates from our core commissions and fees.

In the second quarter of 2007, we received only $2.7 million of profit-sharing contingent commission compared with the $4.6 million that we received in the second quarter last year. To the best of our estimate, we think we might receive an additional 5.5 to $6 million of additional profit-sharing contingent commission during the last six months of 2007 with the majority of that coming in the third quarter.

Looking at the internal growth schedule, similar to the first quarter of 2007, we again had a negative internal growth rate, was a negative 1% this quarter -- it was improvement to a negative 1%. Our total core commissions and fees for the quarter increased 7.6% or $16.1 million of new total commissions and fees. However, within that number was $18.2 million of acquired revenue. That means that we had $2.1 million, less commissions and fees, received on a same-store sales basis.

Of our 162 profit centers, we can, again, look at three of our operations that, on a combined basis, accounted for over $9.2 million of negative growth in commissions and fees. Those operations are one, the Florida condominium program with Florida Intercoastal Underwriters, our FIU program, had $5.4 million less commissions than the $8.8 million that they earned in the second quarter of 2006.

Second, our Hull & Company wholesale brokerage unit had $2.6 million, less commissions and fees. And, again, that was also primarily due to the governmental intervention in Florida.

And third, our International E&S subsidiary in Los Angeles had $1.2 million less commissions than the $4.3 million that they earned in the second quarter of 2006. As you recall, International E&S provides property and casualty products to the residential homebuilding industry in the southern California and southwest United States.

If you exclude just the FIU operations from the internal growth schedule, all of our other operations on a combined basis had a positive internal growth rate of 1.6%. If you exclude all three of the operations that I just mentioned from the internal growth schedule, the other operational on a combined basis had a positive internal growth rate of 3.5%.

One other interesting change that occurred in the beginning of the second quarter is that the three carriers that had previously settled Spitzer-related issues, and they were The Travelers, the Chubb, and the Zurich, they changed their agency contract with our offices, whereby they eliminated the contingent profit-sharing commission portion of their contract and they essentially came up with new contracts that were called guaranteed supplemental commissions. And the way they work is that they took historical results and by office, assign a set percentage that they would give us additional commission on written premium, written during 2007, regardless of what the loss ratios or results were during the year. And therefore, these things are simply no longer contingent commission. They are normal commission override, and therefore, are included in the commissions and fees and had a positive impact on our internal growth rate this quarter. The total amount that we were required to accrue as of June 30th was approximately $3.2 million. So that's the internal growth schedule and you know, Hyatt, Jim, and Powell will talk about the individual activities of each of the business segments in a second.

Moving on, our investment income increased by $10 million, which is primarily due to the $9.8 million sale of the remaining investment in the Rock-Tenn Company, and that -- we no longer have any shares left of Rock-Tenn.

For other income, we had $3.2 million, which is primarily gains from the sales of books of businesses that happen on a nonrecurring basis and are not really predictable.

Our pre-tax margin for the second quarter of 2007 was 34.3%. However, if you exclude the Rock-Tenn Company gain, our pre-tax margin was approximately 31.5% and that is a 60 basis point reduction over the prior year's second-quarter profit margin of 32.1%. Excluding the Rock-Tenn gain, employee compensation and benefits increased by 90 basis points to 47.6% of total revenues. That 90 basis points represents approximately $2 million of net additional average cost, which was simply compensation costs that did not drop as quickly as the revenues dropped. Our non-cash stock-based compensation cost was $1.3 million in the second quarter and that is within the expected range that we thought.

Other operating expenses as a percent of total revenues, again, excluding the Rock-Tenn gain, improved by 30 basis points to 13.3% of total revenues. That 30 basis points in improvement represents only about $650,000, which is really made up of just general miscellaneous expenses around the Board.

Amortization and depreciation expense on a combined basis was consistent with last year's second quarter, considering the acquisitions that occurred in the last 12 months. Interest expense is also consistent with the expected quarterly expense of around $3.4 million. Our effective tax rate for 2007 is currently running on a year-to-date basis of about 38.8%. And really, from a year-to-date number standpoint for the first six months, the same trend that occurred in the second quarter, as we said, was very similar to the first quarter, and so, bypassing a line by line discussion of those changes. But just summarized by saying that the earnings per share for the six months of 2007, excluding the Rock-Tenn investment gain, was $0.71, is a 6% increase over the $0.67 earned in the six-month period ended June 30th, 2006. So with that financial overview, I'll turn it over to Hyatt.

Thanks, Cory. Relative to Florida retail, it was up organically 7.1%. The previous quarter was a positive 10.7%. The property prices are kind of crazy. Non-admitted paper, which is most of what is being written in Florida, including wind, is down 35 to 40% in the last 90 days. All E&S accounts of size, and that means $50,000 of premium or more, are being and have been canceled and rewritten. Broader terms, sometimes for hurricane limits etc., etc., etc.

One large E&S property entrant, who started a little after the first of the year, has changed their game plan from first dollar to higher layer excess. Also, a big national bank has funded a subsidiary risk bearer to write condos 10% under Citizens' rates. That's going to be interesting. Unclear whether the bank assets actually guarantee the risk bearer's obligations. Citizens now moving into commercial, and, of course, the JUA is moving, I should say, into Citizens, and as of September 1, the limits on the amount of insurance that Citizens will write will move to 2.5 million from the current $1 million and total insured values of about $10 million.

Another thing that is happening -- I haven't seen it since 1985 -- non-admitted rates are now lower than admitted in many cases. Of course, that just happens to be a minor violation of statute.

Casualty is soft, minus 10 to 15%. Workers' comp, minus 12 to 15%. Retros and retentions and workers' comp are very aggressive on terms. Standard companies are very tentative on any new property in coastal counties. You get into the spine of Florida, a little different situation, but still not what I would call in any way aggressive. Those risk bearers who have now reached their Florida aggregates, will be out of the market, except in higher layers, and that could have some small impact. Employee Benefits, of course, is continuing to move up 8 to 12%.

Looking at national retail, nice change there. Internal growth was plus 2.7% and that's better ban the negative 7/10 of 1% last quarter. Georgia, South Carolina, North Carolina, [T&T] is down 10 to 15% on renewals and 20 to 30% if you don't want to get a new account.

One national carrier is really stepping to the forefront and is competing fiercely. And that particular same carrier is doing that, not just in this area, but in the Northeast, the Midwest, and the West. And so that's kind of interesting.

Workers' comp in Georgia, South Carolina, North Carolina, 90 days to 120 days ago was flat and it's now down. In the last 90 days, 10 to 15%. South Carolina has a max discount available for workers' comp of 25%; they're not there yet -- 10 to 15 probably. North Carolina is more aggressive and their max credit is 40%. So lots of strange things. It's interesting, as little as maybe 15 years ago, workers' compensation was not considered a particularly interesting line to many, many companies, and now everybody seems to think it's wonderful. The regional carriers continue to dominate the middle market unless the accounts are multi-state and then it's a little different ball game.

Virginia and Maryland, now pricing there varies by the area, meaning the more rural areas are flat to maybe down 10%. The Metropolitan areas are 10 to 20% down and more. Again, regionals are the most competitive. Coastal property is mostly E&F, down 10 to 30%. Employee Benefits down -- excuse me, up 8 to 12%, but higher deductibles, therefore, reducing rate increases. And a lot of people looking very seriously in moving to HSA's and HRA's.

Pennsylvania, New York and New Jersey, in Pennsylvania, new -- to get a new account, you've got to be at least 25% below expiring. Renewals 5 to 15% down. Social services flat to negative 15%. And national underwriter or national carrier is bending underwriting guidelines in that area.

Condos, this is of interest. Condos in Pennsylvania and New Jersey, 18 months ago, the price was $0.20. That's the property prices. It's now $0.10 from down from $0.20 and falling. New York City, the pricing is pretty flat on most business. If it's light hazard and if it's a good loss ratio, then maybe 10 to 25%, but generally New York City is considered to be firm. Small packages are flat. Upstate New York construction is down 10 to 15%. A really good account is down 25%. If it's nonconstruction, it's 20 to 30% and more than that for a good manufacturing account. It has become more competitive in the last 90 days.

Coastal New York and New Jersey was firm 90 days ago. Now, 10 to 15% down. Continuing, moving into Louisiana, Louisiana Citizens is the market for property. In Texas, Houston, still softer. Casualty is down 20 to 25%. Property, it's fairly firm, unless it's outside of Harris County, and then it's down 20 to 30%. And terms and conditions are, of course, loosening. In Western retail it's a negative 4.1%, but that's better than the negative 7.5 from the last quarter.

Arizona, vanilla renewals are down 10. New down 15 to 30%. Workers' comp down 15 to 20%. We are writing now much more workers' comp in -- this is new accounts now -- in Arizona. Primarily because of the Finn Law B&B university training course. Residential construction is flat to up 5%, believe it or not, and mono-line auto is down 15 to 20%. Umbrella is down 10 to 20% and Employee Benefits up 8 to 10%.

In Nevada, there is really no cap exposure in Nevada. Very soft. Actually saw, in the last 30 days, a property rate that's all risk with a low deductible of $0.02. That's pretty darn competitive. Prices are generally down across the board in Nevada. Regionals are very aggressive. The state workers' comp fund, EIG has now moved outside of Nevada and is very competitive.

In California, workers' comp, again, continues to go south 25 to 35%. To give you an example, the restaurant rate per $100 of payroll three years ago was $6 for $100 of payroll, and it's now $2. And we've just written one in the last couple of weeks in the Los Angeles area at $1.90.

Umbrellas are down 10 to 12%. Wraps are down 10 to 15% except we're not writing very many because the home-building business is kind of not doing too well.

The Workers' Comp Bureau has published a document showing that lost costs are moving up, and so that's interesting inasmuch as prices are still going down.

Moving to professional programs, it's a negative 9/10 of 1%, was last quarter a plus 1.5. Dental is doing very well, up 6.6% for the quarter. We're the largest writer of dentists in the United States. We are having additional penetration in new states, where we were weak, and pricing is basically flat. CalSurance is down just a tad, 3 or 4%. Lost a large account; flat other than met.

Lawyers, this is where the downdraft is. If it's one to ten lawyers, then the rates are down 10 to 15%. If it's above ten up, then it's 20 to 30%. That is a substantial change versus 90 to 120 days ago.

Title pack down slightly because home-building is down and we have a new wedding program and it's starting to grow.

And so with that, I will turn it over to Powell for special programs and brokers. Powell?

Thank you, Hyatt. FIU in Q2 was more of the same. Q2 '07 over '06 was down, as Cory alluded to, $5.4 million.

And restating a little of what we talked about on the first-quarter earnings conference call, on January 25th of this year, the government got into the competitive property insurance market with Citizens, a property insurance company, in Florida. At that time, prior to January 25th, the FIU rate in the Tri-County area, as an example, would be $0.85 to $1. And at that time, the Citizens rates were about $1.15. The Citizens rate moved it down into the $0.70 range and then have now settled out in mid 50's. We are now in that range as well. And more importantly, the new rules have sort of been established by Citizens and seem to be interpreted consistently, which, as we've said before, if we understand the rules in how Citizens will interpret those rules, then we can go forward and write new business and operate accordingly.

On a new business front, we are looking at and can write new condominium units that are coming onto the market and there has been recently some information published that there are 20,000 condominium units alone in Miami coming onto the market in the near term. So, an overview, we would say Q3 would be similar to Q2, but with the interpretation of the rules that have been established will be critical going forward.

On a brokerage standpoint, from a property standpoint, it would be soft, softer, and softer. We are seeing -- we saw in the first quarter 20 to 40% rate reductions in the first quarter, but terms were holding firm. That is not the case in Q2. We're seeing similar rate reduction, but we're seeing a loosening of terms from specifically wind deductibles in Florida at the present time are typically 5%. We're seeing 4 and 3% wind deductibles in certain areas on main storms. That is not in Tri-County and that is not in Tampa Bay. The non-coastal property is, as I said, soft, soft, and softer as the standard markets continue to go after that business and even segments of the business that they have been avoiding in the recent past, specifically, some habitational or the better habitational risks, i.e. apartments.

Texas is not softening as quickly as Florida because the rates did not go up as quickly as Florida. Casualty rates are off 30, 40, and maybe 50% in certain areas of the country, depending on the account, with big standard market influence there.

In our binding authority business, we continued to see what we call count swapping, where our rates may be down 10, 15, 20%, and we would write a new piece of business, but we would lose one or two of our renewals as well, so the net gain is zero sometimes on accounts. The pricing is very competitive. We're seeing some expansion of appetite of those binding authority carriers with the encroachment of standard markets in that area. Personal lines continues to be impacted by Citizens and rate reductions that carriers have implemented in the past year.

On a professional liability basis, we break that down into really medical and nonmedical. In the medical arena, we're seeing rates down 15 to 30%, and more specifically, broadening of coverage, i.e. certain claims made forms or forms that have been historically in claims made, moving to occurrence. The nonmedical business rates are down in the range of also 15 to 30%.

D&O, private company D&O is where we're seeing the largest rate reductions of 15 to 25%. Public companies are down typically less than that.

And then finally, in the construction arena, as Cory alluded to on the West Coast, we've seen a gradual slide in rate since the beginning of the year or actually into last year. We've seen terms continue to soften. Deductibles are lowered. Minimum premiums are reduced. We're seeing certain carriers considering exposures that they obviously wouldn't in the past. Rate on permanent insurance are down 20 to 25%. Hyatt alluded to Wraps, which there are not many Wraps right now because many projects have been put on hold, but our rates down 15, 10 to 15 and maybe more. But the example we would use is if your exposure, if your rates are down 20 to 25% and your exposures are down 10 to 15% as they may be on certain accounts, your premium year over year could be down 40%. The big winners in terms of growth in Q2 were Brasfield, Halcyon Underwriters and Peachtree.

So I'll give it back to you, Hyatt.

Thanks, Powell, and I'll now turn it over to Jim.

Thank you, Hyatt and good morning, again, from Ephrata, Washington.

For the second quarter 2007, we completed three transactions with annualized revenues of $21.6 million. Year-to-date, we have completed 12 transactions with combined annual revenues of $46.1 million. All transactions year to date for '07 have been in the retail property and casualty division. The fact that all 12 were in that division was not really by design, but in fact by opportunity for some great properties.

The number of opportunities of agencies in inventory that we talk to and continue to consider is as significant today as in prior years. We believe that the current soft market is creating interest to talk about the agencies in terms of looking at options -- do they sell now or later? Is this a good time?

The timing of an agency acquisition for the moment, we may be introduced to completing the transactions, it may be months. It may, in fact, be years. This creates, obviously, a lumpy volume with respect to growth in acquisitions.

Additionally, a factor that seems to -- is certainly generating a lot of discussion with agencies is the concern about the capital gains tax. There is some discussion, a fear expectation that that tax may, in fact, return to previous levels, and, perhaps this is a better time to in fact trigger the transaction.

Our sweet spot continues to be in the 1 to $5 million revenue size. The smaller, freestanding are fold-in opportunities, fit well with our culture, as well with our margin expectations. Additionally, the smaller firms are not the target of the venture capital acquisition that seems to drive higher-priced expectations.

I also wanted to recognize two significant new promotions within the Company. Recently, we announced the promotion of Mike Paschke and Tony Strianese to regional Executive Vice Presidents. Mike has been with the Company since 1993. He's a long-term successful producer and head of office in Phoenix, Arizona. Mike has been a great partner with Ken Kirk in growing and building the West. He's been a talent magnet and also extensively involved in acquisitions. Mike has most recently served as Chairman of the Benefits Committee of the Council of Insurance Agents and Brokers involved in various specific and professional organizations.

Tony Strianese began his career with the Home Insurance Company in New York and then with Tri-City Brokers. We did business with them. Knew several of our people, including Powell. He joined the company in 2000 -- Tony did. We set up the Peachtree organization. And since that date, from scratch, Peachtree will exceed $20 million in revenues this year. And the amount of talent that Tony has been able to attract there has really been most outstanding.

With Powell's promotion and the recent promotion of Ken Kirk to regional president and Tom Riley as regional president, we now have seven regional Executive Vice Presidents. And we believe with this team, we have -- we think we have the deepest, we have the most experienced leadership team in our industry.

With that, I turn it back over to Hyatt for closing comments and then opening for questions.

Thanks, Jim. Looking forward, Q3 is going to be another slogging quarter. Internal growth rate somewhere between zero and 5%, excluding FIU and governmental intervention.

So having said that, Felicia, we will open it up for questions.

(OPERATOR INSTRUCTIONS). Keith Walsh, Citigroup.

This is Keith at Citigroup. I guess if we take out the $3.2 million of the guaranteed supplemental commissions, it looks like we're looking at a minus 2.5% organic growth versus the minus 1 on an apples to apples. What lines of business are those supplemental commissions allocated to? And secondly, is the $3.2 million a good run rate going forward, and if there's any seasonality associated with those commissions?

The 3.2 is really primarily retail and wholesale spread out. And from a run rate standpoint, it's probably a reasonable run rate because it is based on written premium and but I didn't really run a report to figure out what last year's premiums were in the second half of the year. So it's just a guess.

Okay. And then just last question, your other income line seemed pretty high this quarter at $3.2 million. Is there anything unusual in there?

No. Outside of about 5 to $600,000, which is normal type of rental income that we might get of various other items, most of that other is just when you end up selling a book of business. And so, that comes at whenever it comes. It's not part of our normal business, but if we have to sell a piece, we will.

Thanks a lot.

Dan Farrell, Fox-Pitt Kelton.

Good morning. Just another follow-up question on the supplemental commissions. We saw Hartford yesterday also announced that they are moving to this type of a compensation arrangement. What's your kind of view of how this plays out in the marketplace? Do you think others may look to do this? Is it too early to tell? And what's -- what do you think the acceptance of these type of arrangements is right now?

I think that the great majority of our contingent profit-sharing commissions come from regional, not national. I don't know about other nationals who are not affected by the Spitzer arrangement. I know of one, who has said about three months ago they are not going to change. I do not expect the regionals to change, but strange things happen. So I think life goes on as it has in the past.

Okay. And then the next question is, just a follow-up on some of Powell's comments on the FIU business. I think you said Q3 would be similar to 2Q, but just in terms of kind of year-ago costs, do they begin to get less challenging for a revenue basis? And then also, you talked about all these new condos coming onto the market and I guess getting more comfortable with the new rules that are being put in place, can you just kind of expand on that a little more and talk about maybe potential opportunity going forward there?

Sure. The first thing is the revenue in FIU, I think we've said this before, is heavily weighted in the first and the second quarter of the year. But we think that the revenue in Q3 will be impacted in a similar basis as it was in Q1 and Q2. And as it relates to new business opportunities, we have said that there have been two or three potential opportunities for new business.

After the storms of 2004 and 2005, there were a number of condominiums that FIU wrote that they had to non-renew because they did not have hurricane glass or hurricane shutters. And some of those condominiums have actually been retrofitted, not that many, but some. And some of those can come back as an opportunity to be considered again to be written in the existing FIU program. But I used the 20,000 units just as an example because it was recent information, recently as in this week, came up that it was published that there's a glut of condominiums in the Miami area and there's roughly 20,000 units in Miami alone coming on the market in the near-term.

The other thing that we think is positive is our renewal for FIU occurred on 6/1, and we had a very good renewal, where we had expansion and capacity, which is positive in terms of our ability to write additional exposures in the Tri-County area.

So the rules that I'm alluding to, Dan, with FIU, are, I would give you an example. Currently, the rules say that an admitted, market, which FIU is currently the only admitted market writing business in this class -- in this type of business -- have to be within 15% of the Citizens rates, which FIU is closer than 15%. But I'm saying they have to be within 15%.

And there are typically -- sometimes, as an example, other structures around a condominium tower. And so as an example, you could have a $35,000 pool house next to a $50 million condominium structure and depending on the way the rules were interpreted, the $50 million structure has to be within this 15% of Citizens. But if Citizens currently writes the pool structure, there was some debate over if they could just move the $50 million condominium unit onto a $35,000 pool structure, which is not the intent, but it is more an interpretation of the rules, and those are the things that Citizens are working through, as an example.

Those are helpful details. Thank you.

Doug Mewhirter, Ferris, Baker, Watts.

Good morning. Hyatt, you gave a pretty long list of things as to why the Florida market is very hard to do business in right now. Yet, we still see some pretty good organic growth coming out of Florida retail. How do you reconcile those two data points -- the good performance versus the chaos that's going on in the market?

Well, it's pretty simple. Chaos also presents opportunity. Don't forget, retail uses Citizens. And so we are all over the opportunities at retail and they continue to be there. The issue that Powell was talking about relative to FIU, there is actually a positive side to that, and that is that in the reinsurance renewal that he alluded to, our capacity in the bottom three counties has moved from $15 billion to $18 million. I think our current writings are somewhere in the neighborhood of $12 billion. And so, inasmuch as we are A, the only admitted market and as much as B, our prices are not within 15%, they are much closer in some cases, 2 or 3% and our coverage is much better, and where the condominium unsold glut is in Florida, it's mostly Briar, Dade, and Palm Beach Counties.

So as these come online, then the opportunity for us exists to write a nice amount of new business. So, that's FIU. But in the meantime, our hunter-gatherer retail people are out looking for wherever the best deal is for their customers. And so, my sense is, is that we're going to continue to do pretty well in the Florida retail even though prices are going south. Now you know those cancellations and rewritings, those affect wholesale and retail. And that's been going on and it will, I think, have a little impact in third quarter.

But then, don't forget, we will reach a new plateau on the renewals sometime at the end of the year first part of January.

So all those kind of things are positive and Florida retail has always been the leader in terms of organic growth, partly because it's where we started and partly because we have a very substantial market penetration and other areas of the country are getting better, too.

Okay. Thanks very much. That was very helpful.

John Fox, Fenimore Asset Management.

Good morning, everyone. I have two questions. Hyatt, could you just clarify what you said about the new plateau and renewals? Are you saying the comparisons get easier next year because this year is when you are cycling through or what did you mean by that?

Well what I mean is, is that if in let's say January, prices went down, let's say 30% or 40% on account, from whatever their renewal level. When we get to that same renewal, then we do not expect those to go down another 35 or 40%. Now, it varies. It varies with the account. It varies with what it is. But the new plateau is a more stable plateau rather than a slippery slope, which is what we're going through now.

That begins January of '08?

Yes.

Okay. And then my original question was, could you just talk about Citizens? My understanding was, in the first quarter, some of the problems were just -- they were overburdened with so many applications. Things were not getting entered into the computer. You guys were interpreting the rules.

Could you just give us an update on are they -- do they have more people capacity? Are they easier to work with? Are you figuring things out? Just kind of give us a status on how that's going at this point?

Yes, they are easier to work with. One of the things is that they have pretty much gotten accustomed to this cascade of business.

I think the other thing that was a bit disconcerting to them is that different agents will send in different applications with different information on the same account. And so that's not necessarily the fact that they do that on purpose, although there are some allegations of that.

And so when you get two or three different applications on the same account, you will have two or three different quotes because they may come into different people and they were unable to track them.

It appears they are now able to track them. There is less of that going on, and they are being very sensitive to any kind of bad data that would be coming into them. So they are stabilizing and they are doing a better job, and so we are feeling a lot better about that. And our people have been working with their underwriters to try and be of assistance as opposed to being part of the problem.

Okay. And you gave an example on the last call. I don't remember the exact numbers, but where there was a Citizens quote out there where the premium was obviously wrong. It was just way, way too low, based on any actuarial standards you would have. Are those things getting corrected at this point or is that still a problem?

Well, we haven't seen anything more. I think the number you are talking about, there was a condominium and our quote was like 90 or 100,000 and theirs was 18,000.

That's exactly it.

And so that was down in the Fort Myers-Naples area. We haven't seen anymore that were that egregious. Occasionally you'll see something like that.

That has to do sometimes with an agent sending in incorrect information. But I think Citizens is being much more perceptive now, and it is not their intent to write any business where the rating or the calculation is wrong. And so now, having said that, once they issue a quote, they are a bit reticent to reverse the quote unless it's very unusual. So on a go-forward basis, the interesting piece will be the renewal of that account next year, which we don't currently write, but we will be all over it the first quarter of next year.

Sure. Okay, thank you.

Nik Fisken, Stephens Inc.

Good morning, everybody. So if I hear you right, the FIU rates are now matching Citizens' and I'm wondering why Powell said that should continue the trend which was down 60% in Q2.

Well, partially because rates are down and partially because underwriting criteria is different. We are unable to renew an account that does not have hurricane glass or shutters. And so there are accounts that we cannot renew. And so on the ones that we can renew, the prices are moving from let's say $0.85 to $0.50. This is a round figure.

And then, on new accounts, we are writing, but again, the first six months of last year, there was about $17 million of revenue, retained commissions, written and FIU. And that was down by about $10 million for the first six months. The second six months of last year, for the entire second six months, was about $10 million, a little less than $10 million of revenue. So the -- their business is front-end loaded first two quarters.

Now, the amount of new business being written will be a bit contingent upon the number of condominiums, new condominiums that are coming online. And there are -- there's a lot of them that will be coming online. Just where they are coming online, we don't know and whether or not the construction is being slowed down a little bit for completion because they are not yet sold out. So, again, we're trying to be very conservative on what we're saying about FIU, although we think we are in a solid position to go forward, and at least, by January, we will be in pretty good shape.

Okay. And Hyatt, would you agree with the CIAB study that came out yesterday that said rates are down 12%?

Well, whenever you talk to people about where rates are down or up or sideways, what they do is they send out a questionnaire and it goes to all the members and the members fill it out. And so most of this is Kentucky windage. And so, when you start averaging all out and coming up with numbers, then is 12% exactly right?

If you went into a town that, or an area, that has 100 to 150,000 or less population, and you talk to the two or three best insurance agencies in those towns, 12 to 20% might be in line. Some of the agencies that are more into the smaller accounts, that are accounts that would be less than $25,000 in premium, then those prices might be down only 5 to 7%. So the averages don't necessarily comport with what we might be talking about in a particular area because we may be more aggressive in our pricing. So the 12%, if that's what they say it is, I'm sure that's what their reports show; that is the average of their reports.

From your commentary, it didn't sound like minus 12; that's why I asked that.

Yes, and we are seeing more than that in many places. For instance, if you look at any kind of property that's nonadmitted, I can tell you it's 35 to 45% down from what it was and -- but again, that's coastal. That's Texas all the way around up to Newport News probably. But then you get into the bread basket and John Riedman, one of our directors, was telling me on the plane from Rochester to here last night, that in a Rochester office, on a manufacturing account, this is a package now, that was last year, $125,000, our renewal price was 75 and there was someone at 62 and we kept the business. So, those kind of things, now that's a very -- that's a worst-case scenario, but that is happening.

And then Cory, on the comp ratio, I didn't hear why it went -- why we got upside down on that.

Well, it's just normal compensation. There's no specific one line item. And so it's really just the revenues dropped faster than the comp dropped in that quarter.

Okay, so no real reason behind it?

Right.

So, if we looked at the rest of year, should that trend continue?

No, I would think it would be -- it would not have necessarily the same degree. I think as we go on, there may be additional adjustments or some profit center leaders may postpone hiring somebody. So I think it was more of an impact than I expected this quarter. Wouldn't expect to see the same thing year to date when we get done with all of the '07.

So are you all seeing your office leaders and regional leaders cut back to try and compensate for the worsening pricing trends?

I think it depends on the location. In some cases, yes. In some cases, no.

Okay. Thanks very much.

Keith Alexander, J.P. Morgan.

All of my questions have already been answered. Thank you.

Meyer Shields, Stifel Nicolaus.

Thanks. Good morning, everybody. Were there any of the supplemental commissions in the first quarter of this year?

No, there were not. We really didn't get all those contracts in until really the beginning of the second quarter to be analyzed. So that $3.2 million really represents the year to date six months that got booked in the second quarter.

Okay. Should there be a true-up at some point in time?

Well, that is a -- every quarter, on those carriers, now that the contract has changed, we're going to have to get their estimate of what our written premium is from them for every quarter. So there will be an amount being accrued every quarter from now on since it's a guaranteed amount.

Okay, but there is not going to be a recalculation going back to the first quarter?

No, no, I mean the numbers we just gave you, the only one that -- Chubbs and Zurich's were actual 6/30 numbers. Travelers could only give us the May numbers. So we did have to interpolate what June was by just taking, dividing by five and multiply times 6 on that. But the rest of them were based on their numbers as of June 30th.

Okay.

It's based on the premium written. So whatever the premium written is, it's written.

Right, no, I understand that. I guess I'm trying to understand I guess what happened to the overrides that you should have collected for the first quarter. Not overrides besides supplementals.

Say again. There is someone with a vacuum cleaner outside the room and so can you say that question again, please.

Yes. I guess what I'm struggling with, I know it's a minor issue, but it seems like the carriers got a free quarter out of you where they didn't have to pay contingents and they didn't pay supplementals.

Well, that could be said, but they're trying to figure what they were doing.

No, basically they came up with a set percentage and they --

(multiple speakers) they didn't pay it to us.

Well they're not going to pay it to us until '08, which would be in January of '08, but since it's a guarantee amount, that's why we're required to accrue it now other than contingent because there is no uncertainty about it.

This is Jim. I think now the -- it's deemed to be GAAP revenue in the period that applies to not in the following year, but in the year in which you earn it.

Okay. I think I got it. Are any of the regional companies that are competing aggressively for business also raising commissions for their -- for you folks and the other agents and brokers out there?

Yes, they are, and so are the national. And it depends on the mood of the regional in that area. In other words, some regionals will cover two or three states and some will cover ten or 12 states. And so in those states where the risk bearer is making a greater profit, that's where the 2.5 and as much as 5% more commissions are being paid. And that has just really started in the last 30, 40 days.

Okay. Thank you very much. That's very helpful.

Adam Klauber, Cochran Caronia.

You traditionally run a pretty lean organization. However, with revenue growth somewhat slower than usual, are there any specific actions you can take to get expenses down even further?

Well, generally speaking, if you look back, Adam, in the 1998, '99, looking at our trends, our expenses continue to kind of slope downward, but less rapidly. Obviously, one of the things that occurs when the market is going south and everybody is screaming, yelling, and scrambling, is that each of our leaders are looking carefully at the people who are helping to win the various wars we are fighting in terms of keeping and getting accounts. And those people who do not do very well sometimes are no longer with us by their own volition in some cases. Sometimes by ours. And in those cases, it seems to harden us up and people rise to the occasion. In some of our offices, that's occurring right now.

So I wouldn't expect us to do anything very unusual or different. This is the only difference, frankly, the difference between this soft market and 1998, '99 is Florida and governmental intervention. And the down-swoop in Florida premiums has come more rapidly than was expected and the governmental interference wasn't even expected. So you take that away and it's about the same as it was back in the '98, '99 time.

Okay. And I would like to ask you a bit of a crystal ball type question. If this season is a bad hurricane season that somewhere between '04 and '05 that tends to stress, that could stress Citizens and the hurricane fund, from a financial perspective, that would obviously potentially move rates back up, but potentially pull more capacity out. Do you think that would be, from a financial perspective, net good or bad for your organization?

Well, we prefer to not have any wind this summer, but we. And of course, I'm an optimist and I don't think we are going to have any wind storms in Florida summer.

But one thing that is existent now that was not existent back then is there is a mass of capital in Bermuda and a mass of capital in London and the continent that wasn't really poised back in '04, in those '04, '05 hurricane. So an example of that would be the national, well, I shouldn't say national -- the carrier that has recently come on shore and was going to write middle market business win from first dollar up, and now is writing only high-level excess. And the reason is because the prices have dropped. So as long as the capital stays in place, that -- I think there will be a market.

Now, if it was just an awful, awful, awful situation like four or five hurricanes, then that's not a good thing at all. Don't think that's going to happen. So we hate to prognosticate on that because whatever it is we'll take care of whatever it is at the time.

Right. Thank you very much, Hyatt.

Steven Labbe, Langen McAlenney.

Hi, good morning. A couple of quick questions. One, what was FIU's total revenues in 2006?

About $27 million.

Okay. Second, do your producers get paid on the $3.2 million of supplementals that you accrued?

No.

And third, is there -- is Citizens for businesses basically the only show in town, or is there a hesitation on the part of the buyers to use Citizens at all?

There is a hesitation. As a matter of fact, the place that there is not a hesitation particularly is in the homeowners area. where the average value of the home, or the insured value of the home, is $0.25 million. There's basically no hesitation there.

If you are getting into the commercial property area though, there is a hesitation. And of course, the Citizens coverage is a skinny down coverage too. But having said that, if you have just come through the shock and all of having your property in, let's say, '05 and '06 double and triple, you are looking to just survive. And so that's where Citizens comes in and scarfs up some business as they stop gap sort of thing. So I guess -- I hope that answers the question.

It does. It does. Thanks a lot.

Al Copersino, Madoff.

Thanks very much. I apologize if you guys have addressed this question already. I understand it though, just a quick question on the supplemental commissions. The $3.2 million represents the money you all earned in the first half, but only were able to book it in the second quarter or it represents only money earned and booked in the second quarter?

It represents the -- what they did is they took what the total written premiums we had for the first six months times the overwrite percentage by office. We did not accrue anything at the end of the first quarter only because these contracts were not all in place and all signs and there was -- not completely resolved. And so we were only able to book it in the second quarter, but it represents the total written premiums that we have written for the entire first six months.

Now, on a go forward basis, on every quarter, we will update what our current written premium is for that quarter times those same percentages, which they all vary by office and we will book that on a quarterly basis. And then, in January and February of '08, that's when these payments are to be made to us in cash.

That's helpful. I appreciate that. And then the other question, I don't know if this is hard to answer or hard to calculate or not, but if we assume a similar level of production you guys create for these insurers, would your supplemental commissions over the course of a quarter or a year or whatever be approximately equal to the amount of contingent commissions you would have received under that type of contract?

Well, that's a very good question. It sounds, based on our best guesstimate, it sounds like that's the case. Of course, the fear, and this is something that these companies know is a problem for them for the future, the fear is among a broad base of agents is that the insurance carriers then will start to euchre the agent by changing the calculation downwards so that it becomes less. And of course, that and the safeguard of that, and it's a very substantial safeguard for Brown & Brown because of the mix of our business, is the regionals all know this, and the regionals are going to continue to do business such usual. And they are whispering in the ears of agents throughout the country about a clandestine plot. So perception is reality and it will all work out. Not a big deal.

Thanks very much.

At this time, there are no further questions in the queue. I'll turn the conference back to Mr. Brown for any additional remarks.

No additional remarks. Thank you all for being available and we will be talking to you in about 90 days. Thank you, Felicia.

You are welcome. And that does conclude today's conference. We thank you for your participation.

Bye.