Brown & Brown Inc (BRO) 2007 Q4 法說會逐字稿

Good morning and welcome to the Brown & Brown, Inc. earnings conference call. Today's call is being recorded. Please note that certain information 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 or 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 those actual results and events may differ from those indicated in this call. Such events or such differences -- I apologize -- may differ materially. With that said, Mr. Brown, I'll turn the call over to you.

Thank you very much, Katie, and good morning, everyone. The batting order this morning is Cory will go first -- he's here in the room with me. Powell -- I will go second; Powell will go third and he and Jim, who will go fourth, are on the line. They're on the road this morning. And then I'll take it back over after Jim for a little recap and then we'll have questions. So Cory, do you want to start off with the financials?

Thanks. All I can say is thank God the fourth quarter is over. This is the first quarter that we've ever had where we had less net income than the previous year's comparable quarter. Our net income for the quarter was $33 million compared to $37.6 million in the fourth quarter of '06. Total revenues for the quarter increased only 1.2% to $217.2 million from the $214.7 million in the fourth quarter of '06.

The first line item on the income statement is commissions and fees and that for the quarter increased 1.2% or $2.4 million of new commissions and fees. Included in our press release is our scheduled internal growth and when you exclude the profit-sharing contingency income to get to the total core commissions and fees for the fourth quarter of '07, that increased $3.9 million over the '06 quarter. However, within that net growth number is $20 million of revenues from acquisitions.

So the good news is that we finished the 2007 year with our third-best year in terms of annualized revenues acquired in one year. The bad news is that the continued governmental interference in the Florida insurance market place accelerated the soft market environment for us, thereby creating the fourth straight quarter of negative internal growth in core commissions and fees and actually the worst of any of those four quarters.

The net loss of the $16.1 million of the core commissions and fees on the same-store sales basis reflects a negative 7.8% overall internal growth rate compared to just the 3% negative growth in the very last quarter. The specific internal growth rate by business segment will be addressed by Hyatt and talk a little bit of the activities in each of those segments.

But moving on to our investment income, we earned $500,000 less in the 2007 fourth quarter compared to the 2006 quarter, and this is primarily due to a $275,000 write-down on a small investment that we had in a private equity investment fund that we've owned since 1999. We anticipate that this investment fund will liquidate in the next 12 months and we'll recover the remaining recorded value on our books of approximately $221,000.

Other income was $1.4 million for the quarter compared to $791,000 in the fourth quarter of '06. Most of these gains, as you know, result from primarily the sales of certain books of businesses in the normal course of operations.

Now looking at the expenses for the fourth quarter, while our total revenues grew by only 1.2%, total expenses grew 11.6%. In general growth of our expenses outpaced our revenue growth for two reasons. First, we had a great quarter of acquisitions and during the initial transition phase of new acquisitions the cost structure of these acquisitions are not as efficient as our existing operations and therefore add to our increased cost as a percentage of total revenues.

And secondly, when you have a negative internal growth rate of 7.8% that results in $16.1 million of commissions and fee revenue disappearing in one quarter, primarily due to the rate environment, the fixed cost portion of our employee compensation and other operating expenses do not adjust immediately and therefore these costs, as reflected as a percentage of total revenues, go up.

Our single largest expense line item is employee compensation and benefits. As a percentage of total revenue this line equaled 50.7% of total revenues compared to 46.7% of revenues charged in the fourth quarter of '06. Excluding the results of just -- of the standalone acquisitions, the comparable percentage of total revenues would be 50.2% as compared to 46.7% in the fourth quarter of last year.

Since only compensation to our commission producers and our private center bonuses vary on a real-time basis directly with revenues and earnings, the remaining management, professional and administrative salaries are relatively fixed costs and do not adjust overnight. As of the end of 2007 we had 5,047 full-time equivalent employees of which 508 were from new acquisitions during 2007. Thus when compared to the 4,733 full-time equivalent employees that we had at the end of 2006 we actually had a net reduction of about 194 employees.

Our typical employee receives a 3.5% salary increase each year and this normal cost of living increase accounts for the majority of the increased ratio compensation to total revenues. The remaining differential is due to miscellaneous other cost increases such as a slightly higher cost for group insurance as well as 401(k) profit-sharing contributions.

Other operating expenses for the fourth quarter of 2007 amounted to $35.0 million compared to $35.9 million in the fourth quarter of '06. However, the 2006 amount included a $5.8 million payment to resolve the state of Florida's Spitzer related investigation. Excluding that from the prior year's other operating expenses we had $4.9 million of additional expenses in the 2007 quarter over 2006. Of that amount $3.4 million related to just the 2007 acquisitions that were standalone offices.

The remaining $1.5 million of additional costs relate partially to costs from fold-in acquisitions and other miscellaneous cost increases such as accounting and professional fees went up, we had more software licensing fees, our bad debt expense tweaked up a little bit and we had a little bit more contributions. Again, similar to our fixed compensation costs, other operating expenses are for the most part fixed and are not able to adjust as rapidly as the insurance prices fell in the same period.

Looking at amortization and depreciation expense, those increases obviously were just mainly due to the increased level of acquisitions. On interest expense, it was slightly higher and similar as it was in the three previous quarters. This was due to the increased $25 million borrowing in December of 2006.

Also as a result of our increased acquisition activity in the second half of 2007, last week we borrowed an additional $25 million from the Prudential Capital Markets Group at a 5.37% all-in coupon rate for a seven-year period. We currently have remaining $150 million available to us in this facility with Prudential, which we would anticipate to continue to tap into during 2008 depending on the acquisition activity.

Our effective tax rate for the year was 38.7% and 38.3% for the quarter. However, as we have previously reported, we've had an ongoing IRS examination for the past year and the good news is that there were absolutely no significant issues except that the IRS believes that we should accrue and pay taxes for the profit-sharing contingent commission as of December 31st of each year for which we don't receive the monies until the following February, March, April, May and later.

The calculations to determine the profit-sharing contingent commission are solely in the hands of 150 to 200 different insurance carriers that we represent and that pay the contingent commissions. The vast majority of those carriers do not supply us with their calculations until the following February through May period. Since these calculations are based on information specific to each of those carriers, and there is no reasonable method to estimate those amounts until the carriers make the calculations and inform their agency force, the primary industry standard is to record these amounts for both book and tax purposes at the earliest time that they can determine by the agent which is generally when the carrier sends us the calculations are long with their check.

The IRS believes that if the insurance carriers are taking these payments as a tax expense in the accident year period somebody should be picking it up as income. Since they were auditing our 2004 tax year their initial assessment of the potential interest and penalties through the current 2007-year could amount to over $7 million.

Additional, as ridiculously as it seems, the IRS field agent performing the audit also wanted to classify each of our insurance agency contracts that had a profit-sharing contingency feature as a de facto partnership agreement for which a K-1 should have been issued and therefore allowed the IRS to assess an additional penalty of over $2 million.

Since we historically receive 75% to 80% of these contingent -- profit-sharing contingent commissions in the first quarter of the following year and pay taxes on those earnings beginning with the April 15th quarterly tax payment, this entire issue in a nutshell really centers on a 90-day advance payment of the related taxes. We waved the cost of fighting this issue through the tax court system versus the cost of the lost cash flow from the timing of the tax payment and we determined that it was more prudent to settle with the IRS.

We ultimately agreed to resolve this issue with the IRS for $1.1 million of interest and an agreement to accrue at December 31st each year, for tax purposes only, a similar amount of profit-sharing contingent commissions that we had received in the first quarter of that year, so we're dealing with a known number. And then we would true that number up to the actual amount received by the end of the following March.

Now this agreement will result in us recording a large current deferred income tax asset on the December 31st balance sheet, which you'll see on our balance sheet, there's a $17 million amount there. That current deferred balance will basically go away as of the following March 31st balance sheet since the related income will now have been recognized in our GAAP financial statement as of March 31st.

Moving on to the year-end numbers, for the full year of 2007 we had total revenues of $959.7 million, up from 9.3% over 2006. Our pretax margin for the year was 32.3%, up 40 basis points from the 31.9% in '06. Our net income per share for 2007 was $1.35 versus $1.22 for '06. However, as you know, we've had several unique one-time items that occurred during 2007; so let me just recap on a per-share basis which might want to consider our 2007 baseline earnings to be.

The first and second quarter -- in the first and second quarter we recognized an $18.7 million gain on the sale of the Rock-Tenn stock. This amounted to approximately $0.08 per share earnings. During the year we also recognized gains of $13.7 million in sales of books of businesses. This amounted to approximately $0.06. However, there's always going to be some sales of books of business here and there, so for an ongoing basis let's just assume that $0.05 of the $0.06 was outside the historical norm. This would make the -- take the 2007 earnings per share of $1.35 less $0.08 and less the $0.05 items more like $1.22 earnings-per-share looking into the 2008 year. So with that rather lengthy financial report I'll just turn it over to Hyatt now.

Okay, thanks, Cory. Moving into the retail areas, first of all Florida retail was a negative 11.2 this quarter versus a negative 12.3 last quarter. The downdraft in pricing does continue and, I think as I mentioned previously, starting in July casualty prices, which had been somewhat flat, all of a sudden started to precipitously drop and they're continuing. The renewals are 20% to 25% down almost regardless of loss ratios. Workers compensation is down an average of 18%; that's the new credits.

Plus there are some companies that are using additional schedule credits that were not using those same schedule credits 90 days ago. So it's continuing to -- and apparently worker's comp in Florida has been quite profitable. Umbrella is not quite so soft, down maybe 10 to 12 to 15.

Some good news -- some non-embedded markets, these are property including wind markets, are now taking accounts from the Citizens win. Now these generally are larger risks, $10 million or more, that have been previously A rated by Citizens. Of note and kind of an unusual note, we were told by one large national carrier, now this is their larger accounts division and they're writing accounts that are $300,000, $400,000 of premium and up. And the office I think is responsible for maybe three or four states.

On January 1 they wrote no new accounts and they lost no accounts. Never before happened. And this is reflective almost across every company across the United States is companies are telling their underwriters don't lose any renewal.

Prices in the spine of Florida -- now the spine of Florida would be Lakeland, Orlando, Leesburg, Ocala, Gainesville, etc. -- those are dropping 5 to 10% faster than elsewhere, meaning coastal. So if you had an average of 20% to 25% you've got to add another 5% to 10% on packages. The Citizens rates are stabilized, meaning there hasn't been anything that's happened there in the last six months or so.

In the Tri-County area the standard carriers still aren't in the market yet. They're still hanging back, although we're doing okay now with FIU, which I think Powell will talk about. In the marine area we do have a large volume of yachts and these are basically Caribbean yachts of course and some of them I guess go to the Med in the summertime. If the yacht is $1 million or thereabouts the prices are down 10%. If it's $1 million to $15 million it's down 30% if it's -- about $13 million. These are the Hull coverages. Then it's 35% to 40%.

Exposure units are down in construction risk. Homebuilders, these are the payroll and fleets of vehicles, etc., homebuilders are around 50 to 60 to 70%. The exposure units on renewal and commercial (technical difficulty) quite a bit of business there and they're down maybe 10% to 20%. The actual real serious capacity problem in Florida in terms of property is really not in the area of commercial, although there are some problems, but the real problem is in homeowners and that capacity is constrained and of course we're continuing to build new homes. And the values of the homes plus the contents, etc., create huge exposures.

So I would expect the current conditions will probably continue for the first maybe one to two quarters of '08 and I think there will be some equilibrium. And that assumes no further hurricanes and it assumes no further governmental interference. Employee benefits in Florida are up 10% to 12% (technical difficulty) on the average. Again people are not exactly taking (technical difficulty) changing coverages, etc., so the price increases are actually a little over than that.

National retail, moving on from Florida, was a negative 3 and (technical difficulty) tenths of 1%. All areas are experiencing downward rates with a few exceptions. Now one of the things in national retail, depending on where you are, A, rates never went up as high and therefore they can't go down as low; and, B, there are some places where we're having a boom as a result of oil and related sorts of things. So a little different situation.

But to get a little specific in Georgia South Carolina (technical difficulty) reductions (technical difficulty) across the board on packages. Coastal property is still going to 25% to 40%, however (technical difficulty) that's going to kind of flat out a little bit. Worker's comp is (technical difficulty) in Virginia Maryland and Atlantic middle-market 20% to 40% on good packages. Auto is 10% to 20%. Umbrellas are softer on tougher risk.

If you're in Pennsylvania and New Jersey area trade contractors is a minus 10% to 15% on renewal. Worker's comp is down 20% to 25%. Social services is the more stable area, generally 5 to 12% down. Frame condos, frame condos in that area, this is property now, are $0.085 rates on renewals and they were $0.12 to $0.13. And if it's AAA then it's $0.02 to $0.03 and those are pretty rock-bottom rates. Don't think those can go much lower.

In New Jersey package is very soft, 20% to 30% lower. Construction umbrellas are flat to minus 10. Some New York City contractors are getting a little more competitive because there are some new markets there. Worker's comp is very competitive. Upstate New York is a little different situation. Packages are off an average of 15% to 20%, umbrellas a minus 10. The property rates are the same as we talked about in New Jersey, $0.085 on frame and $0.02 and maybe a little less on some AAA. Again upstate New York never went up as high and therefore is not going down as low.

The exposure units are down on some contractors. There's no big changes though other than that. In Indiana, Illinois and Wisconsin -- worker's compensation in Wisconsin has kind of gone crazy. Scheduled credits there are now being given up to 50%, never heard that before. The heavy contractors in the Chicago area, that's a little more stable -- maybe it's down 10, maybe down 12. Lighter contractors though, less exposure, are 15% to 20%.

The regionals -- now the middle part of the United States is regional heaven and the regionals are really, really, really aggressive in that area. Going down to Louisiana and Mississippi and over into Texas for a moment, in Louisiana larger property is a minus 30%. Now again, this is all non-admitted stuff. And if in fact there was an admitted market that had written a highly protected risk, like a AAA risk, those prices are flat, but it's the non-AAA stuff that is going down 30% or so. Umbrellas are flat to down 10%. Marine is down 10%, unless it's excess Moraine and that's minus 20%.

The oil boom is going on and there are lots happening, lots of increases in exposure units, etc., and markets now in Louisiana are taking business from Citizens as markets are taking business from Citizens in Florida, which is good news. In Texas much softer than 90 days ago. Tier 1 is still tight on wind. Tier 1, that's kind of a -- I guess you'd call it a little bit of a misnomer. It's really -- if you look in the Houston area you'll find that Tier 1 is south of I-10 and anything that's north of I-10 it's become very, very competitive.

E&S markets are starting to reduce their prices in the Tier 1 area. Packages are down 20% to 30%. The economy is strong however. And oil and tough lines is minus 10% to maybe minus 20%. Employee benefits in that area of Texas is a plus 2% to 5%. That's the lowest pricing that we found. In Western retail it's minus 8.3%, it was minus 5.9%. New Mexico and Colorado packages 10% to 15%, up to $100,000 in premium and above that they are 20% to 30%. E&S on a -- general liability that's in the E&S market, that's a little flatter, particularly on the tougher classes. Worker's comp is a minus 10%. Umbrellas are flat to minus 10%.

Aviation, now that's a very, very soft area. The softest, according to our people, in 35 years. Four new markets, two of them are overseas, two of them are of course U.S.-based and the two that are U.S.-based are really at each other's throats. And so Hull prices on industrial used aircraft, and these are jets and aircraft that would be $6 million or $7 million in value all the way on up to $30 million or $40 million or $50 million and those Hull rates are down 45% to 55% and the liability is down 30% to 40%.

Looking however though so -- but other than the aviation I would call Colorado, New Mexico a little more stable than some of the other areas. California, Arizona, Nevada is still crazy, even MedMal in California is now going down 10% to 20%. Although in California worker's comp that we've talked about is going down -- has in the past gone down 25% to 30% or 40%. It's now more in the 15% to 25% and there is a recommended rate increase, as you know, but no one is taking it. So I think by the end of the year there will be some changes there.

I will say one thing -- that the largest writer of worker's comp in California has now increased their commissions to agents by 2% which is always kind of interesting. Homebuilders, those exposure units on renewals are down just crazy, 60%, 70%. In California and Nevada and in Arizona. The umbrellas, and particularly the more vanilla umbrellas, are pretty stable because there's a $1000 per million minimum and that's not being so far violated. And the last soft market, I remember them getting down as low as $500 and $750.

In Washington and that area packages are -- it's a little more stable. Package is down 10% to 20%. Fish boats, Marine, those kinds of classes, those Hull and the P&I is up plus 20%. One of the few areas that's up. The longshoreman harbor worker's comp is about flat. Tribal business is down 10% to 15%. So with that I'll turn it over to Powell to talk about the other sectors. Powell?

Thank you very much, Hyatt. In special programs, FIU, revenue was down 28% in Q4. Things are not as erratic with the Citizens as has been in the past quarters. GL pricing and ex wind business continue to be under great pressure. American Specialty, our sports and entertainment broker, and AFC, our social services facility, rates in those two facilities around the country are down on average 10% to 20%. CalSurance, their professional liability lines on accounts under $150,000 are down 10% to 20% and accounts over $150,000, to $250,000 and above are down 35% or more.

Procter Financial continues to perform very well and I would say as a general rule on all programs special and professional programs we have very good support from our risk bearing partners and we're thus retaining a number of our accounts, but they are at slightly reduced or very reduced prices.

Relative to the services area, as we noted in the Q3 call, we are very, very pleased with USIS and NewQuest, but at the end of Q3 we lost a portion of one of the clients for United Self-Insured Services and they took it in-house. We didn't lose the entire account, they took a portion of it, the majority of their business in-house and that affects us to the tune of roughly $400,000 a month. That will continue on until September of this year.

Relative to brokerage and transactional properties specifically -- as you all remember, the pricing went down substantially after June of last year. In Q4 in Florida property down 30% to 60% and Florida has got the most significant downdraft, lots of options for buyers, most notably Citizens, but they have non-rated options in other rated options. Outside of Florida the general rule in transactional property, I would say it's down 20% to 50% and the standard markets are really starting to stretch on classes of business.

As Hyatt alluded to about the frame apartments, that's typically a class of business that, depending on where you are in the country, that's not something that's the most desirable in an admitted market, although they are now starting to attack that in certain areas around the country.

And casualty on the East Coast is very soft. Lots of standard market activity there. On accounts over $100,000 in premium rates are down 30% to 50%. As it relates to West Coast residential under $100,000 premiums would be down 30% in rate. Over $100,000 premiums down probably 40% plus in rate. And as Hyatt alluded to, the exposure base is down anywhere from 40% to 70%.

On the commercial side in the West rates are down typically about 30% plus and exposures are down probably 10% plus. Seeing lots of standard market activity in California and other Western states which is a first in some of those classes of business in a while.

In binding authority -- in Florida the commercial binding authority, we're starting to see some more standard market intrusion in areas, i.e., North Florida, Northeast Florida, Northwest Florida. Rates are down for property typically 20% to 30%. Casualty is down 5% to 20%. In personal lines in Florida, as Hyatt alluded to, there is a capacity crunch but in our environment in binding authority we are seeing Citizens and other non-rated takeout companies as the biggest competition there.

Outside of Florida the binding authority business is primarily casualty driven, standard markets are very active, casualty business is down 5% to 25%. In the fourth quarter of '07 Citizens did not rollout, as they had talked about, the $2.5 million all perils policy and we are still waiting to hear additional information on that.

In public entity business, casualty over $100,000 accounts, rates are down typically 15% to 25% and under $100,000 premiums rates are down 10% to 15%. Professional rates are down in the same range as those for casualty.

In professional national programs lawyers continue to do very well. The small account premiums are down 10% to 15%; in over $30,000 premiums the rates are down 20% to 30%. Dental, the professional on dental continues to be flat and the packages are down 10% to 20%. And in PIP, which is our shipping facility in St. Louis, rates are flat but their revenues can be impacted by economic swings going forward. So that's the rest of my report, Hyatt.

Thank you very much. Okay, Jim, would you like to talk about M&A activity.

Thank you, Hyatt, and good morning, everyone. First it's really a pleasure to report a bright spot in the most recent quarter and that is our merger and acquisition activity. As an overview of this activity I would like to review three different topics -- the first being our activity level; second, comments on the current M&A environment; and lastly, additional Brown & Brown resources that we have moved over to transaction capability.

First, as to activity -- as announced in our press release, the fourth-quarter 2007 and first 40 days of 2008 has been a very busy and very successful period for acquisitions. For the period we completed 20 transactions with $61.2 million in annualized revenues. $26.6 million, or 44% of the acquisitions in this period, was for retail employee benefit businesses.

This is a fast growing profitable segment of our business and we have as an overall corporate goal to increase the employee benefits revenues to 25% of our total revenue base. We currently have approximately $132 million in revenues in this product line or approximately 14%, 14.5% of our revenue base. For calendar year 2007 we completed 26 transactions with $107 million in annualized revenues.

Secondly some comments on the current M&A environment. We have recently experienced a moderate improvement in the acquisition, deal pricing and terms. With regard to the transaction activity for the industry, there was a report by one of the agency consultants and brokers that there were less agencies purchased by banks or by venture capital firms in 2007 versus 2006. Indeed several banks have sold their agency operations in the past year and Brown & Brown made two such acquisitions from banks.

We can also report an increase in the number of agencies that have expressed interest in selling their agencies. The soft market cycle, tougher economic conditions, reduced exposure units, perhaps an anticipated change in the tax laws are concerns expressed by agency owners. The lack of an effective economic perpetuation plan remains the leading factor that drives agencies to sell.

Given the current soft market conditions we are exercising great caution in the pricing of agencies. Our long-standing approach to pay for actual forward delivered earnings has been a technique that has served us well. Our preference in the current conditions is to have a minimum of a two, preferably a three-year earnout period to resolve pricing concerns.

Lastly, I'd like to make some comments on our acquisition team. We have really world-class individuals' capability in this area. The recent announcement regarding Tom Donegan is but one structural improvement to our M&A resources. We have realigned other resources from internal audit, quality control and leadership development that will enable Brown & Brown to routinely complete an increasing number of transactions. Organizationally the M&A resource teams will report directly to me and to Hyatt.

All right, with those comments I'll turn it back over you for wrap-up comments and perhaps the questions.

Okay, thanks Jim. Good report. The outlook for '08, the bottom line is that property and casualty pricing is going to continue to go south. In the January 7th edition of National Underwriter there's a very interesting graph. The graph shows the soft market starting -- and hard markets -- starting from 1970 through 2008 estimated.

And in each one of the softest cycles of the market, the first was in 1974, at the depth -- according to this graph in National Underwriter, at the depth the property and casualty premiums for the industry grew approximately 6%. In 1981 and 1982 the depth of the next soft market, the property and casualty premiums in the market and the entire industry grew 3% to 4.5%.

Then in the protracted soft market there were a couple of down blips. 1992 the entire industry grew about 2%, that's 19 -- 1992. In 1998 grew about 1% and the projection for this coming year is that there would be a negative growth in the entire industry. Now if that's true, again according to this article and it's also sourcing A.M. Best insurance information as to -- if that's true that will be the first negative premium growth since 1943.

So all of that having been said, it just means that we have to go out and write a lot more new business and, of course, we do write more new business in the soft markets than we do in hard markets for obvious reasons. We think the first three quarters of '08 are going to be challenging for organic growth. There will be, we think, some moderate opportunity -- or modest opportunity maybe -- for change in Q4.

Loss ratios for P&C carriers must increase 5% to 10% before rational pricing appears. And as you know, the first three quarters of this year I think the combined for the 20 or 30 largest companies that do reported business insurance or they're picked up in business insurance show something like a 90 to 92 combined. So there's a way to go there.

Now according to information, one of the reasons for those low loss ratios are takedowns of old reserves. And what we have is a very, very unusual set of circumstances. Really for the last four or five years frequency and severity have both been down. Nobody knows why. Maybe it's because we've had great business conditions and therefore there's no malingering. But if that turns, which generally if you wait around a little while things will change, if that turns and the pricing is at an unreasonably low level then things will start to change.

Now there's -- I'm sure someone is going to have a question about what do we think about contingent profit-sharing commissions and obviously we don't really know, to tell you the truth. But when the companies are making a lot of money every year that occurs we seem to do pretty well in the contingent area, so we would expect to do pretty well this year.

Jim commented about our employee benefits. We had a large focus on that at our October leadership conference. As a matter of fact, the better part of a day. And we feel that setting this 25% goal for employee benefits revenues as a percent of total revenues is very accomplishable. We have set no target date except we'd like to get there as soon as possible.

So the other very positive is that it is -- it is true that the acquisition potential is a little more robust than it has been in the last year or two. So '08 is going to be fun. So Katie, do you want to open up for questions?

(OPERATOR INSTRUCTIONS). Keith Walsh, Citi.

Good morning, everybody. You know, first I guess I was just pretty surprised about the level of margin deterioration you guys experienced and I know, Corey, you mentioned M&A is one of the reasons why. You guys have had M&A in the past, just want to know or reconcile why this is so much more of an issue this time around. And then also if you could maybe touch on employee comp costs, the fixed versus variable component there. And then I've got a follow-up for Hyatt. Are you guys seeing higher levels of competition from maybe the larger brokers searching for growth domestically. Thank you.

Let me start out by saying that we have always had acquisitions and they have always traditionally had a phase-in period where they gradually become as efficient as our normal offices. The main difference here I think is the fact that the internal growth and the elimination of $16.1 million in one quarter.

If you look at our quarterly total revenue of $217 million, of just the standalone offices they counted for about $16.996 million or right at $17 million. The compensation percentage of the compensation of that $17 million was roughly $9.670 million and that's a percentage of 56.9 versus our companywide average of 50.7. And so that knocks it down to 50.2.

Now kind of trying to understand where that differential is, is kind of what I was trying to allude to is that producer compensation who are on full commission, those compensation and profit center bonuses, those are much more variable costs. In fact, for the whole year with our revenues down producer compensation dropped by over $4 million which would be expected because that's tied in more directly.

But if you look at the major salary -- the major salaries of non-producers which would be management, profit center leader, administration staff, the professional staff of CSR's, we accounted for basically this year there was roughly $228 million of that versus $205 million last year. So there was a net increase in that side of it of about $22 million. If you take out just the cost of all the acquisitions for the year that are standalone, they account for $19 million of that $22 million.

So on a net same-store sales, it does have a little bit of a fold-in included in that, amounts to about $3.2 billion of additional cost. And that's where I was referring to the fact that if you just take that $200 million of baseline cost outside the acquisition, that would account to almost $7 million of salary increases at 3.5%. And so that's why I said the majority of that increase is related to just the normal labor cost increases.

Now the percentage though, it does go up when all of a sudden you just drop that revenue. So again, that stuff doesn't change over time -- I mean overnight, but it does work itself out. When you've got a decentralized system like ours, each of those profit center leaders are managing that on a daily basis and over time they get that more in-line. But we've never had the kind of revenue drop that we had in one quarter.

So that's what I was trying to lay out to explain that margin, because I know it's easy just to look at a percentage and automatically assume that every cost in an organization is variable. And so for every dollar you drop you don't drop the other, but that's not really the case. And if we're having the same conversation in four or five quarters and the revenue drop isn't as substantial, then there's a concern. But I think right now it's almost purely a mathematical percentage when you look at just the margin number.

And I think also, Cory, of the 5,100 people we have, about 550 are commission producers.

Correct.

Keith, also to answer your question about is there more competition from national brokers, no. The competition -- you must understand that our average commission, this is the annualized commission on the lines of new accounts as they're bound, the average for the whole company is between $12,000 and $12,500 in commissions, that's not premiums. So the premiums would roughly be -- that's about a 10% commission so it's a $120,000 premium.

The national brokers, because of their cost structure, really can't get down below I don't know $40,000, $50,000 or $75,000 in commissions. Although they may try to set up divisions that have a different cost structure. But our competition truthfully is in that huge group of middle market insurance agents and brokers who are spread across the United States.

And don't forget, many of our offices are not located in Chicago and New York City and Los Angeles. Most of our offices are located in middle and smaller towns, and so being part of the fabric of the community is part of the way that we get our business. So we just aren't seeing any particular competition from national brokers at this time in that area.

Keith, this is Cory again. Let me finish just a couple numbers so I can just get all the numbers out publicly. On those standalone acquisitions that I was mentioning, that $17 million, their compensation was that 9.670 number which is 56.9. Their other operating expenses relating to that revenue was $3.398 million or 20% total cost versus the 16.1 total.

Let me give you what the year-to-date numbers were. Now these are, again, just the standalone acquisitions, any of the fold-ins are kind of just lumped in with our normal same-store numbers. But for the year acquisitions on a standalone were $62.183 million in terms of total revenues. Their compensation and employee benefits was $33.491 million which was a 53.9% factor. And their other operating expenses were $11.092 million which was a 17.8% factor. And then of course they did have their proportionate share of amortization, depreciation and interest calculations but those aren't as much of a concerns. So I would want you to have those numbers so you can work them into your model too if you choose to.

Thank you very much.

Dan Johnson, Citadel Investments.

Great, thank you. Cory, just to follow-up on what you just said there for a moment. You said the fold-ins are inorganic.

No, no, no. If you look at the revenue numbers that I just gave you, those are simply the standalone acquisitions. If you look at our internal growth schedule, that will take all acquisitions including fold-ins. And so you can really mathematically just deduct those two and figure out how much revenues the fold-ins represent.

Got it. Got it. I was just making --

I'm just not breaking out the expenses on the fold-ins because it does it a little bit, you'd have to make a lot more of assumptions and I just like to pull out the raw numbers.

Okay, great. I was just making sure that fold-ins weren't in the organic growth number.

No, they're not.

Dan, one thing that I might just comment on that is that we don't know, but we understand, at least from certain quarters, that in some of the people who are our competitors, larger and smaller, they're going out and hiring producers away from other offices and violating noncompetes and non-piracy's and counting that revenue as internal growth. And the reason they do count that is because it is not being paid for except through legal expenses and when they have to make settlements and all that sort of stuff. We don't do that.

Understood. My real question then was around -- on the comp line. I would have thought possibly with the challenges of the fourth quarter we would have seen some sort of incentive comp accrual reversal that would have helped the fourth-quarter numbers. We've seen at other times folks have tough fourth quarters. Was there any such comp reversal in the fourth quarter?

On an aggregate basis there was. There was roughly $600,000 of bonuses that went away and part of -- there is a normal process at the end of the year that we have certain formulas driven if they typically get 8% of the operating profit and then there are certain bonus penalties that are evoked that if they don't grow a certain percentage. And during the year you do have certain changes of particular profit centers.

And so what happens is that we accrue for those during the year and then all of a sudden the fourth quarter where we might have had a change in a leadership at one office they kind of come back and say well, I went from a profitable office to this office and I'm making the changes and these are all problems that may have occurred under another leadership. So I think you ought to give us some dispensation on these penalties or I've got to have the bonus.

So the pure dollar amount down swoop is more of a variable of the 8% operating profit, but at year end we did have to come in and make some accommodations to certain offices and to give those bonuses because they are kind of under our new leadership and we don't want to negatively penalize them for something that maybe wasn't under their control. So that does happen. So that's the reason why it's not probably as great as you would have initially thought.

Okay, understood. Then I guess with the comments about really in the short term employee comp isn't as variable as maybe we'd like which is good in the good times, the sort of margins you saw in this quarter -- you don't feel that they were unrepresentative of what actually sort of happened in the quarter and what could happen until we get some more lift from revenue?

I think so. I'm not sure if I follow the whole thing.

Well, my point is I just want to make sure there wasn't anything abnormal outside of some really modest items in the quarter.

You know, there really is not. And just from a magnitude standpoint if you look at -- maybe this will help clarify -- out of the total comp -- in that total comp line you have all salaries -- you've got benefits included in that, you've got training costs, you've got a lot of things in there.

But as a general rule if you take basically all management and staff and professional fees, that amounted to that $200 million number that I was referring to earlier from basically $228 million. If you look at just pure producer commissions on the same year we're basically $70 million, so the $70 million is more variable. On top of that you do have -- you have salary producers who haven't hit the 40/20 and that amounted to about $33 million.

That's the one line item that actually did go up because we continue to hire producers. And we've always talked that we reserve 1% of our revenue base to hire people that we don't need, primarily producers. And in corporate for the year we hired -- we spent $1.3 million in addition, additional over last year, for producers that we are bringing in and training. So that line item did go up. But hopefully between the 228 and the 72 and the 32, those will give you some perception of the variable side of the compensation, payroll cost.

Yes, that's great. Thanks very much for the additional help there.

Dan Farrell, FPK.

Hi, good morning. Can you just talk a little bit about organic growth again for next year, your expectations? You said you thought the first three quarters of '08 would be challenging, but you thought that there might be some improvement as we head into the fourth quarter. Can you talk about what maybe drives that improvement. Is it just the comparisons starting to get easier in either wholesale or Florida retail or is it along those lines?

Well, I think you sort of have to look at it in pieces. The big down swoop in Florida started in July of this year and it occurred as a result of two things. Number one, in addition to the property prices going down, casualty, which had been kind of flat, it was edging down, all of a sudden it fell off a cliff.

And so generally speaking, when you have that kind of change in pricing the underwriters who have authorized a 30% reduction or 35% reduction on a package or on a casualty line, when it comes up for renewal they've got their files sitting in front of them and they're saying well, you know, it's been an okay account, but maybe we'll see if we can't do 5% less or 10% less. And that's what I call sort of meeting an equilibrium.

And so what I think -- what we hope and we've been surprised this year about the Florida marketplace, what we're hoping is that we'll find that pricing equilibrium where prices won't be going down quite as much. Now the other piece is if you look at the states in the United States that have been most impacted by the home-building change, it's Florida, Arizona, Nevada, California and to a lesser extent some pieces of Texas.

So in addition to prices going down we are seeing exposure units trailing off and particularly in the home-building area. But it's not just in the home-building area. If you think about the '04 and '05 hurricane years it was really into the beginning of '07 before all the roofs and all the other repair jobs finally got completed. So you put all that together and by the last quarter of this year '08 we think there's going to be some modification.

The growth in Florida has been sort of a little flattish, I'm talking about the population growth, etc., but over a period of time we've always had these ups and downs. So it's going to come back, that's not any big deal. So that's Florida.

Now if you get into the P&C market outside of Florida then the national retail has been over a period of time kind of flat and down a little bit and maybe up 1/10 of a point or whatnot. And so if you look at national retail for all of '07 it was a minus 4/10 of 1%, that's the negative growth for national retail.

So if you look at some of the areas in national retail, again they haven't gone up as far and they haven't gone down as far, so there seems to be a little more stability. The area where we're going to still have a substantial amount of downdraft would be in the West, which is really Arizona, Nevada and California. We think that's also going to get better, but at the moment apparently loss ratios there are dog gone good and to think that the largest worker's comp carrier in California would increase commissions by 2% when prices have been going down 30 and 40% for the last three or four years, that's kind of far out.

So rational pricing will creep back into this area. In the meantime, if you look at some of our other special programs, looking at for instance the dental program and the lawyer's program, you'll notice from Powell's remarks where we have programs where the premium, not the commission but the premium, for each of our risks is small and the average premium now I think is around, for a dentist package is around $2500 for $2800. So how many people are going to be going out after that? Not to doggone many, it's just not economically feasible.

So across-the-board we have a lot of other little niches that are not as adversely affected as some of these down swoops that you're hearing about. Having said all that, this is a time -- and I've only been in the insurance business for 48 years, I've never seen it like this before. And if you think about the combination of having the most profitable years in the history of the property and casualty business and then having offshore competition that is coming onshore with lots of new capital, it's a good time for consumers.

That's very helpful detail. Thank you. Just one follow-up on sort of margins and expenses. Can you talk a little bit about how long it might take you to sort of adjust that variable expense side? Is it one or two quarters? And then also can you just talk about your willingness, how much you'd be willing to adjust it because there's obviously a trade-off in cutting your expenses versus investing in your business. Is there a lower level of margins that you're willing to tolerate, not necessarily like, but tolerate in a softer environment to sort of keep the franchise strong?

Well, if you look the last time we had a real down swoop in the top line we actually grew about 1.2% organically back in 1998 and 1999, they were 1.2 to 1.7 and of margins came along pretty well at that time. There was some flattening but we're still going along. But again, what we have in this case is a pretty virulent change in a state where we have about a third of our business. That's a bit unusual.

Florida is a great place to be in business and the 18.5 million people we have today, according to all the gurus who know, say that by 2020 that's going to be about 25 million people. So growth can overcome a lot of other potential problems.

So if you start looking at all of these variable factors we are not going to cut core cost of people if they are producing. And we have been pretty darn effective and efficient over a period of time by weighing and measuring people. One of the things that we have spent more money on this year, meaning '07, than in the past is on bringing on new -- Cory mentioned producers.

But we have also brought on -- we've increased our staff of internal auditors from 19 to 28 and why is the reason for that? Well, two reasons. That's a spawning ground, that's a recruiting ground and those people moved from that area into, A, a training area for a producer or they've moved into another area that might have something to do with accounting or it might have something to do with the program. At the same time we have recruited more people out of college and that lead time is longer. But as we are finding these people with the right kind of training and, particularly with Brown & Brown University, they're doing exceptionally well.

So we're not -- I know that you all are very concerned about the margins and no one is more margin centric than is yours truly, and our margins over the next period of time will continue to be very, very high. Now will there be a dip or two? Maybe so. But our model absolutely works. Now if you take any business that has a substantial reduction in the top line and very intense competitive conditions there are going to be pressures on the margins. And so if you look at our margins versus everybody else I think you'll find we ain't doing too damn bad.

Great. Thanks a lot.

Matthew Heimermann, JPMorgan.

Hi, good morning, everyone.

Excuse me, I didn't get your name, please.

It's Matt Heimermann at JPMorgan.

Hey, Matt. How are you?

I'm doing well. Good morning. I had just a quick question. In the past you haven't had a formal M&A group. Most of the M&A has been sourced and accomplished by a lot of the regional folks. Can you just talk how Jim's group is going to interact with some of these folks?

Yes, I can and it's really an evolution. We still have all of our regionals and our profit center leaders who are constantly talking to people about the potential for M&A, but what is happening is -- as we are finding more interest and, you know, part of the interest that's always been around has been interest that comes about as a result of consultants. And so they send us information and they've already got a client, so on and so forth.

A lot of what we are seeing now is not through consultants. These are people who are part of the fabric of the community of Town A or City B and they don't want anybody to know that they're interested maybe in merging with anybody. And so those kind of M&A activities take a lot more personal kinds of touching and understanding and making sure that we understand them and they understand us and that they want to go forward and grow.

So in order to do this and because there are more and more opportunities Jim has been exceptionally good in the past at handling some of those kinds of negotiations. An example of that would be the situation with the Hull acquisition and another would have to do with the CalSurance acquisition, this is about three or four years ago.

So the idea is that what I am doing is I obviously am always involved in M&A and we do bring people to Daytona Beach and we do bring them to our home and have dinner and have a drink or two and see how the chemistry is. We're going to continue to do that. And as I continue to morph over into being Chairman but not on the payroll, what my intent is, assuming the Board will approve that which they've indicated they want me to do, is I'll be also involved, continue to be involved in M&A and also in recruitment of people. That's something I've always done and liked.

But back to the M&A specifically, we have over the years developed a matrix of characteristics that is very -- it's starting to be very telling. And so what we're doing today not only is an expansion of the down and personal sort of thing, but it also is a methodology which we have not been using in the past until recently of taking the characteristics of each acquisition and putting them into a matrix of all of the other acquisitions that have similar characteristics. And there are some things, there are some green flags and there are some red flags and there are some yellow flags. And then we list those and that has something to do with our decision-making. It may also have something to do with pricing.

And so the idea is on the one hand we do not want to become big company oriented where you have a team and the team is cool and suave and smart and they go out and make a deal and then turn it over to someone else who wasn't involved and then they're responsible that someone else was responsible for making it happen. We're not doing that. In the case of where Jim or I or others are involved the person that also is involved in each and every step of the way is the person to whom that M&A candidate would report to and that's generally a regional.

So it is a situation where as relationships are expanded with people who really aren't in the marketplace, then we're always bringing in a regional who is going to be responsible for the P&L and the success of that office afterwards. That's a long-winded to tell you what we've been going, Matt, through for the last year to develop a process that we feel is very objective and is measurable based on our past successes or in some cases not so successful on some of our M&A candidates.

No, that's very helpful. Thank you for that perspective. I guess the one follow-up I have then with respect to some of these, given the examples you gave with Hull and CalSurance, I mean is a lot of this -- I guess what I'm asking is does this mean there are perhaps, when you're talking about these people who don't want it out in the open, that they're perhaps looking at doing something, do they tend to be larger agencies or brokers?

No, but they tend to be -- they're all sizes, but they tend to be more profitable.

Okay.

And you see, when someone comes to you and says we want to talk, then the first question is -- why? And there are a lot of different reasons. And that's where the matrix comes in along with not just the reasons but the internal structure of this organization and who's in there and are they related and have they been with the agency and then they left the agency and then they came back to the agency. Do they have certain slices of business that we find are less profitable -- on and on and on. It's a fairly complex process.

That's helpful. Thank you very much.

Nik Fisken, Stephens.

Good morning, everybody.

Hey, Nik, how are you?

Doing great. So as I calc it, if I take out some one-timer stuff, EBITDA margins fell from 40 to 39 '06 to '07 with fourth quarter falling 600 basis points. And I guess where I'm headed with this is if I listen to the call there's really no reason to believe that it won't fall -- '08 won't fall by that same magnitude. So call it 500 bps if you take out what happened in the fourth quarter.

Is that a question or is that an answer?

Do you think it's going to fall by 500 basis points?

Well, you never know. It's possible. But we don't think so.

If you assume the same level of internal -- negative internal growth that would be a possibility. But I think each one of our profit centers, as they manage their individual offices, they will continue to maybe tighten down on their expenses and maybe they were going to hire another person, maybe that gets delayed. We have great faith in our prof center leader and that's what makes our company so good is our decentralized approach.

But there won't be any wholesale changes in our methodology, we just don't believe in going out and cutting people. So again, you can't lose $16.1 million basically in one quarter due to rate and not have the margin impacted.

And how much of contingents that are typically paid this year got booked into the form of overrides in '07?

About $6.5 million. That's the guaranteed supplemental commissions, about $6.5 million. One thing that is a positive thing, it doesn't have anything to do with margins particularly, as you know, we have long-term -- a long-term incentive plan called performance stock which is a 15-year deal. It's a grant of stock and every time the stock goes up 20% then one-fifth of the number of shares that have been granted move into an award category and then there are five years for the grant to get totally awarded.

The last large group of grants was done in January of '03 and so four-fifths of those grants have tranched and are awarded. Those particular people -- and there's maybe 300 or 400, I'm not sure exactly the number -- know that we're in the process now of weighing and measuring the results of the last five years because we're getting ready to reload people based on the future. In other words, what did you do for us in the last five years and then that's the basis on which the grant would be done this year. It could be more, it could be less or it could be the same.

So that will occur sometime in the next 30, 60 days and we've been talking with our Board about it and what we're trying to do is make doggone sure that the people who are really making the boat move will be given substantial consideration for the new performance stock grant. So that's a positive and our people view it as a positive also.

And Cory, was the 1.1 IRS settlement paid in 4Q?

It was paid in the fourth Q and it's embedded in the tax -- in the income tax line item.

And what kind of new data points are we seeing in terms of further government intervention out of Florida?

Well, good question, Nik. At the moment we don't see anything other than the situation where, as Powell mentioned this in his response, they've been talking about having a $2.5 million layer, front layer for small businesses. This is property, and that was supposed to come out in December or January, and it hasn't come out yet. And so to the extent that that might have some impact, I just don't know because I don't know what the rates are that they are looking at.

The rates that they were looking at, at least initially, were as most residual markets should be, were not highly competitive rates. So at the moment, we don't know of anything that is going to be a negative.

It sounds like given the strong M&A pipeline that there is no change to your repurchase philosophy on stock at $19.

Good question. As long as we have opportunities to buy agencies where we can get the return we can get, it is pretty hard to take and use money to buy stock back. And one of the things that you have got to recognize is that even though we do produce a lot of free cash, we also have to put a lot of that free cash out, all of it, plus some, to make sure that we are able to get the M&A people in that we really want. So I wouldn't expect any change in that.

Thanks.

Kenneth Billingsley, Signal Hill.

Good morning. One of the questions I want to ask is just on general pricing trends. I listened, obviously, to the comments about a 15% to 20% down in particular lines, and I believe the press release was saying 15% to 30% in general on a generic basis. The CIAB data that had come out show that large account business was down on average 12%, small accounts down about 8%, and then on the individual lines nothing seemed to be down more than 12%.

Can you talk about maybe what some of the differences that you are seeing versus what in general the CIAB was reporting?

Well, it is very difficult to make a comparison. In the case of the CIAB, what you have there is a combination of large and small brokers. I don't know what piece of that has to do with the largest brokers or what piece of that has to do with accounts that are less than $50,000 in premium. But I can only tell you what we are seeing. And so what happens is this, is that it is a little bit like if you talk -- if you look at the insurance carriers and their next reports, and they're I am sure starting to report now, they are talking about their rates being down by 7% or 8% or 10%.

Well, what they are not telling you is had they not lost accounts and they had gone down to the level that they had to stay to get -- to keep those accounts, then that would be a different percentage. And it is going to be interesting if that particular national company that I mentioned, that said as of January 1 they had no loss accounts and no new accounts, that means they followed down all of them.

So what we are saying is that if we are going to go out and get a new account away from somebody else, we are going to have to be 20% to 30% to 40% below their expiring. Now, in the case of our renewals, every renewal is not down that much because number one, some of them have losses, some of them are changing the way they do business, etc. So the renewals are not quite as competitively priced as the brand-new accounts.

So that is the only thing that I can offer in terms of what -- I just came back from a meeting about, I guess, members of the Council of Insurance Agents and Brokers -- this is the Board of Directors and some other people -- and the numbers that I heard from them in just casual conversation were the same as ours or even in some cases more downswing. So I think it just depends on who you are talking to.

Okay. And this other question has kind of been asked a few different times. I'd like to ask it from a different direction. And it is just -- it is regarding the expenses in the quarter. And essentially, if we abstract the acquisition costs that came through and the increase in the less profitable margins from the new hires currently, the margins still has fallen and they are at their level since they've been -- since 2001.

So excluding the M&A business, are you guys losing accounts in general? And the reason I ask that is if the revenue is declining $16 million quarter over quarter, looking forward into '08 and '09, does the headcount need to be the same? Or are you writing the same amount of accounts, just at such lower prices that you still are going to need the bodies to write that business, and it means that we are going to perpetually have lower margins maybe for a longer period than just three quarters?

Well, number one the bottom line in is that we do not believe that there is anything organically wrong with the model. Now when you have -- and to answer the first question where you asked about are we losing more business, no. We are losing about -- and this is retail now -- we're losing about the same amount of business in retail in terms of dollars as a percent of our revenue as we have in the past. There's not been much change there.

Now if you look at some of our brokerage operations, and I'm talking about now binding authority and transactional, we've probably lost a little more there are for the simple reason that business is moving from non-admitted to admitted paper and that's always been that way, it's up and down.

So in the case of the brokerage area and other areas that are like that, yes, we are looking at whatever needs to be done to maintain the margins that are acceptable to us. So over a period of time one of the things that becomes apparent is that some offices are more profitable than others. And generally speaking that has to do with two things, number one, the leader; and number two, which is really also the leader, is the right leaders have a tendency to attract people who are more efficient.

And we do have ways of measuring CSRs across our -- which is a very important part of our machine, customer service representatives. These are the people that are inside the offices who handle the details and in many cases handle most of the accounts. The same thing is with brokers and underwriters in our brokerage area and binding authority area. So there is some change and there's always been change going on because we're always trying to get people to be more productive and to recognize that there are certain slices of business that simply are not going to be marginally as profitable as we need to have.

And one of the things that you'll find is that we had in our numbers this year about $13 million of sales of books of businesses. A pretty good chunk of those came about because those were slices of business that we didn't feel like we could get our margins. And so therefore we sold those books to the people and the people left and went to another agent or broker. And so you'd say well, what's an example of that? Well, one example is trucking business.

Trucking business is there are big, big premiums and one of the things that happens in trucking is that you just can't get more than a 20% or 25% margin. Now that's not true on some of the wholesale trucking, but it is true on the retail trucking. So where we can't get our margins on any slice of business we are not going to continue to be in that kind of business. In all of our mergers and acquisitions, in every case there are always ways that they can get better and that's one of the reasons that they're coming to us.

And in the first quarter and generally the second quarter of any new M&A there are some expenses that generally aren't anticipated but that are one-time expenses that might have to do with a true up of some sort of a compensation program or it might have something to do with the fact that after 30 and 60 days after the acquisitions occurred there are people that are not particularly happy and so therefore there's some severance pay, that sort of thing. So that's just the way life goes on.

And in terms of this discussion on margins, we recognize that more than anybody else how important that is. And the fact that we've had our first quarter in the history of our firm where -- now this is since we've been public because we didn't keep quarterly data as carefully before that -- it's the first quarter we've ever had a quarter where we made less money in the previous quarter, same quarter last year. That's pretty surprising to us.

In fact there was a lot of yanking and jerking and anxiety and so we've been looking at all of the factors that might influence the future and we found out that the model is the model and the model works and we just keep working it and the key is to get more good people.

And just following up on that, you still have one of the best margins in the industry, especially with the publicly traded guys. Is it just going to take a little bit longer to get to that B-40 now, that you'll get to the B before you get to the 40?

Well, actually if you take out -- that's a good question. If you take out the -- Ken, if you take out the non-cash stock cost and you leave in the Rock-Tenn and stuff, actually our margin was 40.33%. Now we know that there's stuff in there that is non-recurring.

That's 40.03.

Yes, 0.033.

Yes.

So the bottom line is that sometime this year we will across the B and not exactly sure when that will be on a rolling 12, and the 40 is going to take a little more time to get there, but we'll get there.

Great. Thank you.

Eli Fleminger, Stifel Nicolaus.

Hi, my question has been answered. Thank you.

Doug Mewhirter, Ferris Baker Watts.

This is a question for either Hyatt or Jim or both. Generally have you kept the terms of your acquisitions the same in terms of the balance of stock and cash, or is it fairly random as to when -- how much cash or stock you'll offer in a given acquisition?

Yes, Doug, I can answer that. I'm not sure -- Jim had another -- Jim, are you there? No, I think he had another meeting that he had to leave to go to. First of all, we don't use stock. We basically quit using stock back in 2001 so it's all cash.

Okay. That answers my question, thanks.

Mike Grasher, Piper Jaffray.

Good morning. Thanks for taking my question. Just to follow-up with regard to some comments you were making earlier. Certainly the market is soft, a lot of capital out there chasing risk, as you touched on. But how much does the overall macro environment weigh on your business? And I understand your business is small account driven, but if you look back historically how would you weigh the impact of any economic slowdown?

It will have an impact on us. You're talking about a recession?

Sure.

It will have an impact on us. Generally speaking, Florida has been kind of recession proof and the reason is that we have a lot of retired people and more and more retired people and their incomes are fixed and substantial. So they spend it. And we insure restaurants and we insure hotels and motels and we insure bus companies and we insure all kinds of entertainment facilities. So that area has not been -- the downswing hasn't had a lot to do with what's happening in Florida.

There has been though in Florida, Arizona, Nevada and California, there's been more home-building in the last three or four years than I think we've ever had in the past, so there's a little downslip there. Looking around the rest of the United States, I don't find -- upstate New York would be a place where if we were having a recession you'd think there would be a lot of negativism and there's really not. In upstate New York what they're really saying is we never had the big upswing and we don't have a big downswing. But having said that, a recession -- which I'm not sure we're going to have one, but if we had one it will have some impact on us.

Okay. And does that change your approach during these periods of time -- does it change your approach to the M&A activity in terms of terms and conditions?

Well, obviously what we're always looking for is that the earnout must go two to three years and in certain cases people do not want that, meaning that they want to have cash upfront because they want to go to the farm. And if that's true -- and we do have that. If that's true then it's less, the cash upfront will be less, but the other thing is we've got to have a game plan that we know that we can get that margin and that profitability.

In some cases in the last two or three years we've found that, and this is kind of interesting, people, and this would be people basically kind of east of the Mississippi, the owner of the agency has been working -- has been living in Florida half time and working a quarter of the time and therefore the agency has been doing the numbers it's been doing because of people that are there.

And so when the owner sells then the impact is really not -- there's just not much impact because he or she hasn't been involved particularly aggressively for several years. But if it's a situation where someone wants cash and they want to leave and there's not anybody there and there's a question about sustainability then we just kind of walk away.

Okay. Well, thank you and best of luck in '08.

Thanks, Mike.

Thank you. And with no additional questions in the queue I'd like to turn the conference back over to Hyatt Brown.

Okay, and thank you, Katie, and thank you all and we'll look to talk to you in I guess April. Okay, this is all. Goodbye, thank you.

Thank you. That does conclude our conference call today. We appreciate your participation. You may disconnect at this time.