Brown & Brown Inc (BRO) 2008 Q1 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 as 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 or 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 those actual results and events may differ from those indicated in this call. Such differences may be material.

With that said, Mr. Hyatt Brown, I'd like to turn the conference over to you.

Thank you, Bill. And we have Cory Walker and myself, Powell Brown and Jim Henderson here with us in the room and we're going to start off with Cory who will talk about the financials. Cory?

Great, thanks, Hyatt. We had a good quarter considering the continuation of a very soft market environment. Our net income for the first quarter of 2008 was $51.8 million which was down 13.3% from last year. Correspondingly our net income per share for the quarter was $0.37 and that was down 11.9% from the $0.42 we earned in the first quarter of '07.

However, as you will recall, in the first quarter last year we had an $8.8 million gain on the sale of half of our investments in the Rock-Tenn Company which translated into $0.04 of the $0.42 earnings per share. Therefore on a continuing earnings basis, our $0.37 we earned in the first quarter of 2008 was only down 2.6% from $0.38 last year.

From a revenue standpoint our commissions and fees for the quarter increased 3.2% to $253.5 million, up from the $245.6 million earned in the first quarter last year. As always, in our press release we have our internal growth table that shows the total growth rate as well as the internal growth rates from our core commissions and fees. And as you know, our core commissions and fees exclude contingency income and any business that was divested since last year.

From the standpoint of our continued commissions, in the first quarter of 2008 we only received $36.3 million of the profit-sharing contingent commissions which represents a decrease of about $7.8 million from the $44.1 million that we received in last year's first quarter. Of this $7.8 million decrease, $7.9 million related to a reduction in our Retail division. We had a reduction of about $1.9 million in our wholesale brokerage division, but we actually had a $2 million increase in contingent income in our National Program division.

Remember that 2007 and now 2008 are transition years for some carriers that have moved from the traditional pure contingency commission approach to a guaranteed supplemental commission which we refer to as the GSC [of course]. During 2007 we accrued approximately $6.6 million as of the end of December throughout the year for these GSC accruals.

So for the current year comparison purposes we must subtract the $6.6 million from the $44.1 million that we received in the prior year to really arrive at a comparable contingency commission amount which would be $37.5 million and, of course, that compared to the $36.3 million that we received this year, the contingent commissions are only down about $1.2 million.

Now looking at the contingent commissions for the rest of the year, our best guess -- and that's what it is, kind of an educated guess -- we think may be between $7.5 million to $8.5 million of additional contingency commissions we'll receive in the second half of -- in the last nine months of 2008.

We think the way that would fall would be probably about $2.5 million in the second quarter, somewhere between $4 million to $5 million in the third quarter and probably, again, less than $1 million or right around $1 million in the fourth quarter. So in summary I think that we think we'll have less contingency commissions for the final nine months of '08 as compared to what we did receive in the final nine months of '07.

Now if you look at the internal growth schedule we have there, the continuing soft market trends that occurred in '07 continue and we had a negative internal growth rate of negative 4.1%. Our total core commissions and fees for the quarter did increase 9% in total, or $18 million; however, within that net number was $26.1 million of acquired revenue. So that means that we had $8.1 million less commissions and fees on a same-store sales basis. Hyatt and Powell will talk about the activity in each of those business segments in a minute.

So moving on, if you look at our investment income, it decreased $9.6 million which is due to the $8.8 million sale of the Rock-Tenn Company in the first quarter of '07. Additionally, we had approximately $1 million in less interest income as a result of lower investment yields as well as less investable funds due to the increased acquisition opportunity. Our other income had a total of $1.2 million this year in the first quarter and that really came primarily -- $900,000 came from a court ordered settlement from a producer that violated his non piracy agreement.

Now moving down to our expenses in our pretax margins; our pretax margins for the first quarter of '08 was 32.9% compared to our pretax margin of 35.8% in the first quarter of '07 when you exclude the gain on the sale of the Rock-Tenn stock. The majority of the percentage differential is due to the employee compensation and benefit line.

So when you exclude the Rock-Tenn gain in 2007, employee compensation and benefits in 2008 increased about 280 basis points to 47.2% of total revenues from the 44.4% of total revenue in '07. That 280 basis points represents approximately $10.4 million of net additional cost of which $12 million came directly from stand-alone acquisitions that we made since April 1, 2007.

So therefore, when you exclude the impact of just the acquisitions that we added, the actual same offices that were there in the same-store sales basis, we actually had approximately $1.6 million less compensation and benefits overall.

Our non-cash stock-based compensation cost was up about $400,000 and that was due to the additional PSP grant that we issued in February of 2008. We expect the 2008 annual cost to be in the $8 million to $8.5 million as compared to the 2007 total annual cost of $5.7 million.

Looking at the other operating expenses as a percentage of total revenue, again excluding the Rock-Tenn gain, it actually improved 60 basis points to 12.2% of total revenues. That 60 basis point improvement represents approximately $700,000 of net cost savings. However, again, if you exclude the stand-alone acquisitions that we added, they made up approximately $3.4 million of new cost for the quarter.

Therefore our existing same-store offices really reduced their total expenses by an aggregate of $4.1 million. Now $2 million of that reduction came from reduced D&O claims activity and reserve balances, while the rest of it came from various expense line items that were just naturally managed by our outstanding leaders in each of our profit centers.

Amortization and depreciation increased $1.8 million over last year's first quarter and that was primary due to the increased number of acquisitions. Our interest expense decreased about $200,000 and that's reflecting the payoff of our old SunTrust note back from the original Riedman acquisition, but then that was increased -- offset slightly by new increased interest cost on additional $25 million that we borrowed in early 2008 from our private bond facility with Prudential.

Our effective tax rate for 2008 is currently expected to run about 38.8%. And so in all we ended up with a net income of $51.8 million which reflects a 4.8% decrease excluding the Rock-Tenn gain from last year.

Just quickly looking to the balance sheet, we had total cash of roughly $256 million of which $17 million of that was just pure Brown & Brown cash. We currently have approximately $260 million of total debt and we have an additional $150 million still available on our private bond facility with Prudential.

In addition to that, we have been talking to our banks and with the bank debt cost coming down and tied more directly to the LIBOR, we probably will end up increasing our line of credit with SunTrust by at least $50 million and potentially having an accordion feature to where we expand that to $100 million over the next three to five years, so that would give us additional borrowing power should we need it.

There are a couple other line items on the balance sheet that probably people ask questions about. The first is you'll see that on the current deferred taxes that $17 million was there last year, that was eliminated as of 3-31 as we had previously mentioned because of the fact that contingent commissions were added into our first-quarter earnings and therefore there was no differential as of 3-31 between book and tax handling on that.

The other is other current assets actually increased by $25 million because we ended up having an acquisition deposit, basically a payment on a 4-1 acquisition, we made that at the end of March. And so that was hung up as just basically a deposit on the acquisition and, of course, that will, as of 4-1, will move into the intangible asset category.

One other point I want to bring out is that in our 10-K every year we have our cash commitment table that under the SEC rules we're required to report the potential maximum acquisition payments that are potential out there. And of course for the end of 12-31-07 we had roughly about $120 million that potentially could be paid out on prior acquisitions.

And I think it's important to note that given the soft market and the fact that some acquisitions did not hit the maximum target, we probably -- out of that $121 million -- we'll probably only -- my best guess would be maybe $30 million of that $121 million, so just to keep that in perspective in terms of cash commitments coming up for '08.

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

Thanks, Cory; good report. I'm going to talk about Retail and then Powell is going to talk about brokerage, services and programs. Looking at Florida Retail first of all, Q4 of '07 it was a negative 11.2, it has now moved to a negative 7.2. There is a continual price decline across all geographic areas and the Tri-County area -- Broward, Dade, Palm Beach -- dirty accounts, that is renewals that have bad loss ratios -- are being renewed flat to down 10 to 15%. Everything else is for whatever -- up to as much as 40%.

Wind deductibles are being reduced, that's not new from January. Citizens condo and apartments with Wind is still pretty much the bottom of the market except for AAA structures. I would also comment that Citizens' rates have stabilized; there has been a little upward movement on certain Citizens' prices relative to condos that are AAA and more than $10 million in values, insured values, and those are A rated and those rates have moved up a little.

To get a new account, and this is true in the Tri-County and it's true across the entire United States, to get a new account, unless there is a huge amount of pain then we're going to have to be 30% below expiring to be able to have a good chance at getting the account. So that's just part of the way it is today.

Further in South Florida, large yachts more than $1 million in value, were flat to down 5%. But a new player is now in the marketplace as of really about two weeks ago, new risk bearer, and they're quoting 10 to 15 to 20% down on those kinds of yachts. Personal lines are flat to down 10% and really the ones that are down 10% are ones that have hardened up some like shutters or mitigation credits as a result of garage doors and etc.

If you look at the rest of the state there is a very substantial shift from Citizens wind to, and this is on condos and apartments, to nonadmitted carriers that are any place to 5 to 10% below the Citizens rates and better coverage. That started happening really in January and it's becoming widespread. It is not yet happening in southeast Florida.

We are also experiencing, and this is true across the United States, but it's a little more virulent in a couple of areas of Florida -- we're experiencing reduced exposure units; that means lower payrolls which means less economic activity and less trucks and less inventory and blah, blah, blah. And those are renewals. That's part of a downdraft in renewals.

The biggest dip in Florida however is really Sarasota, Naples -- Sarasota Fort Myers, Naples, and that has to do with the home building business really kind of drying up, almost like down 80% maybe. Large admitted carriers are now starting to write some property, a little bit here and there and other than, as I mentioned in the last report, that they were writing some in the spine of Florida, along the spine.

We still believe that it's Q4 until we have a somewhat normalized soft market and I guess if you want to say what is a soft market normalized -- well it may be 10 to 15% down as opposed to these other much more aggressive pricings.

We think that there are some companies that are starting to actually try to do some underwriting and using some exposure criterion, etc., but that's -- not so sure about that. Personal lines is the real capacity problem in Florida for the foreseeable future. However, new building codes are helping plus individual home hardening. So that probably will take care of itself. Looking into -- but, I'll tell you, when I say "taking care of itself", that's over and long period of time.

National Retail was down a negative in the last quarter, down a negative 3%, it's now down negative 1.7. And sort of giving you a broad brush across a number of states, looking into Georgia still very soft, particularly in the Atlanta area, 25% to 40% down on prime package business.

Bad loss ratios are starting to be flattish, umbrellas are flat to down 10 unless they're large dollars. In South Carolina it's more of the same except workers' comp is not quite as aggressive. There's a little difference in the workers' comp there. Moving into North Carolina work comp is crazy; reductions are up to 40% and underwriters are simply ignoring the longtail of this business.

Some construction, some property, that is west of U.S. 17 -- U.S. 17 is kind of a coastal highway -- is being written by admitted markets. In Virginia the marine market, fish boats $400,000 in value to $1.4 million in hull value are down 30 to 40% and that's a change from January. Packages in coastal areas are down 10% versus rest of the state is down more and workers' comp is down 10 to 15%.

Pennsylvania work comp has softened since January. Companies are now writing monoline and they weren't before January. Regionals are, again, leading the way. Social services is still eroding about 10%. Condos may be, may be, may be, may be, may be sort of starting to level off with it maybe down 10%. In the New York City area not much changed since January 1. Fire resistant buildings were $0.07 to $0.09, they're now $0.06, so a little different there.

Marine cargo is very competitive and in that area two big companies are going head to head, so that creates lower prices. And there are some capacity wind problem on homes along the coastal areas on Long Island. In up state New York some of the work comp trust funds have been shut down, and so there is some business there moving into the regular marketplace. Lots of competition on frame apartments. Regular packages down you know 30%, etc. So it continues to be very, very aggressive.

Looking at Indiana, Illinois, Wisconsin, Ohio, Michigan -- across the Midwest non-admitted paper is moving into admitted. As a matter-of-fact I think the, again, regionals are leading the way. So again, there are -- we hear some of these awful things and so that's 40 to 50% down on packages. But in some cases those are packages that haven't necessarily been shopped in the last 12 months. Payrolls are down in most places and large tough contractors, particularly in the Chicago area, are down maybe 10%.

Looking into Connecticut, that's really not much different from other regions, again 30% minimum down to over expiring to look at a new account unless they're paying. Louisiana, Texas, rate decline in the Houston area is more virulent now than January 1. Rural areas of Texas more moderate. There is something about Texas -- of course, Texas is a little difference in lots of ways. But they allow the rate modifications to be negotiated and these rate modifications are supposed to be promulgated based on the actual losses including IBNR so you can negotiate them there. That's a little different than any other state I'm aware of.

Coastal is still tight on wind, the economy is good. Looking into Louisiana, the New Orleans area, it's not quite so competitive and the economy there is not quite so good either. And if you get north of I-10 in Louisiana there is still lots and lots of competition.

Looking at Western Retail, Q4 of last year they were down a negative 8.2, they're down a negative 4.4. Colorado, New Mexico not much change. Payrolls are down, aviation very competitive, down 30 to 40%, I think that's going to last until the end of this year. By then we'll be getting renewals that have been down that much.

In contractors there's a little less competition on workers' comp. In California -- still California is California -- there's one thing that's different. The work comp rating bureau out there, for the first time I believe in five years, is not recommending a rate decrease. So what does that mean? Also one large national carrier has said we're really not looking to write any more workers' comp in California; keep what we have but we're not going to write any more. Are they going to be able to hold that line? We'll see.

So maybe next year, as the saying goes, on sanity for workers' comp. The only other area would be GL on small contractors and these would be artisan types and there's a yard of those in California. They're not down quite like others; it's maybe 5 to 10%. In Washington, fish boats from the northwest to Alaska are flat to down 5, packages 15 to 30, tribal is off 5 to 10.

If you look at employee benefits across the country, employee benefits, the asking renewal price would be plus 8 to plus 15 and of course there are some accounts that have bad loss ratios so it's more. But on the average 8 to 15 which is the asking price; the negotiation gets it down to maybe 3 to 4, maybe a little more, and that means that we've got different deductibles. We also have fewer employees in some of our accounts.

So that's kind of a brief potpourri of Retail, so I'll now turn it over to Powell for brokerage services and program.

Thank you, Hyatt. Brokerage, starting with transactional brokerage, coastal property continues to be down 20 to 50%, non-coastal properties are down 20 to 30% with significant standard market pressure particularly in the non-coastal areas, but eeking into areas in certain coastal areas.

Casualty pricing, nonconstruction typically down 30 to 40%, significant standard pressure on primaries and umbrellas. West Coast residential contractors under $100,000 in premium, rates are typically down 10 to 20%, premiums over $100,000 the rates are down 20 to 40%. And as we've said before, exposure units are trending down 40 to 70%.

In the commercial construction space we continue to see significant standard market impact there as well. In our binding authority business in Florida specifically, standard market continues to have an impact, rates are down 20 to 25% with more property capacity in the binding authorities as a limit.

Personal lines continues to see in Florida Citizens and non-rated takeout companies and the national binding authority business rates are down typically 10 to 20%.

In the Services area, we continue to be very impressed and pleased with USIS and NewQuest being on budget or above budget depending on the operation. Last fall, as you remember, we lost a part of a large account which roughly translates to about $400,000 a month which really equates to that negative internal growth, everything else we're going along as planned.

In special programs, FIU, core revenue in Q1 was down 12%, Citizens continues to play a role there to a lesser extent, but they continue to interpret their rules a little differently on any given day. The ex wind business and the casualty business there continues to be under pressure.

Public entity business with casualty specifically is down 20 to 30% in Q1. In Professional National Programs, lawyers are trending down 15 to 30% depending on the size and dentists are down 0 to 10%. In CalSurance on the West Coast their professional liability programs are trending down about 5 to 10% and rate and exposure units, depending on the program, are down 10 to 30%. The winner in the clubhouse in Q1 is Proctor Financial which continues to do a great job for the team and we continue to see more [forced] place coverage on regional banks.

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

Thanks. And now I'll turn it on to Jim who's going to talk about M&A and Citizens (technical difficulty). So Jim, it's all yours.

Thank you, Hyatt, and good morning, everyone. M&A continues to produce favorable results for the Company and we have a very positive outlook on acquisitions. The activity for the first quarter 2008 continues at a brisk pace. The $43.8 million with some 13 transactions this year announced compares very favorably with the $108 million we completed for all of 2007 -- 2007 we did some 27 transactions.

There are concerns about the increase in the capital gains tax rate and further soft market conditions are current factors influencing agencies to consider selling. We continue to exercise our dogged discipline on pricing and terms. Our model is to pay a fair value for forward actual delivered earnings. Our ability to pay 100% cash for agencies is an attractive option when liquidity is very, very important as it is today.

Next I'd like to turn to some of the activities in Tallahassee with respect to the state of Florida, Citizens Insurance Company and the Florida cat fund. The Florida Senate has passed Senate Bill 2860 that addresses certain regulatory rules and sets a possible rate increase in '09 and limitation on subsequent years. There is no companion bill in the House at this time and significant provisions of the proposed bill will have to be resolved between the Senate and the House.

The Senate's bill includes certain provisions to -- one is perhaps repeal the antitrust immunity currently afforded insurance companies in Florida; to eliminate the use of the use and file rate statute for Florida, a provision to freeze Citizens' rates for 2008 with a possible 5% rate increase in 2009 and limit future increases after '09 to 10% per year.

The bill requires more rapidly payment of claims within a certain number of days, a repeal of the arbitration provision exercised between insurance companies and the office insurance regulation on rate changes; requirements for approval for the hurricane cat modeling; and also establishment of a $250 million fund, a matching fund, for new takeout companies, this money would come from the surplus as defined from Citizens.

The state Chief Financial Officer has introduced a provision to reduce the Florida hurricane cat fund by some $3 billion for next year -- not for this year but for next year -- and consider certain private market reinsurance to assist the cat fun. This change is prompted by a concern of liquidity for Florida Citizens and for the cat fund obligations.

The current bond market may not permit Citizens or the cat fund to issue the projected or timely issue the projected $25 billion to $30 billion in bonds required for a category 4 or 5 storm. So certainly there is a buzz in Tallahassee, a sense perhaps of reality that Citizens Insurance Company has -- over the last few years has written some close to some $0.5 trillion in values. Its obligation given a significant storm is of such a magnitude that in fact it may out reach the bond capacity for Citizens and for the cat fund.

We view these changes as positive in a sense that the solution is a greater participation by the private insurance market. We think this will take some time but definitely a sense of change from the growth that we've seen in Citizens for the state. With those comments, Hyatt, I turn it back over to you for closing comments and then for questions.

thanks, Jim. To piggyback just a little bit on what him is saying relative to what's happening in Tallahassee, the Legislature of course is trying to come up with solutions. Quite frankly, the best solution is to let the private marketplace work. And of course, I'm a Florida cracker and born and reared here, and I kind of think that hurricanes do have a tendency to come in bunches like bananas and then you don't have any for a while.

And so assuming that to be the case, there will be several years with not much wind blowing and, as you can tell from my remarks relative to what's happening outside of the bottom three counties, that the private marketplace is coming in at prices and coverages that are depopulating the commercial area of Citizens.

But I certainly am not in the position to waive a wand and say no hurricanes this year, but kind of think there won't be. So let's look at a general outlook. First of all, a press release was put out yesterday by the Council of Insurance Agents & Brokers in Washington saying, and I'm just quoting the headline, it says, "Council survey shows soft market even softer in first quarter of '08". And I think that's correct in many respects.

And so some of the comments that they're finding from their members -- and of course, we're members also, and I'll just quote you a couple of three -- "Carriers will quote with less information and quickly, there's more flexibility in carriers in terms of expansion of class as they want to write, therefore it's coming out of the non-admitted market. And then the last thing, it's all about price.

So we see that some P&C carriers are starting to have a bit of a game face in terms of not being quite so wild and crazy. But I think the broad profit profitability is overwhelming. According to Best, the combined, and of course you can talk about accident year and you can talk about calendar year and blah, blah, blah. But personal lines moved from '06 92.7 to '07 96.1 and commercial lines move from 91.3 to 93.7. So the companies are still making a yard of money and as long as that continues you can see this market is going to continue to be very, very competitive which is good for the consumer.

We think that Florida maybe would be a little better in the last quarter, but really not too sanguine about that. We are very pleased with the way our employee benefits are going along, we think they're going to be at a run rate of about $150 million by year end. We do recognize that the most significant organic challenge will be in Wholesale Brokerage and that bottom is going to lag Retail.

We also feel that National Programs, other than lawyers, will tend to be slightly more stable. So all in all it's more of the same, but this is a repeat of '98-'99 except Florida is a whole different world and I think that the profitability, the gross profitability, meaning total profitability, of the risk bearers is greater during this time in the marketplace than it was in the '97, '98, '99 years.

So we continue to feel good about what we're doing, although we recognize that the suggestion that we had in the first quarter was that quarter one, two and three are going to be very challenging and quarter four may be, may be a little less viral.

So with that, Bill, I'll turn it back to you and we'll open it up for questions.

(OPERATOR INSTRUCTIONS). Keith Walsh, Citigroup.

Good morning, gentlemen. First question for Hyatt on specifically Retail, Florida Retail. I know you've talked about this extensively, but it just seems that we're really starting the deceleration in the declining prices we're seeing. Are we heading towards a bottom here do you think? And then I have a follow-up.

And the answer is, no, we're not at a bottom. I think that you're looking at next year, although in some areas you see -- one of the things that's making this a little hazy is that not only do you have a price or a rate decrease, but you have an exposure decrease. So that's a little hard to put together. But we don't see, at the moment -- if we have an account and we're about to lose the account we can almost name the price. And so as long as that is the circumstance I don't think we're at the bottom.

Okay, that's very helpful, but then just following up and thinking about cash and your stock right now, you guys are at the lowest multiple you've been at in over a decade. Why wouldn't you be buying back stock right now?

Most people like to buy back stock because they don't have anything else to do with it. We feel that the M&A opportunities, just based on what we're seeing, are greater than they've ever been. And we feel that our best investment is our M&As because that's the future of the Company. So as long as that is a great opportunity for us, the buying of the stock is in second position.

Okay, thank you.

Keith Alexander, JPMorgan.

Good morning. I was just wondering, given the magnitude of rate decreases are some companies buying more coverage?

Yes, and of course -- Keith, that's what we're trying to do. We're trying to sell everything we can do to offset some of these rate declines. So if you have someone who hasn't taken a -- it's a $5 million umbrella and we think they ought to have a $10 million, we're trying to sell $10 million. And if they haven't had employee practices liability we're trying to sell that or etc., etc. So yes, there is more coverage being given for the same price, but there are also additional coverages or expanded coverages being written for additional dollars.

Okay. And is the current economic environment impacting your customer base, like changing buying behavior?

Not changing buying behavior. If you mean towards -- Keith, you mean to some alternative risk bearer or something like that?

Yes.

No, we're not seeing that. But what we are seeing is businesses that are no longer in business, that's fairly bad, and then we're seeing people who are cutting back because of the economic times.

Okay, great. Thank you.

Mark Hughes, SunTrust.

Thank you very much. Any movement in your average commission rates from 4Q to 1Q and what's the outlook there the next couple quarters?

Yes, there is and what's happening is we're seeing higher commissions being offered by companies and we're also asking. And so what's really happening is that as these prices are going down we are getting some additional commissions in some cases and the companies are pushing this to try to maintain their marketshare. So that's a positive.

Now could I quantify that? No. I was in a meeting in the west on Thursday night and Friday where we had all of our profit centers. It seems to be that in the west there is a greater propensity for extra commissions than elsewhere -- might have something to do with the way the market is out there.

Got you. And then in terms of the cost structure, did very well in other expenses. Any onetime benefit there, should we look for similar performance excluding acquisitions?

Cory, do you want to answer that?

No, not in general. Probably the only thing that may not have a reoccurrence is the fact that the E&O reserves, as claims are settled that comes down, and that was probably a little bit more than normal. But the rest of those costs really just came across all line items. There was nother -- one specific and that's why we're saying it, it's really the function of our decentralized system that really naturally modifies their cost as the market gets tougher.

I think also, Mark, one of the things that a lot of people don't recognize is that this virulence in the marketplace actually is really good for us because it hones our skills and it's a little bit like Lipitor for arteries and veins, it cleans out any plaque. And so what's happening is that we will come out of this even more efficient than we were in the past. So we're not looking at this as being a negative. This is just sort of get down and get it done time.

Got you. Thank you.

Dan Johnson, Citadel Investments.

Thank you very much. Just a couple numbers follow-ups, please. The $2 million E&O, the line broke up during that. Was that a $2 million reduction in E&O accruals in the quarter?

It's a combination of less E&O claims activity as well as as claims were settled we may have had a reserve on it and it just comes down. Basically attorneys kind of come up with a list of each of the accounts and say this is what we think we reserve and this is what has been settled and not settled. And so as a comparison between the end of last year of '07 and in the first quarter there was a little bit of claims actually coming off the list.

I guess what I wanted to be clear was that this was an income statement impact, not a balance sheet or not only a balance sheet impact item?

Right, they're both linked together.

Okay. So that $2 million flowed through the earnings, got it. The Proctor -- can you tell us a little bit more about -- remind us roughly how big that is and what sort of growth you saw in the quarter?

Powell, do you want to answer that?

Yes. Let me just see something here. Proctor for the quarter -- it's about 6.7 for the quarter. And once again as I said, in light of some of the things we're seeing on a macrolevel, we're just seeing more forced place coverage in existing clients, meaning existing banks, and we're seeing we're writing new business.

I think to piggyback on what Powell is saying, the increase in foreclosures is a positive if you're writing forced place business for banks.

And that 6.7 was what sort of growth rate did you see in the quarter?

Say again, I didn't hear that.

What sort of growth rate did we see out of Proctor in the quarter?

Let me comment on something, Dan, I misspoke. It's 9.3 instead of 6.7, is the revenue. And they're up -- they're basically up almost 100% in the quarter.

Great, great. And then the last one, Hyatt, just overall for the 50,000 foot views here. We've been told for the last two years from a lot of different people that this would be a different pricing cycle, the industry had better data -- you know the story. We could give you a list of five to 10 reasons why this would be different. And the best you can tell from looking at what's actually going on, at least at 50,000 foot, doesn't look that different. I'd be interested in your views if you see why this cycle doesn't appear to be meaningfully different than before or if you disagree with that comment?

Well, it's meaningfully different only that the profit level across the entire P&C industry was substantially more than it's ever been. Now how much of that is due to Sarbanes-Oxley and not showing or not having over redundant reserves I really don't know, but here's what you must recognize.

The people that you all analysts listen to are the national companies, the national companies are centralized and the national companies have a structure that is a bit ponderous. They're competing against regional companies that are very profitable and are in the agent's and broker's offices with people, friendly people, every week. And so when you have let's say 500 to 600 risk bearers competing, that's a pretty darned broad base of competition.

So I don't care who you are, you can say well, I've got all this great data and my data shows that this is the price it should be. Well, if someone else is willing to quote 30% less than that and it's an A+ rated company and the agent is a good agent, then you're going to lose the account unless you match it and so that's what this is all about.

Now when you get into the very largest accounts -- the multinationals, etc. -- it's a little different. It's crazy there too, but you're talking about risk transfer at a much higher level. And the business that Brown & Brown is in generally speaking is risk transfer from almost the first dollar -- that's not exactly right, but close. Does that help?

That's very helpful. Thanks very much.

Dan Farrell, FPK.

Good morning. Just in terms of your comments on the fourth quarter, you mentioned that maybe you get back to a more -- we get back to a more normalized soft market of 10 to 15% price declines, I think you were referring to just Florida. But within that context, is that the type of environment where you can generate flattish to modestly positive organic growth? Or is the fact that we also have a slowing economy, reduced exposure use, is that an additional headwind that makes it difficult to get back to a flattish organic growth environment?

About three different factors, the economy is one of them and home-building is off very substantially. The second thing, and looking at Florida, Florida has had these ups and down. And so when is the real estate market going to come back in Florida? Who knows, a couple years, three years maybe. But we still have a lot of economic activity down here and there are people that are making an investment here and in Arizona and in Southern California and in -- maybe not so much in Las Vegas at the moment -- they're going to be stimulative to the economy.

There is one thing, if you look back at '98-'99, which is when the depth of the last soft market, we had an internal growth rate of about -- at the bottom about 1.8%. Now, there is one thing that is different about us today that was not then, and that is that we have a greater amount of revenue in Wholesale Brokerage, both transactional and the actual binding authority kind of stuff. And so that will lag some.

But the offset to that is that we have substantially more revenues and employee benefits. As a matter-of-fact, if you sort of think about this for a moment, we think that we'll have about $150 million on a run rate of revenues and employee benefits and probably, Powell, would you say $180 million on wholesale brokerage, $180 million?

That's fair.

So how do you balance all these things? Damn if I know, Dan; but whenever it is that's what it is and we just keep on keeping on.

Okay. That was helpful. And then also, can you just comment on the TPA Services business and just some of the trends we're seeing there?

Sure. Actually, Dan, if you remember last year in the end of the Q3 call we talked about we lost a portion of one account where we service, do claims management services and some loss control and other things, bill repricing for a carrier. And in doing that we lost roughly 400 -- slightly more than $400,000 of revenue a month. And so what you're seeing is that flow through the entire year and that will normalize next -- I should say this coming September if I'm right off the top of my head.

So that's what we're seeing there. And once again, their business, just to elaborate slightly, depending on how it's set up the contracts are written on premium serviced for the insurance carrier or some other metric. And it depends because, as you know, in Florida rates have come down roughly 18.7% this year for the fourth year in a row -- fifth year in a row since meaningful reform was enacted in Florida in 2003 and work comp. And so that in turn has pressure also on the business and yet they continue to write more business except this one piece where we have this $400,000 that we lost on a monthly basis.

Okay, great. Thank you.

Joseph DeMarino, Piper Jaffray.

Good morning. You might have answered this, but it looks like there was a little bit of an increase in the compensation expenses. What was the cause of that?

Well, of that --

Including the first quarter of last year capital gain.

Right. Well, if you exclude that, it basically went up about 2.6 percentage points and I think the total was about $10 million. But that's where I was saying if you take the acquisitions that we made since been the end of last -- first quarter last year, first quarter, April 1st, $12 million of compensation came from those new acquisitions. So then if you just strip that out and you're really just looking at the same offices that were there in the first quarter last year versus the first quarter this year, we actually had a net decrease in compensation expense of $1.6 million.

And so probably part of that was producer commissions which are based on -- that are paid on a commission basis, that was probably down a little over $1 million. The total management -- management salaries and staff salaries, were essentially flat. And then, believe it or not, our salaried producers who are generally newer producers who have not become validated, that actually went up by about $1.4 million.

So the point is I'd make there is that even though this is a tough market we continue to develop our producer forces and are not trying to cut any of the meat that we have there. So the difference to get down to 1.6 is then just all of the related taxes and benefits relating to those decreases in compensation. Does that answer your question?

Yes, it does. Thank you. And then some of your comments around the wholesale area would seem to indicate a longer or greater struggle within this business model. Are you seeing more M&A opportunities there?

Yes, as a matter of fact we are.

There are quite a few on the market. This is Jim, and I think that the question there becomes the sustainability of their revenue base and their earnings going forward. And in fact we have looked at several, some that we could not move forward with because of concerns about pricing or expectations. Some we have.

And I think one of the more positive aspects of wholesale is that it is -- becomes the market of choice when in fact the market does change. So right now we have the headwind of rate changes, we also have the change dealing with in fact accounts leaving the E&S market over to the standard market. When the change does happen, the turn happens, they are more benefited by that change than the retail side.

Okay, thanks. And also could you expand on the wind capacity problems you talked about in New York?

I think he's talking about my comment about the fact that some homes along Long Island coast, some companies have -- there are -- companies are drawing lines and setting limits of exposure that they want in each geographic area along the coast there. And some companies reach their capacity and they won't write any more homes. So there is some pain there, but not a great deal, not like Florida.

Okay, thanks for that clarification. And my last question is could you give a little more color on the reduction in payrolls that you've seen?

I wish we could. It depends on who you're talking to. If you are talking to anyone in the home-building business -- now first of all there are homebuilders -- their payrolls will be down 40 to 75 to 80% if they're still in business. Then secondly, you have the contractors, the subs, etc., that are around those homebuilders. And of course what they're doing is they're out now scraping around for other business. So their payrolls aren't going to be down quite as much, but it's had a decided impact.

Now in the commercial area contractors, there's still a substantial amount of business around because of the fact there's a lot of governmental jobs and then there's still construction that's going on as a result of financial commitments made by banks and other lending institutions where the contract or where the development didn't get completed.

Then if you get into other general kinds of businesses -- in the Midwest there are some manufacturing operations that are doing very well because of the weak dollar and because they're exporting their product. So we don't have a way of putting all this data in some kind of a software system and coming out with an average, except to say that if you look at the construction area, it's down pretty sharply in most areas of the country.

All right. Thanks, guys.

Nik Fisken, Stephens.

Good morning, everybody. Cory, on the other operating expenses, last year they were down Q1 to Q2 $300,000. And just to get crystal on this one, it sounds like it should go up by at least $2 million on this E&O release, correct?

I'm not sure so sure I'd make that assumption. I think it's more of a function of what happens here in this next quarter relative to E&O.

So worst-case it goes up to -- sequentially?

I'm not sure I can say that either. Basically any claims that come up, our attorneys look at it and make a valuation as to what is the likely outcome. And then based on that you establish a reserve if you believe that there's going to be an indemnity payment there. And so it's just a matter of what gets settled and the drop this quarter just happened that in the first quarter this year there was a lot of claims that just got resolved or got thrown out of court.

One case we had that we were sued, we actually got a defendant payment out of it, like $200,000. So it's all -- generally I think the number of claims have actually dropped too and some of the Spitzer-related stuff is kind of winding out. And so I don't think it's something that you can really predict.

Okay.

But there [have] been wide fluctuations from quarter to quarter.

So the two a wide fluctuation?

That's probably been -- I would say, yes, that's been probably the widest over this last 18 months probably.

Okay. And Jim, on the M&A front, it sounds like a little bit change of tune when he guys have 150 on your line left and you're looking at doing another 50 to 100 floating-rate deal. That tells me that the acquisition opportunities, like Hyatt said, are very robust. I'm wondering can you quantify the dollar amount in your pipeline? And then secondly, are you guys looking at some greater than $30 million revenue deals?

There are a few out there, Nik, and of course the larger they are they seem to draw more attention and sometimes more aggressive pricing. We've tried, particularly this year, and we've had some degree of success of staying with our purchase multiple and counting the market to come back to us which I think we've seen some positive development there. Whether that's the banks or whether it's the venture capital money out there that's been looking at deals, certainly they pressed the pricing of wholesale operations and certain MGUs very high. And then some banks would in fact create some really very delta change on pricing for Retail agencies.

The banks, there's a lot of change there. There's been at least Bank of America, Commerce Bank, Webster announced exit from this business. There are about two or three others that we're aware of that -- a similar type, at least they're reviewing whether or not they stay in the business. And then the baby boomers, the time now, later and certainly the capital gains.

So I think it's a combination of all of those. For us to go every quarter and say, well, gee, the pipeline is robust and I'm sure you draw tired of hearing that. But we're pleased about the activity. We have in fact stepped up our resources to look at more numbers of deals, they average around $4 million or $5 million. If we're going to do more, which I think we can and we should, they're very accretive -- that we're adding to our resources to review and complete on a similar quality basis more transactions. And so I think that component is very positive.

I think one thing I could sort of add to that and piggybacking on what Jim is saying -- we are seeing a change in the attitude of banks, and of course I know you know that too, and of course there are two reasons. The first thing is that the culture is different and they're not getting what they thought they were going to get out of it in some respects in terms of the agency operations.

The second thing is that banks have credit problems and they're now having to retreat back to core competencies. But the third shoe and the big shoe -- and this is when you'll see the final nail in the bank coffin on insurance agencies -- is when one bank gets nailed with the [time-outs evil] -- suit, class action suit. And they will lose more money on that than they would ever make in 1,000 years on an insurance agency operation.

So this is two things. Number one, opportunity for acquisitions; and two, a competitor out of the marketplace. So that's a good thing.

Have use spent a or is there a suit filed against a bank where they're tying credit and insurance?

Not that I know of, but over a long period of time it seems like that's a substantial exposure for a bank. And of course they recognize that and are trying to be very sensitive to it. But when you get -- it's a little bit like the banks and the subprime lending. Banks always before were lending 75 to 80% of the values of homes and getting lots of credit information.

In this last euphoria, which now has turned into a disaster, banks in fact ignored all of the old rules and as a result of that billions of dollars are going down the tube. So when you have an insurance operation sitting over here to the side and someone is under a lot of pressure to produce additional earnings, it's just a huge exposure.

And last (multiple speakers) -- I'm sorry.

I'd say it's a huge exposure even though they may have an absolute edict, you can't tie it together. But the very fact that the bank is loaning money to someone that they're soliciting insurance from is sort of imposing.

The last thing, do you guys sense you're winning more deals because you've got the cash and $2.5 billion market cap and you're not offering equity in a private company?

Jim?

That's a very good question, Nik. I think that cash is king right now. And I think to be out there with someone saying here's 25, 30% of it's going to be forward equity of some undefined time period. But that's being looked at a lot more skeptical because now the results of some of these operations involving equity rollups have not been great and if the track record is not wonderful then how would they win? So we're very comfortable with our cash only, no equity with that, and we feel like it is now an attraction as opposed to maybe being a neutral or negative before.

I think to piggyback on that also, Nik, as you know, we've had some very large opportunities in the last couple years for which we have not chosen to proceed. As a result we have a lot of dry powder. And so this is the kind of marketplace in the next two or three years when dry powder is a real plus.

Great, thanks so much.

Meyer Shields, Stifel Nicolaus.

Good morning, everybody. Hyatt, in your opinion, other then concerns about the weather, is the attitude of Florida's insurance regulators deterring any carriers from stepping up their participation in the market?

Well, that's a really difficult question to answer. You have the Legislature who is trying to respond to the cries of their constituency, and so there is some chest pounding going on. The regulators are trying to be evenhanded, but they have been pushed over some by the elected people. So is it just awful, awful? It's not awful, awful, but it is not considered to be a very positive climate by insurance companies at the moment, particularly if you're in the personal lines business. That's where the real rub is and that's where the big capacity problem is.

So we'll work our way through this. This has happened before, Meyer. I remember in the 1970s when companies were going to walk out of Florida because they were being put to the test on personal lines auto liability. Well, there was a lot of yanking and jerking and angst, and now it all went away and file and use actually work. And so if we just let a little time go along the marketplace will solve the problem.

Jim, can you talk a little bit about the I guess M&A strategy and opportunity in London?

Well, the opportunity there with Decus is a project that Powell has had the lead and established. But it's been a project we've looked at for over a long period of time. And we've looked at several operations there and they simply had either culturally or issues that we felt had some strings to them that we did not want to bring into our financials or our obligation. So we started from scratch with our own people, our own culture. Very, very pleased with what's going on there with it. I think maybe Powell could tag onto that with respect to the individuals (inaudible). Any comments?

Thanks, Jim. I would tell you -- to piggyback on Jim's comment, we definitely -- we do a lot of business in London and it's growing and over the last three years in particular we've spent time looking at several opportunities. And as Jim alluded to, none of those really fit for a number of reasons. And we decided to look for what we always look for which are good people and we've identified a team of people which have started.

We have four people on the ground there and Tony Strianese who is a regional Executive Vice President who started Peachtree Special Risk de novo here in the states in 2000 is in charge of that and is growing that and it's a traditional London broker which serves intermediaries here in the United States, independent retail operations and can work with Brown & Brown. So we're very excited about the opportunities.

Okay, that's great. And one last question if I can. Is it reasonable to expect as long as there is competition between the carriers that push rates down you'll see a continued sort of compounded offset in terms of commission rates?

A compounded what was that, Meyer?

The same way you're seeing companies take rate decreases year after year after year, is it reasonable to expect commission rates to sort of drift up year after year or is this a onetime adjustment?

Well, they'll drift up as long as the companies are aggressively seeking business. The moment the worm turns and the prices start to go up they immediately will go down. So the worm isn't close to turning.

Got it. Thanks so much.

Steven Labbe, Langen McAlenney.

Good morning. Just a quick question. I was wondering if you could give us what organic growth would have been excluding the supplemental or the GSCs that were included in this quarter but not last year?

I can calculate that, but it's about $2.4 million. Because remember last year in the first quarter there were no GSCs accrued because we really didn't even know what Travelers' or Chubb's game plans were until the end of April. And so in the second quarter of last year -- of '07 we accrued $3.2 million which was roughly $1.6 million to $1.65 million per quarter. So it was two quarters that we put into the June second quarter year end. So there wasn't anything in the first quarter. So this year there's another 2 point -- The Hartford is now part of the GSC in addition to Chubb and Travelers. And so that amounts to about $2.4 million this quarter.

So to be apples-to-apples I would have to just use that $2.4 million?

That's correct.

Okay, thanks, guys.

Ken Billingsley, Signal Hill.

Good morning. Just a couple questions here. Seeing that the stock is trading at early 2004 levels, yet your income is at least near 2006 levels and stabilizing, based on your bonus structure how is employee morale and the retention of office leaders right now?

Actually it's a good question. The individual offices' bonuses for the head of office and the department managers is based on the growth or lack thereof in their own offices. So individual offices, some offices' bonuses went down last year and some went up. It's the same for this year.

And so the only people's bonuses who are probably going to be down is probably the senior leadership which is the top 10 people in the Company. And that's because those bonuses are tied to a minimum growth in the earnings for the whole Company.

So we're not experiencing a loss of PCLs. We continue to make some changes as they are deemed necessary, but from the standpoint of people leaving us who we want to keep, we just don't seem to have that problem.

And we also this first quarter, we reloaded our performance stock awards at this lower stock value and I think that is due -- and is due to some very positive element meaning our ability to grow the stock and create equity wealth for them. And so that was well received and given the headwind there to grow the value.

And Ken, as you remember our performance stock plan, those are grants of stock and unlile options they're never under water. They may have had a grant of option at the $35 mark and now the price is at $17, it's still worth $17. And of course this new grant we just gave, it was issued in February because the last major grant we gave was actually five years ago in the period of time that that period ended on 12-31-07. So this new grant was just a reupping of the normal grants.

And piggybacking on to what Cory said when he used the $35 example, that would be for a PSP grant that had actually been awarded. As you know, in order to get awarded these grants the stock has to go up 20%. So let's say that -- I'm just pulling this off the top of my head -- if the stock was at the PSP current awards were at $18 a share, 20% I think is something like maybe $21 or $22.

So once the stock goes to $21 or $22 and stays for 20 days on an average then one-fifth of those shares are awarded. Those then are sitting there in the award category until the person is either with the Company 15 years or 64 or death or disability. So that's a general description of the way that the plan works.

Very good. And the last question is just on comments that you made last quarter and then you restated at the end of your prepared comments was that you expected the first three quarters to be tough in 2008. Were there any surprising benefits during this quarter that may have offset that opinion for the first quarter?

No.

Do you think you guys performed better than you initially expected based on the comments that you made last quarter?

No, we kind of did exactly pretty much what we kind of figured we'd do. But there wasn't anything -- we didn't get any breaks and we didn't get hit in the back of the head. So it was kind of slogging through a tough time.

Very good. Thank you.

Mark Hughes, SunTrust.

Thank you. What was the cash flow from operations?

The cash flow from operations this first quarter is going to be roughly $45 million.

The Proctor division in the fourth quarter was up 100% in Q1, how did they do in the fourth quarter?

I don't have that with me, Cory. Do you have that?

The fourth quarter of last year they had --

We're looking.

Proctor last year -- in the fourth quarter of last year they basically were down margin like 3%.

Down year-over-year 3%?

No, that was just for the fourth quarter.

Okay, thank you.

And Mr. Brown, we have no other questions standing by at this time, I'll turn the conference back over to you for any additional or closing remarks.

Okay. Thanks, Bill. And thank you all and we'll look to see you in July. Bye.

Thank you. That does conclude today's conference call. We do thank you for your participation. You may disconnect at this time.