Brown & Brown Inc (BRO) 2008 Q2 法說會逐字稿

Good morning and welcome to the Brown & Brown Incorporated 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 events -- excuse me, such statements are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made, as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the Company's business and prospects are contained in the Company's filing 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. Brown, I would like to turn the call over to you.

Thanks, Bill, and good morning, everyone. The batting order is the same. Corey will go on first, me second, Powell third and Jim Henderson fourth, and some concluding remarks and then questions. So, Cory, take it away.

Thanks, Hyatt. The challenges of this soft insurance market continued in the second quarter of '08. Additionally, when I'm going to compare the 2008 results to those of 2007, please keep in mind that we had a $9.8 million gain, or $0.04 per share, in the second quarter of 2007 on the sale of our remaining stock investment in the Rock-Tenn Company. Also, in the first quarter of 2007, we realized an $8.8 million gain, which also rounded to $0.04 per share, on the first group of the Rock-Tenn stock that we sold.

Therefore, for the entire six-month period in 2007, we realized a total gain from the sale of our all of our investment in the Rock-Tenn Company of $18.6 million. Therefore, all the following comparisons that I will make for 2008 against the 2007 results will be excluding those nonrecurring gains from the sale of the Rock-Tenn investment.

Our net income for the second quarter of 2008 was $40.4 million and it was down 12.1% from last year's second-quarter net income of $46 million. Correspondingly, our net income per share for the quarter was $0.29, down from the $0.33 we earned in the second quarter of '07.

From a revenue standpoint, commissions and fees for the quarter increased 3.6% to $238.8 million. That is up from the $230.5 million we earned in the second quarter of last year. Included in the press release is our table that summarizes the total growth rates and the internal growth rates from our core commissions and fees, which obviously excludes the contingent commissions.

In the second quarter of '08, we received $5.4 million of profit-sharing contingent commissions compared to the $2.7 million that we received in the second quarter of last year. For the rest of the year, we expect to receive an additional $9 million of profit-sharing contingent commissions in the third quarter, and maybe we will receive another $1 million possibly in the fourth quarter.

Now, looking at the internal growth schedule, our internal growth rate for the quarter was a negative 7.9%. Our total core commissions and fees for the quarter increased 3.8% or $8.6 million of total new commissions and fees. However, within that net number was $26.3 million of acquired revenues. That means that we had $17.7 million less commissions and fees on a same-store sales basis.

As the internal growth schedule indicates, the vast majority of the negative internal growth came from the broad-based impact of our retail and wholesale operations. Hyatt, Jim and Powell will talk about the activities in each of these business segments in a minute.

But moving on to investment income, excluding the $9.8 million gain in the second quarter due to the sale of the Rock-Tenn stock, our investment income decreased by $1.3 million, which is primarily due to lower interest rates this year and less investable funds due to our increased acquisition activity. Our other income only had about $1 million in this quarter, which is primarily gains from the sales of a few books of business and other.

As it relates to our expenses and our pretax margins, our pretax margin for the second quarter of '08 was 27.6% of total revenues compared with the prior year's margin of 31.5%. That is a reduction of 3.9 percentage points. As we have mentioned in the previous-quarter conference calls, as long as we remain in the soft market that creates a negative internal growth rate, we will probably continue to see some margin compression.

In the current quarter, our employee compensation benefits increased 2.3 percentage points to 49.9% of total revenues, which represents approximately $7.9 million of net additional average cost over the prior year's comparable quarter. The employee compensation and benefits relating to just stand-alone acquisitions accounted for $11.7 million. Therefore, on a nearly comparable same-store sales basis, those offices existing in both quarters had an aggregate reduction of employee compensation benefit costs of $3.8 million.

One area of our compensation that did increase over the 2007 second quarter was that of salary producers, which consists of our new producers that have not yet validated on a straight commission model. For the quarter, this compensation increased $1.3 million. We have always invested in our new producers and talents and will continue to do so in the future.

Related to our noncash stock-based compensation cost, it was $1.8 million in the second quarter, which is an increase of approximately $0.5 million, and this is due to the new performance stock grants that were given in February and April of this year.

In the current quarter, other operating expenses increased 0.9 percentage points to 14.2% of total revenues, which represents approximately $2.8 million of net additional average cost over prior year's comparable quarter. The other operating expenses relating to just the stand-alone acquisition again accounted for approximately $3.2 million. Therefore, on a somewhat comparable same-store sales basis, those that were in both quarters had an aggregate reduction of other operating expenses of less than $1 million.

Amortization and depreciation expense on a combined basis increased approximately $1.5 million due to the number of acquisitions that occurred in the last 12 months. Interest expense is consistent with the expected quarterly amount of about $3.7 million.

Now, our effective tax rate tweaked up a little bit and is currently expected to run about 39.3%, and this is really more of a mathematical problem. As the quarterly revenues dropped, we have effectively the same amount of permanent tax differences, and so therefore the rate tweaks up just a little bit.

Now, just these trends that we just talked about in the second quarter are very consistent with what has occurred on the six-month year to date. So I won't go through the line-by-line comparison on a year-to-date basis, other than to say that our earnings per share for the six-month period ended June 30, 2008, excluding the Rock-Tenn gain, -- well, excluding Rock-Tenn in '07 -- we made $0.65 this quarter compared to -- which was an 8.5 decrease to the $0.71 without the Rock-Tenn stock in the six months ended June 30, '07.

Now, turning to the balance sheet, one item that I would like to point out is that for years we have reported cash on a very conservative approach. At June 30, we had approximately $215 million of cash throughout our system, of which only approximately $115 million were in legally restricted premium trust accounts. There are a handful of states that require separate stand-alone premium trust accounts, like New York, California, Illinois, but the vast majority of the states allow for the commingling of our cash accounts.

However, we follow a more conservative approach, and instead of just reporting $115 million that is actually in the premium trust account as restricted, we do make a mathematical calculation of the amount of cash that will ultimately be paid to the insurance carriers by taking the total amount of accounts payable due to the insurance carriers, less the accounts receivables that we have not yet collected from our customers, in order to calculate and theoretically determine an amount of cash that must have been collected for premium payment. It is this balance that we include, quote, as restricted cash, and then anything in excess of that restricted cash does get put into the cash and cash equivalent line item.

The main reason that we have used up the excess cash as of June 30 is that for the six-month period ended June 30, or for the quarter ended June 30, we've spent about $110 million on acquisition-related payments.

From our borrowing power standpoint, as of June 30, 2008, we have a remaining $150 million available on our Prudential Insurance Company borrowing facility, and additionally we have a five-year, $50 million line of credit with SunTrust that actually has an accordion feature to borrow another $50 million on top of that. So, in a sense, all that means is, from our financial position, it is very strong as of June 30.

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

Thanks, Cory. Moving to Florida retail, this was a not very good quarter. Last quarter, we were a negative 7.2% growth, and this quarter was a negative 15.5%. So what has happened in the last 90 days? Two things -- greater impact on the economy, but also, rates are still going south. So let's talk about the rates for a moment.

Property rates in the last 90 days, since 90 days ago, property rates are generally down 10% to 15%. Much habitational property is moving out of Citizens, except in the Tri-County area, and of course Tri-County is now, that's changing also. All markets are offering lower wind deductibles and broadened coverage, i.e. nonadmitted paper is now offering agreed amount endorsement, which effectively weighs coinsurance provision, and in some cases even blanket coverage -- almost unbelievable.

There are a substantial amount of cancellation and rewrites that are going on, and the reason is that as business was written in Citizens last year, or in nonadmitted carriers last year, now the rates are at a level where a cancellation short rate, cancellation provision, will be overcome by the savings. Let me give you the worst example that I was able to come up with.

This is a North Florida account. It was written in November of last year. It was a property, wind included, $151,000 in premium. We rewrote it in May of this year for $63,000 in premium, and that is a 58% reduction. So that is just one of the things that is going on. Additionally, The Hartford, I might mention, is nonrenewing all of their homeowners in Florida, and that is starting as of August 1.

In the West Coast of Florida, now, the economy is having a greater impact from really Sarasota South and Palm Beach South. Now, one of the reasons for that is a little bit unique to Florida, and that is in '04 and '05 there were, as you know, several hurricanes. There were about $40 billion of claims dollars that were paid to reconstruct, rebuild, et cetera, et cetera. And if you multiply that times the normal multiplier of 4, that is $160 billion that was injected in '04, '05, '06, and started to shrink out in '07.

That's part of what's going on If you look from Sarasota to Naples, homebuilding has basically dried up. I think the highest foreclosure rate in the United States is in the Fort Myers area.

So, having said that, most contractors' payrolls are down 40% to 60%, and of course homebuilders are more. Looking at the spine of Florida, now, a little difference there in the economy. They did not have as much hurricane claims; therefore, the injection into the economy wasn't as substantial. And we are seeing admitted property markets taking business into Central and North Florida that was in nonadmitted markets.

In the Tri-County, casualty is down 10% to 15%. Workers' comp is down 15% to 18%. Exposure unit is down, and all construction, 25% to 80%. Competition on less than AAA-constructed condos and apartments is torrid. That is going to be fun -- lots of cancellations and rewrites, including frame and [joist] and mason requirements. Auto is off about 15%.

We did a little comparison on general liability rates, and general liability rates this July versus April are down about average about 10%, but that is 20% to 40% lower than 12 months ago.

Marine rates are flat to down 5%. Palm Beach County has a little more rate downdraft than Broward and Dade. Umbrellas are much softer than 90 days ago. An example is a $5 million umbrella that last year, or expiring premium of $61,000. When I was in a sales meeting last week, the best quote we had was $37,000, same coverage, $5 million, so you can see what is happening there.

Employee benefits is a positive 5 to 8% up, even though prices are higher than that because there is the change in benefits, et cetera, but there is reduced employment. So that is just the way that is, but employee benefits is stable across our Company.

In national retail, we were down a negative 1.7% and now a negative 6.8%. Looking at Georgia, South Carolina, Virginia, workers' comp is leading the way, 10% down across all areas. The property rates are getting very thin away from the coast. Now, what that means is that there is not a hell of a lot more to go, and so I think there's going to be some flattening there. Marine commercial is flat. Payroll is stable. Fishing vessels are down about 15%. That is a little different -- on the whole -- that's a little different that the commercial.

The economy, the impact of the economy is not as significant elsewhere as it is in Florida, Arizona, Las Vegas, Southern California. New Jersey, New York, workers' comp, minus 8% to minus 15%; packages, minus 5% to minus 25%. Umbrellas are going south, and more so in the last 90 days. Homebuilders' exposure, of course, where there are homebuilders, there is a 65% to 80% reduction. There is a bit of an uproar in New York over a guaranty fund that is being apparently imposed on the WC -- Workers' Comp Trust, and that probably is going to mean some movement of some business.

In the Michigan and Illinois, Chicago area, large commercial contractors, and commercial contractors throughout the country, those are holding up. So the prices are down 5% to 10%. But no company -- and this is true across all of our offices -- no insurance company will lose an account if they get the last look, almost regardless of the pricing.

We have seen in the Chicago area heavy auto fleets with an average premium per unit of $1200, which is very competitive. But I'm going to give you one shortly that will probably blow you away.

Louisiana and Texas, as the energy market there, the fact that energy is up and the cost of gasoline, et cetera, is forcing more development, that is helping the economy. Middle-market packages are down 12% to 20%. There is some standard property now being written north of I-10 in Louisiana. The marine is stable, flat.

Texas work comp is very soft. All companies are writing almost without regard to underwriting on workers' comp. However, on packages, on packages there is some underwriting being exercised, which is a little -- there is some restraint. That is different.

In Wisconsin and Minnesota, I mentioned last quarter that Wisconsin was wild and crazy on the workers' comp. Well, that has invaded Minnesota, so they're both about the same in terms of downdrafts. We are seeing umbrellas in that area now, some umbrellas, being written at $750 per million. That is very low. The lowest that I have ever seen I think in the past, and it's been a long time ago, was about $500 a million, and that didn't last very long.

We do have one example here. In Wisconsin, we wrote a -- this is a new account, a ready-mix account, concrete ready-mix, and there are, I think, 13 or 14 trucks, big concrete hauling trucks, and for $1 million of liability, and full physical damages was $350 per unit. By comparison, if you were going to insure a Toyota Maxima for $1 million plus full collision and comprehensive, that would be a premium of $750. So that is kind of crazy.

Western retail was down 4.4%. It is now a negative 12.1%. Colorado, with workers' comp, is flat to down 5% if the premium is less than $100 to $150; if it is above $150, changes. Packages are off 15% to 20%. Aviation is off 20% -- lots of planes being sold -- energy and the economy being soft, and there's a lot of movement in the sale of airplanes.

Workers' comp in Arizona, prices are down 10%. That is a different state because the state fund has been the dominant, by far, workers' comp market. And we are penetrating that now. And contractors' payrolls in that area are only down about 20% to 30% at the moment.

California workers' comp is still going south, but, but, somewhat slower, and this might be the only state where workers' comp is reaching [measure]. Don't, however, count on it too quickly. Umbrellas down 10% to 15% -- they are no longer auditable. Sounds like that would be good for the customer, et cetera, but it is not. And if you think about it, it's better for the underwriter.

New accounts ex-workers' comp must be 25% to 35% below expiring. Regionals are very aggressive and they are very aggressive in every area of the United States -- California [is at the new] -- except for the Tri-County area of Florida. One sort of unusual thing in California is quake is flat, but there is a lot more capacity. So if you want more quake, you can get it, and the rates are about the same.

In the Seattle area, the economy is pretty good, as a matter of fact, really pleasant. Packages are down 10% to 15%. Our tribal business is flat. Marine is down 5%. US L&H is flat. And the regionals are very aggressive there.

So having said that, Powell, I will turn it over to you.

Thank you, Hyatt. Brokerage transactional property rates are down 15% to 20%. Standard markets continue to put pressure on that business. We're seeing standard markets regularly put up to $25 million of wind limits in coastal communities. Casualty rates there seem to be down 25% or more, with umbrellas down even more, 20% to 35%.

Residential contractor rates are down 25% to 45% rate only, and on top of that their exposures are down 40% to 80%. Terms and conditions continue to broaden. Commercial contracts written in the E&S market currently are seeing lots and lots of standard market pressure.

In the professional liability arena, two areas we are seeing increased pricing would be public company financial institution business and anything real estate errors and omissions or mortgage errors and omissions. Related, remaining professional liability lines, private company D&O, public company D&O, employment practices liability typically are seeing rate decreases of 5% to 20%.

In the binding authority arena, in Florida the standard market continues to have an impact on some of that business, and rates are down zero to 15%, with expanding property capacity in those binding authorities.

Personal lines, particularly in Florida, we are seeing more and more nonrated takeout companies as the biggest competitor. They are cheaper than Citizens right now, and Citizens continues to be very aggressive there. And the national binding authority rates are down zero to 15%.

In our services arena, we continue to be on plan there. As you may remember, we lost part of an account last August, so that will have run through our numbers by September of this year.

Professional national programs, lawyers were down 8% to 20% in terms of rates. Dental rates are flat. And in all of our other national programs, any account over $75,000 in premium typically face rate pressure of 15% to 20%.

In the special programs arena, public enemy rates are down zero to 20%, with the professional liability in public entity arena down 20% to 30%. Two bright spots in special programs -- FIU was up this quarter. The wind rates in that class of business seem to be stabilizing somewhat.

Citizens' multiperil policies continue to be very inconsistent and somewhat all over the place. Let me give you an example. If you had an account, and we know of an account that Citizens wrote the wind for $250,000 in premium, and then another carrier wrote the other perils or the ex-wind coverage. And then citizens quoted a multiperil policy which would include wind and all other lines, all other perils, for $225,000. So that doesn't sound right. Ex-wind continues to be very, very competitive, and Proctor Financial was up again this quarter due to the countercyclical nature of their business.

With that, I will turn it over to Jim.

Thank you, Powell, and good morning, everyone. The challenges with organic growth, [its face] industry, is presenting opportunities for mergers and acquisitions. For the first half of 2008, we have closed 24 transactions, with $77.8 million in annualized forward revenues. This represents an average of four transactions per month, with $3.25 million average revenues per transaction. A very special thank you to our regional leaders and our M&A transaction teams for an outstanding job of enabling these fine agencies to be a part of Brown & Brown.

Our M&A activity is unique in that it is led by our operating leaders that must buy into ownership of the deal and assume responsibility for integration and for future performance. Given the soft market conditions, however, we are exercising special caution to assure that we acquire and we get what we pay for. In fact, the forward actual delivered revenues and earnings are what we anticipate. Seller pricing expectations are too often based upon prior-year performance.

We have had success in reconciling this issue with prospective sellers and, in fact, we are experiencing some moderate improvement in pricing in 2008 compared to 2006 and 2007. The recent transactions as a multiple of earnings have moved back into the mid-6 range as compared to high 6 and sometimes slightly over 7 for the previous two years.

There is much being written and said about the federal capital gains tax. The potential for an increase in this tax appears to be a motivating factor increasing the amount of deal activity. Further, the pullback in agency purchases, acquisitions by banks and by venture capital firms, is a favorable environment for Brown & Brown to move forward with deals. We are encouraged by the increase in the quality and quantity of available agencies to acquire.

With that, I will turn it back over to Hyatt for closing comments.

Thanks, Jim. One thing before I make some conclusions. I would like to sort of embellish what Cory said about the $1.3 million of additional payroll for new people. We view the current economy and the circumstances as being beneficial for us. And so the pressure is on all of our profit centers to recruit high-quality people.

Of course, there are more high-quality people that have been, let's say, working four, five, six, seven, eight years who now are looking to see if maybe they would like to come into the insurance business because, let's say, the mortgage business or the contracting business or the furniture business or whatever it is is not quite so good.

So we are going to and you can expect us to continue to increase that expenditure, because that is an investment in the future. And the economy and the soft market that we're in today provides us an opportunity that won't come around again for a while, in addition to the fact that we're looking very carefully at each nook and cranny of our existing operations.

One other comment that I would make, and it is very difficult to sort of get your arms around what all of these reductions mean in a very general way, but let me give you something that might be helpful.

In our Top Gun, which is an organ which is published once a month, we are tracking the hits. Now, these are retail, now, it's $2500 to be a hit. It has to be $2500 of commissions to whatever. So that average hit has shrunk from about [twelve eight] down to [eleven six] or something like that, and that is about a 13.2% reduction. However, if you take out the employee benefits hits, and employee benefits commissions have a tendency to be a little bigger on the average because we're talking about account where you have 25 or more employees, you take those out, it's more like an average downswoop of about 18.5%. So that is just something for you to sort of put in your pipe and smoke.

Now, conclusions -- employee benefits should grow slowly in Q3 and Q4, depending on the economy, and the rest of '08 is going to be challenging. Q4 in Florida should be, should be a more favorable comparative base. Number four, we are not going to give any organic growth projections until the market provides more stability. And last but not least, the joker in the deck is the economy.

So having said that, Bill, would you like to open it up for questions?

(Operator Instructions). Keith Walsh, Citi.

First question for Jim -- you made some commentary on deals, and basically, are the deals in '06 and '07 not meeting your return on capital hurdles? And then also, have you changed the structure of these deals, maybe more earnouts involved in them? And then just the side follow-up on that -- any outlook on the NYAG amendment that is going to allow the global brokers to accept contingents for three years? Is that going to change the competitive dynamic in the market? And then I have a follow-up for Hyatt.

Well, several points here. Back to -- no, the deals are meeting our expectations. We acquire deals with a band of price, a min to a max. And today, I think they're probably falling more in the lower half of that band than they were probably maybe prior to the rate market change 2006, '07 and this year.

I was addressing the fact that we were able to go back in and get an offer on the table on the purchase of multiple. We're back into 6, 6.5 range. And probably last year, year before, those deals would not go at that rate. So the fact that if you acquire a business and there may be, let's say, 90%, 95% of the revenue base there, so we're just being cautious to make sure that we -- if that happens, we have an avenue there not to harm the performance of that deal.

Now, with respect to I think your question dealing with the contingents, there's the healings going on in New York State on the subject. We are monitoring those. I guess really nothing out at this point. It seems to be shaping up as a matter of disclosure, which we are there. We have been compliant with that. We had inquiry going back the last several years and feel that everything we have seen with respect to those hearings thus far we do not see as an impact upon Brown & Brown.

I guess my question was more centering on the New York Attorney General amendment that now Aon/Marsh/Willis can accept contingents for three years on a transaction. If that would maybe see them doing more deals in the midmarket in the US, it may be more of a competitive situation for you guys?

Well, certainly it looks like, in the case of the Willis deal with HRH, they have that, and then maybe some assumptions that they can increase the commission base during that period of time. So that is the avenue there to deal with that component of it. So will their model allow this is going to be I think the even greater issue with that as being an attractive model for the middle-market agencies to migrate to.

But I guess to piggyback on what Jim says, where you have fee business, where you are contractually obligated to take X number of dollars, contingents mean nothing because you can't take them anyway. So it's a little bit -- there has always been confusion over contingents versus flat overrides. And still there is a lot of confusion about that. So we don't see the national brokers, and that would be Marsh and Aon, doing too much in the middle market, although Willow has made a very deep dive with HRH.

And just for Hyatt, getting back to the comp hearings going on in New York right now, I would agree, I guess, with Jim's statement. It seems like disclosure is really at the forefront here. How would that impact your Company directly? Do you fully disclose right now what you are making to all your clients?

What we do is we have -- it is not just contingent commissions. If we place insurance with one of our wholesale brokers, there will be a wholesale brokerage. If that wholesale broker is going through [Dekas], our office in London, there may be a commission in London. We may earn interest on money that is being held for the insurance company. We may, if we negotiate financing arrangements for our customer, there may be a fee that goes to Brown & Brown.

All of that is disclosed, not in dollar terms, but in general terms on each new and renewal proposal. And then we also suggest that if someone wants to know exactly the dollars, we will try to compute them. It is almost impossible to compute a contingent profit-sharing arrangement. But the GSCs, the guaranteed supplemental commissions, that are now being used by some of the national companies, of course that is a percentage of the premium written. And so it is just another contingency. So it is just a little more determinable. So anybody that wants to know, we are ready, willing and able to give them specifics for their account.

Mike Grasher, Piper Jaffray.

Hyatt, a follow-up question. When you were going through the Louisiana and Texas market and speaking to oil and gas, you were mentioning the workers' comp being soft within those markets. Can you provide a little bit further detail in terms of the type of workers' comp? Is it across the board or can you parse the classes of risk?

Well, yes. I'm speaking about Texas, not so much Louisiana, and it does not include US and L&H. But it is pretty much -- apparently, Texas has been very profitable, and the old state fund is now a separate privately run company. And they are very competitive and very aggressive. And the companies, almost everybody is coming in and just trying to scarf up workers' compensation. So I don't think it is limited, and at the moment there doesn't seem to be much underwriting going on. It is just, I want it.

And then do you have any feel for the U.S. L&H?

Well, I would guess that to be flat. Everyplace we know about it, it is flat. That is a different kettle of fish there.

And then, Cory, just a follow-up for you with regard to your commentary around the expenses and that. Basically, I think it sounds like you are saying on a same-store sales basis that the margins are not as they seem. Expense is lower. Do you actually have any more color or additional color? I think it was the last call we spoke about how the fixed portion of the expenses, because of less commission and fee income, that would actually drive the ratios higher. Do you have any color for us in that regard this quarter?

The basic ratios are the same, and the main point is to show how much from each component. So when you look at it, we had $17 million of internal growth coming out and essentially only $4 million of expenses being adjusted. So it does show the same component, that there is a higher amount of fixed cost in our operation. And when you are as efficient as we have historically been, there's just not a lot of fat to remove as quickly as the rates go down. So the same relative thought process is the same.

Josh Pechter, Cacti.

Two questions. The first one is if you could offer us your thoughts on other past soft environments where the internal growth rate might have been, to give some perspective. I think a lot of us looked at the number and wondered, gee, is this extreme or not?

And second, thinking about the Willis deal with HRH, one of the driving forces of getting that premium way up was Joe's comment that they could extract better commissions from carriers as they push the volume up. That may be a function of their very centralized system. But I wondered, as one of the larger brokers, why I can't expect the same pressure from you guys on carriers, and if the decentralized structure is hurting you in this environment?

Okay. Relatives to the commissions, there are commission increases that are going on, and it is being basically driven by companies who want to increase their revenue base. So we don't make a habit of going to companies and saying, by God, we're going to do this if you do that, because then we have to impose that upon our various offices, and we're just not going to do that.

However, the various offices are dealing with their own companies, and they are dealing pretty effectively. So I don't know exactly about how Willis is going to effect a substantial increase in the commissions that they are going to get from the HRH business, but if Joe said he would do it, then I'm sure he intends to do it.

Now, what was the first question, first part of the question?

Before we move on, so do you think that that is hurting you, Hyatt, in this environment? I mean, he is essentially saying that we're going to take our big stick of volume out and say to people, pay us more, when rates are falling, and because we are Willis, kind of a guaranteed number. What you're kind of saying to us is, well, the Atlanta office versus the Charlotte office is all negotiating independently with State Farm. And I wonder, do you think that is hurting you?

Well, one thing that you've got to understand is, in the case of Willis also, if I understood what Joe said, they're going to be moving commissions to fee. So therefore, the additional commissions, if they are getting them more than we would, wouldn't be -- they couldn't affect them on contract business, on fee business. So that doesn't work.

But we don't find that anyone is getting substantially more than we are. Now, on occasion, where someone is going to move a book of business, which we don't do, then that is a different ballgame. When you move books of business, then you've got another problem you've got to deal with.

I was asking about other -- I know I can look statistically at the numbers over the last, like, say, 10 or 12 years. But I wondered internally, when you guys looked at the growth numbers in this environment, give us some perspective on other soft markets and what we should see an internal growth rate?

Right. It's kind of interesting. Yesterday, we had the retired President of one of the Federal Reserve Banks talking to us about the economy. And the point that he made, which I frankly had forgotten about, was in the last downturn, which is '01/'02, you had a downturn in the economy. You had, however, an upswing in homebuilding, which was kind of unusual. And at the time that was going on, we also had a start of rates being increased.

So that is sort of a strange set of circumstances. But if you go back to the most virulent downturn that I remember, it was '78 through '84. And during that period of time, frankly, we were only in Florida, and I don't remember the economy being all that bad, to be frank with you. But I know prices were going down like crazy.

Now, what happened then and what is happening now is that in those downturns, companies are offering additional commissions. We're getting additional commissions on workers' comp. We're getting additional commissions on packages -- not every company, and it varies by state. It varies by the amount of new business that that particular risk-bearer wants to write. And if it is a regional company, they may focus on just one or two states and increase 5% or 7% or 3% or whatever it is.

So looking at that downturn, the pricing was just as virulent in terms of the downturn and it lasted from '78 to '84. And then it turned precipitously, and the prices then went crazy. They went up by 50% to 75% in the first year and 50% to 75% in the second year. And then starting in '86, they started to go down. And so they went down and flatted, and then down and flatted, and that went all the way to really about 2000.

So it was 13 or 14 years, but it wasn't -- it didn't go down precipitously like it is going down today. And at that time, I don't remember the economy being all that bad. According to the gentleman yesterday, we had really from I guess 1988 to maybe 2000 a pretty vibrant growth in GDP.

So it is very hard to make comparisons. I will say this, though, and I'm speaking now of Florida. I have never seen the combination of $160 billion taken out of the economy and a downturn in economy because of gasoline prices and et cetera, et cetera, et cetera, and prices dropping as precipitously as they have, with the state getting in and leading the way at a 50% reduction in property prices. So that's never before happened, and we are weathering the storm pretty well, but I can tell you, it ain't fun.

Finally, and I will get out of the way, do you have any problem raising capital to do more deals? Is there any worry, given the credit environment, that you'd have much higher borrowing rates or you couldn't get access?

No. Do you want to comment on it?

Josh, no. We have -- I already told you what we have currently available, which is with the three- to five-year. And I have talked to our other borrowers. And we feel like we can borrow another $500 million with absolutely no problem at all at essentially the current market rates. When you get up above that, do you have to structure a little bit different deal? Possibly. But (multiple speakers) real problems.

By the end, I believe our current debt is less than 1 times our (multiple speakers)

And our current debt to equity is a 0.83 ratio, debt to EBITDA.

Chuck Hamilton, FTN Midwest.

Three questions. I think, Cory, probably the first on probably is best for you. I think Hyatt mentioned in the call this morning that Florida retail had experienced a significant amount of cancel and rewrites. Recognizing the fact that pulls revenue into this quarter and subtracts it from future quarters, have you been able to quantify that potential impact in future quarters, what decrease that might be for the upcoming quarters?

It appears to me that it has a minimal impact. I think the interesting aspect is that there was a spike, if you go back to second quarter of last year, that was more of a significant spike, where we had cancel and rewrites, and that is because the Citizens was just getting a hold there and a lot of the offices canceled and rewrote those policies. So I think the second quarter had kind of a unique amount of [too there, that are at] the third and fourth quarters does not appear to be the same comparable situation.

But to sort of piggyback on that, don't forget, when you take the example I gave, we reduced the premium by more than half. So therefore, the impact in terms of the cancellation and the new revenue is about the same. It's hard -- we don't think that it really has inflated in any way our income this quarter.

Hyatt, a couple of questions for you, then. Looking at the Willis deal, do you anticipate that there is going to be some opportunity on acquiring new producers from Hilb Rogal, producers that may decide they don't want to work for a larger broker?

We don't know. We don't really find very many people coming from other brokers, and it is just that the cultures are different. So from time to time, we will find some. We think that probably there will be a little dislocation, but I don't think much. I think probably you may find more dislocation going to local privately owned brokerages than you would to, let's say, us.

And I guess last question again, back to looking at the Willis-Hilb Rogal transaction, since Hilb was really in the market doing some acquisitions, do you see the fact that they are now part of Willis and Willis has indicated that they are going to really focus on integration and certainly less so, then, on new acquisitions, do you see more opportunities by having perhaps one of the competitors in the M&A environment out there?

Well, maybe. But it seems like when one goes away, then another will come about. So it is what it is. We don't really see much difference. We did, and we have competed some with HRH, but not a lot.

Dan Farrell, FPK.

Just some questions actually focused on national retail and Western retail. I realize these are obviously being impacted by both rates and the economy, but is there anything specific related to your operations that might be causing some of the drop as well? Have there been any departures, any operational things that you guys might be trying to address, given the sharp slide?

No, not really. We have had some offices that have had some turmoil, Las Vegas being one. But generally speaking, we really haven't. The reality is, is that our model kind of chugs along at about the same speed throughout market cycles, so there's not a lot of change. So other than a few aberrations, we really don't see that.

And then just general thoughts on 2009. I know you mentioned that you thought '09 might get better versus '08. Are there assumptions underlying that? I mean, I knows you've alluded to the comps improving, but if we were in a scenario where, say, the economic environment stayed where it was over the next 12 months and pricing continued to drop at the same level, are there other levers that you can pull, or is it not unreasonable to think that there is another continued negative trend in organic if conditions stay the way they were?

Well, it is very difficult to determine what is on the horizon. The reality is, is that Florida is a resilient economy. And one of the things that a lot of people don't realize is that there are a huge number of people who are retired who have incomes that are not dependent upon the economy. They are guaranteed incomes because of retirement plans, and they spend their money. And so there is this underpinning.

Now, what has been jerked out from under the economy in Florida is the $40 billion-plus whatever multiplier it is of the hurricane claims. So my expectation is that the economy is going to soften out and the comparables will be much better for next year, because we have this huge downdraft this year.

You have already seen a situation where FIU now is starting to grow again, and I think that next year we might have a little more favorable situation. So is that something that we can make any categorical statements on? No. So we're taking it a quarter at a time. Our push on new business is the same or maybe even more pressure than ever before. And we are looking at new programs in our program division, which we have always done.

So all of these things take a little bit of time. But because this year has been -- and I have only been in the insurance business for 49 years -- this has been the most unusual year, and surprising, that I have ever seen. So, therefore, we are very reticent about making some statesman-like statement for '09 that we have no basis for backing it up.

Sure. Understandable. That is helpful. Thank you very much.

Doug Mewhirter, RBC Capital Markets.

I just had one question. My other one was answered. Regarding your, I guess, the dynamics with the Florida takeout companies and Citizens, I know a couple quarters ago you described that working with Citizens was a little maybe higher maintenance, and they paid a little bit less. How does it work when the Florida takeout companies, first of all, I guess, take out the policies from citizens? Do you get in the middle of that transaction? And if you don't, how are you treated upon, I guess, renewal? Do you get paid more or less or the same by these small takeout companies?

Well, first of all, we are not dealing with takeout companies, except in the homeowners' area. And if there are some of the takeout companies that have been approved by our security committee and others are not, if it is one that is not approved, then we obviously notify in writing the customer that this is not approved and that we will handle the insurance for them. But we cannot certify in any way, shape or form that our security committee has approved this. And we don't write new business with that takeout company.

As regards the commercial property, those really aren't takeout companies. Those are companies that are not admitted and have alacrity for rate and form, and they are coming in and writing the business. And it is generally coming through either a wholesaler that we don't own or a wholesaler that we do own.

And so what is happening is that the amount of commission dollars on this reduced premium is probably a little less, but we keep the business. And if we don't do this, then we lose the business, which is 100% loss of commission. So there is a reduction as this continual downturn is in the marketplace, but it will stabilize. And in fact, it stabilizes our relationship with our customers, because they're looking for us to do the best for them, which is what we're going to do. Otherwise we'll lose the business.

Okay, thank you very much. That's all my questions.

Mark Hughes, SunTrust.

Actually, this morning it is Jack in for Mark. Most of my questions have been answered also. I just had a quick question for you. On the operating expenses, they're up about $3 million sequentially. I was just wondering, if the acquisition pace continues at the same rate, are we going to see that -- any kind of gain in the back half of the year?

You were breaking up. I didn't hear the full question. Can you say it again?

Sure. Cory, your other operating expenses were up about $3 million sequentially, and you pointed to acquisitions driving that. If the acquisition pace continues at the same rate for the back half of the year, are you going to expect a similar gain, or was there something unusual?

No, there was nothing unusual. I mean, essentially, if we do have the same pace for the quarter, there was other operating expenses, like you said, about $3 million, which should stay about the same.

Matthew Heimermann, JPMorgan.

I just have one question. You made the comment in the press release, and I guess this isn't too surprising, given your economic comments, but effectively, clients are pocketing whatever rate savings they are seeing and you're not really seeing any incremental purchase of coverage. Is that true universally across the board? And I guess when I say universally, I'm thinking geographically. Is that pretty consistent? And also, are there any differences from the smallest accounts to the largest accounts you handle?

Well, the smallest accounts are less impacted by rate decreases. And there is some geographic difference, but the difference may be more a slice of business. For instance, apartment owners are under tremendous pressure, profit pressure. And so if their price was $500,000 last year for their apartment physical damage coverage and it is now $300,000, they're not buying any other insurance. They're trying to take that money and either pocket it or put it in the bank or use it for something else.

So there are some geographic differences. We are, though, where you have businesses that are growing, and we do have those, and also where we are having folks that, two years ago, the umbrella was $5 million and then they reduced it to $1 million and now the prices have gone down and we're trying to sell them back to $5 million. So all of that is going on. It is hard to quantify that, though.

And then just maybe just specifically on work comp, do you have a sense, given that the economy does appear to be weakening some, how much, if any -- well, I guess to what extent you are seeing payrolls slowing down in terms of the pace of expansion or maybe staying flat or even declining?

They are eroding very rapidly in terms of all construction. Now, if you look at manufacturing, as you know, manufacturing is the bright spot in our economy, so some of those are going up.

Here is the one thing that's also no one's discussed, is, as the economy slows down, you're going to have more workers' comp claims, because people who are about to get laid off have a tendency to get injured, and they get serious injuries, which last for awhile. So the bottom line is that the loss ratios in a down economy will rise more rapidly than they would otherwise, which forces, then, higher prices.

Meyer Shields, Stifel Nicolaus.

I guess one quick question for Cory. You mentioned that same-store compensation was down $3.8 million. Can you break that down between fewer people and paying people less?

You know what, I did not break that down specifically, and I don't even have the number of people down. So I think it is similar to the last quarter, where we actually do have some normal attrition. And probably the biggest drop did come from probably commission producers, where their salary is tied directly to a reduction of the revenue. And that was probably about $2.5 million -- I think I recall off the top of my head; I don't have the sheets in front of me here in Houston -- but like $2.5 million, and I think there was another $1 million that was primarily from just management and staff salaries.

But you're not worried about attrition itself being a specific challenge now?

No.

Can you talk a little bit about your own utility or transportation costs? Is that a significant factor in year-over-year expenses?

Transportation and utility costs?

Right, in other words, with the rising price of energy. How much --

I can make one comment about that. One of the things that -- and the cost of air travel is going up and the cost of moving around generally is going up. One of the things that we have done in the past and we're probably going to do it in the future is we have quarterly meetings of our leadership council, couple hundred people. That's our senior leaders from all of our office, where, as a matter of fact, we're in a meeting -- that meeting is today and yesterday, and it is in Houston. We are in Houston as we speak. So we're getting ready to go down to continue the meeting, which has started at 8 o'clock this morning this time.

In the October meeting, we are going to do it regionally. And one of the reasons is there will probably be six regional meetings, and we can get people into regional meetings for less money than we can bring everybody to one location. So, yes, it is -- the cost is impacting us in terms of those people who are traveling a lot, and those are generally our regional people. The local agencies, of course, we do have some reimbursement for gas for some of our folks, but that has not been a significant amount.

On T&E, it is essentially flat. I think it may be up like $200,000 when you exclude the impact of the acquisitions. So that is not very significant at all for the quarter.

Very helpful. I appreciate it. And the last question, I guess -- given the specific challenges in the wholesale market now, I guess they're being disintermediated as standard companies increase their appetites, is there a difference in pricing between the wholesale brokerage and retail?

Yes, there are. And usually, you would think that the standard markets are less expensive and broader coverage. And what you're finding is some of the wholesale markets on certain classes of business are below the standard markets, not exclusively.

And the other thing I would say is this -- there are really, we think, three types of accounts. And what I mean by that is there are accounts who are always in the standard market. There are accounts that are always in the excess and surplus lines market. And then there are some accounts that typically look like excess and surplus lines markets, but they're kind of in between.

And as the market changes, as we are seeing now, those in-between accounts, some of those flip towards the standard market. And so that is typically the breakdown of accounts. So you are going to see, in a change like we're seeing now, you're going to see more business move into the standard market from the E&S market, and then when the market goes up in the future, you will have some of those accounts that are in between go out of the standard market and back into the excess and surplus lines market.

Is that having any impact on, when you look at wholesale agencies that you're considering acquiring, is that changing their price demands?

Well, just to tag on that is, on the wholesale side, I mentioned our caution about forward revenues being delivered. And as a matter of fact, we have had to step aside from several wholesale opportunities to acquire because of that issue you are addressing, that is that we really could not assure that the revenue base that was there would be there tomorrow, and reaching the conclusion that the seller be willing to take risk on it. So the drag there is significant.

I think maybe one tack on that is we have a significant amount of our wholesale business is binding authority, which is being perhaps a little bit less impacted than the transactional side, which [it's vacation] over to the standard market. So our wholesale teams are doing some great jobs in terms of remodeling and restructuring their offices, dealing with the flow of business and looking at new product lines.

One last item on that is that some of our trading partners in the E&S world are buying MGUs right now to sustain their volume, which is rather -- it is another approach to it, assuming they're going to get both underwriting profit and the operating profit from that entity.

Very helpful. Thank you so much.

John Fox, Fenimore Asset Management.

I had, I guess, three questions left. One, can you tell us what was the FIU revenue?

FIU for the quarter?

Yes, just for the quarter.

It was roughly $4.4 million.

Okay, great. And then, Cory, you mentioned a figure earlier in the call that you've spent $110 million on acquisition activities. Is that just for purchasing agencies this year, or did that include any earnouts from previous years?

That is everything. That would be kind of the number that would show up on the cash-flow statement. That is everything, including earnouts.

And then, Hyatt, in your closing remarks before Q&A, I thought I heard you say Q4, kind of Florida gets better, and I'm wondering if you could discuss the reasons for that?

You are trying to put words in my mouth.

Okay, well, I'm asking you to clarify.

Listen, it's a good thing I know you. Here's the bottom line. What I said was that the downswoop last year created a plateau that was lower than previous for the fourth quarter. Therefore, assuming that could be the case, which I think it is the case, then maybe the downswoop might not be quite as virulent. But who knows? So we'll see.

So it's basically the comparison?

Yes.

Nik Fisken, Stephens.

Hyatt, did the minus 8 surprise you?

Say again? I can't --

Did the minus 8 organic --

You mean the 7.9. Yes, we were a little surprised at that. And primarily, again, Florida -- the economy is having a bigger impact in Florida than we'd expected.

So if you had to crystal-ball the breakout of the economy versus pricing, would you say it's half-half or more economy related?

That would be simply a guess, and I don't know. Probably, if you go office by office, and you go from Sarasota South to Naples, then the economy is substantial. We're writing new business, but when you renew a contractor's accounts and the payrolls are down 50%, that is a 50% reduction, plus whatever the price reduction is.

And so from Sarasota South, it is much more than 50% of the downdraft. If you get into Broward and Dade counties, we do have in the Fort Lauderdale office a very substantial amount of condo business. Now, the condo business is just wild and crazy, and it is moving, it's constantly moving. So is that the economy? No, it is the price. It's just the market. So how do you weigh and measure all that stuff? Damned if I know.

But it sounds like Q3, it's got to be worse than Q2.

In terms of the economy?

And internal growth.

Well, we don't know that either. I would hate to prognosticate. You have to figure it out. See, you're over there in Little Rock, and you're away from the maddening cry, and therefore you ought to be able to figure it out.

Steven Labbe, Langen McAlenney.

Is there a big difference between the internal growth at seasoned Brown & Brown offices versus those that you have acquired, say, in the last year, two years, three years?

Well, the most seasoned offices are Florida, and ex the economy, ex the economy, maybe. But I'm not really sure, because we have some offices that are brand-new that are growing nicely. So it just depends on the circumstances. It's a mix of business. Some of the new offices are benefits offices, and they are a little different scenario right at this time.

So you don't believe that any part of the surprise in the decline in internal growth is a function of the newer offices doing materially worse than those that were not recently acquired?

Certainly not in Florida. And if you look at the Northeast, which is where we've had a lot of acquisitions, those new acquisitions are doing pretty well. So I don't think there is really much difference there.

Just a quick second question. Cory, do you have what GSCs were this quarter versus last year's second quarter?

Yes. We have, essentially on this quarter, they were about the same. This quarter, for '08, it was about 3.2, so year to date we are at 6.3, 6.4, something like that. As you recall, in '07, we booked both the first quarter and the second quarter in the second quarter, which was also 3.2, but it was for the two quarters. So we do have -- running basically double the amount, because this year in '08 we have now Hartford, Safeco and Fireman's Fund that have a reserve that are going to the GSCs from last year, and that's why it's up.

Okay, so it was $3.2 million --

Compared to $3.2 million.

Compared to $3.2 million.

Right, if you look at just the quarter.

But you actually have -- okay, but it's a little different because last year's $3.2 million included some first quarter.

It included the first quarter, right.

[Dick Cagney, Cagney] Network Inc.

Just had two questions. One is, could you discuss the impact that the Bermuda and London markets might be having on the U.S. business and their entries? And secondly, can you talk about the impact that the regional acquisition people that you have out in the field are making on your acquisitions versus a centralized approach?

I will field the Bermuda and London questions. We have written a lot of business over the last several years in London and continue to do so. In the past, in our system, it has been predominately a property-related market, not exclusively, but predominately. And so the prices there have come down substantially, both from Bermuda and London, not any different than the domestic excess and surplus lines markets.

We do do some casualty and professional liability as well there. But I would tell you that pricing pressure for classes of business that are written in Bermuda and London are similar, if not more, their desire to retain it. So I hope that answers your question.

On the acquisition question, could you maybe re-present that? The impact, you said, on our regional leadership?

Yes, in the past, the majority of your acquisitions did you do from a centralized basis? Because I know that --

No, we have not. We have never done that. One of the features of our Company, you hear about the AOL, which is the posterior on the line. That goes back to a long-standing, more than 20, 25 years, of -- it requires one of our regional operating leaders to buy and support and take forward an acquisition, including the impact upon their compensation. So it becomes a validation that here is an entity we really think we can integrate and operate forward. And it is very, very important to us.

What we have done as we have strengthened our support teams for those leaders to do more transactions. But the funding in telling the story and completing the transaction and integrating the transaction.

Just going back to the first question about the Bermuda market and London markets, I am curious what the impact of Bermuda and London companies coming into the States is and what you see their impact in the States in terms of (multiple speakers)?

I would say that historically they have been -- let's talk about Bermuda more so than London -- but focused on larger accounts, Fortune 1000 accounts or very high excess layers and D&O and E&O and things of that sort, which is not the vast majority of our business. However, as you know, there's a number of syndicates in the Bermuda carriers that are trying to get really significant onshore presence. And quite honestly, some of them are trying to circumvent the traditional London broker market to develop direct relationships with retail agents in the States.

We view that as another market opportunity, and we have significant relationships with them from trading with them overseas already. So we view that as positive, but I can't tell you that one or two markets stand out as making such a significant impact on the market over and above some other domestic E&S market.

I think we can take one more question, because we've got an 8.30 presentation to make downstairs.

Chuck Hamilton, FTN Midwest.

My follow-up has already been answered, so that makes it quick for you.

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, and thank you all very much, and we will see you in October. Goodbye. Thanks, Bill.

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