Brown & Brown Inc (BRO) 2008 Q3 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 or events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance and that such statements are intended to fall within the Safe Harbor provisions of the Securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and those actual results and events may differ from those indicated in this call. Such differences may be material.

With that said, Mr. Brown, I will now turn the call over to you.

Thank you very much, Elizabeth, and we have Jim Henderson and Cory Walker and Powell and myself and so we're going to start off with Cory. It's all yours.

Thanks, Hyatt. Well, in honor of Yogi Berra, it's deja vu all over again, relative to our third quarter earnings statement in two respects. The first, it's the same that you saw when it was inadvertently released ago and two the net results are very similar to the results of the second quarter of 2008. Our net income for the third quarter was $40.6 million which was down 12.2% from last year's third quarter. Correspondingly, our net income per share for the quarter was $0.29, down from $0.33 earned in the third quarter 2007.

From the revenue standpoint, commissions and fees for the quarter increased 8.1% to $243.8 million, and that is up from $225.4 million last year. As part of total commissions and fees in the third quarter of '08 we received $9.7 million of profit sharing contingent commissions and that's compared with $8.9 million that we received in the third quarter last year. We estimate that we will receive an additional million to $2 million of profit sharing contingent commissions in the fourth quarter. Now looking at the internal growth schedule, similar to the past six quarters we had a negative internal growth rate. However, this quarter was slightly better at only a negative 5.1%.

Our total core commissions and fees, which excludes those profit sharing contingent commissions, for the quarter increased 9.3% or $19.9 million of total new commissions and fees. However, within that net number, was $30.9 million of acquired revenues. That means that we had $11 million less commissions and fees on a same store sales basis. As the internal growth schedule indicates, the vast majority of the negative growth, internal growth dollars are from a broad based impact on our retail and wholesale operations. Hyatt, Jim and Powell will talk about the activity in each of these business segments in a minute.

Moving on to our investment income, it decreased by $2 million, primarily due to lower interest rates and less investable funds due to our increased acquisition activities. For other income, we had approximately $2 million in the current quarter. In the third quarter of last year, we had $8.6 million of other income, which was primarily due to gains on the sales of various books of businesses. This decrease of $6.6 million in the other income revenue accounts -- it accounts for almost 80% of the $8.3 million of the total reduction in our pretax income of the current quarter when compared to last year's third quarter. As it relates to our expenses and pretax margins, our pretax margin for the third quarter was 27.2%, compared to last year's third quarter of 31.8%, a reduction of 4.6 percentage points.

As we have mentioned on previous quarterly earnings conference calls, as long as we remain in the soft market cycle that creates the negative internal growth, we will probably continue to see some margin compression. In the current quarter, employee compensations and benefits increased 2.9 percentage points to 49.5% of total revenues or an increase of $11.7 million of total dollars. If you look at just the employee compensation and benefits that relate to just new acquisitions that are stand-alone by themselves, since October 1st, they accounted for actually $13.4 million of total employee compensation and benefit charges versus the net of $11.7 million. So, therefore, just the offices on a same store sales basis actually had a net reduction in employee compensation of about $1.7 million. Now, that's compared to their revenue decrease on those same existing offices of about $7.7 million of commissions and fees and about $16 million of total revenues when you look at other income and that is the main reasons why the margin compression occurred on that line item.

Our non-cash stock-based compensation cost was $1.8 million in the third quarter of 2008, which is an increase of about $300,000, and that's due to just the performance stock planned grants that were issued in February and April this year. In the current quarter, other operating expenses increased 0.8 percentage points to 14.7% of total revenues or $3.5 million of actual dollars. The other operating expenses relating to just the new stand-alone acquisitions since last year accounted for $3.8 million of that total. Therefore, the offices on a comparable same store sales basis had a net reduction of other operating expenses of about $300,000. Again, the increase in the cost as a percentage of total revenue was mainly driven by the revenue reductions. Amortization, depreciation expense on a combined basis increased about $2.1 million that's just due to the number of acquisitions that have occurred in the last 12 months.

Our interest expense is consistent with the expected quarterly expense of about $3.9 million. Our effective tax rate is running about 39.5%, which is slightly higher than the previous quarters because as a result of lower earnings, but with the same effective amount of permanent tax differences. Our third quarter or nine month year-to-date numbers are very similar to the third quarter numbers and we'll just end by saying that for the nine months ended '08 we earned $0.94 per share and that's about a 9.6% decrease from the $1.04 that we earned in the first nine months ending September 30th, 2007. When you exclude last year's Rock-Tenn gain. Now, from a balance sheet perspective, at September 30th of 2008, we had $240.6 million of cash, which we conservatively report in the restricted cash line. However, only $139 million of these funds are in legally restricted premium trust accounts. Therefore, we have approximately $100 million of liquid cash.

In addition, we are fortunate to have two very strong lenders standing behind us and that is SunTrust and Prudential Capital Markets Group where SunTrust we currently have a $50 million revolving line of credit with an accordion feature for another $50 million. Then Prudential Capital we have a $150 million credit facility that gives us access to seven year and ten year monies. Finally, for the nine months ended September 30th, 2008, $221.6 million of cash was used to pay for various acquisitions and that includes any settlements of earn-out provisions from prior year acquisitions. So with that financial overview, I'll turn it back to Hyatt.

Thanks, Cory, good report. Florida retail. Last quarter was down minus 15.5 this quarter minus 9.3. The spine of Florida which is Lakeland, Orlando, Leesburg, Ocala, Gainesville, Jacksonville, which is a different part of Florida from an insurance standpoint, the admitted markets are now looking at good property. Existing property accounts is minus 10%. But there is more capacity. The economy is down 5 to 30% depending on whether you're in the contracting business or not and no existing risk barrier will let an account go if they get the last look. So that means there's not as much turnover in accounts as you might expect. Cash is off 10 to 15% in terms of pricing. Tampa to Naples, this is where the economy is kind of really the softest in Florida. Naples to Sarasota is really the worst. Overbuilt in terms of homes.

Citizens, believe it or not, has reduced their rates again from frame and joist and masonry condominiums by instituting an additional mitigation credit and this will vary from 5 to 25% and it varies with the region of the state. There is some feeling of renewal flattening, first time we've seen that. And that's forward-looking, looking at November and December renewals. The casualty prices are flattening a little bit, down in that area of Florida, but the exposures are also down 20 to 30%, particularly when you're looking at contractors. Our largest contractor in that area of Florida two years ago had 527 employees, now has 57 employees. The Tri-County area which is Broward, Dade and Palm Beach County, there is still no movement by admitted markets to write new property. Non-admitted property may, may be close to the bottom. Currently, zero to 15%.

Condo values are going up because of the requirements to have current appraisals and apparently what has happened is, is that the values that had been used on many of the policies were lower than the actual values, even though values may have reduced a little bit today, so therefore we're getting some increase there. The casualty including auto is still down 10 to 20% and in the Tri-County area, property older than 1994 is going flat. That's different. So in Florida, synopsis one, no underwriter will lose an account and that's true really country-wide. Two, the economy is affecting casualty exposures. Three, workers' comp is very soft. Now, there is another 18% believe it or not rate reduction starting January 1 of '09. There is a feeling of rate reduction, of resistance to rate reduction and employee benefit is up 3 to 4%. Now, prices are up more than that but when you get through the downdraft in employment and the change in benefits, it's positive 3 to 4.

National retail was a negative 6, 8, now is a negative 1. Georgia, South Carolina, the same as last quarter. Carriers are not meeting sales goals. The economy is better than Florida but still down 5 to 15%. Exposures are also flattish, except in the area of contractors. Georgia workers' comp is flattish. That's a change. South Carolina workers' comp is still staying the same, very competitive, off 10 to 15% and Virginia the renewals, prices may be slowing. Maybe 7 to 10% down. Exposure basis are down. Marine rates minus 5 to 7. Kind of a little more stable. Workers' comp, 5 to 7. Not as competitive as 90 days ago. Pennsylvania condo rates are flattish now to maybe 5 or 4% and the reason they're flattish is they can't go any lower. $0.07 on a joist and masonry condo that's about -- that's rock bottom. Workers' Comp is very competitive. Social Services, flat on small accounts, minus five on others. The market downdraft may be slowing.

Economy is soft. Exposure units down 5 to 25%. In New Jersey, there is a malaise. If you take a circle around the New York City, there's kind of a dark cloud there and the reason is because of the financial meltdown and so exposure units on developers is down 20 to 40%. Renewals are down 10. New business is crazy. So anybody who wants to write an account away from someone else is going to have to be 20 to 35% off renewals, prior renewal pricing and some companies are starting to try to push back on rate reductions, not being very successful. Connecticut renewals down 10 to 15%. Renewal downdraft is slowing. Workers' comp very competitive. Exposure units down 5 to 10%.

Upstate New York renewals and it's been a little -- there's been a little pushback in upstate New York for a while. The rentals now are down zero to 5 and maybe 10 to 15. Exposure units, other than contractors, is kind of flattish to down a little bit. Workers' comp is kind of a mess, primarily because the self-insured funds are losing business and it's kind of moving around because of some changes there. Looking into the oil patch, Oklahoma, Louisiana, Texas. Oklahoma renewals minus 5 to 15 but slowing. Workers' comp is very aggressive. 25% plus deviations. As a result of energy, the energy patch, related exposure units to energy are all up. Subprime, not a big deal in that area. Louisiana renewals are flat to minus 3 to 4. Citizens is flat. They're the largest writer, property writer in the state. None admitted now better than Citizens. Marine is stable. Workers' comp soft, minus 10 to 15%. Lots of consent to rate. The economy is now being influenced by energy. And same thing in Houston. Workers' comp is very soft, minus 15%. But property is now flat and the reason is Ike. And it had an effect.

The economy is strong, again, energy and then contractors, there may be a little different now in contractors in that area for the simple reason that there's going to be a lot of work available as a result of the hurricane. Indiana, renewals, workers' comp down 10. Casualty property down 10 to 15. Some pushback-- some pushback on pricing. New business very competitive. Economy is down some but not vigorously down. In Illinois, renewals are down 5 to maybe 8, workers' comp is very competitive, minus 10. The economy is down there. It's a little more downdraft in the areas of Illinois where we are than it is in Indiana. Wisconsin, renewals, workers' comp is flattening, rates may be flat to up 4%. That's different. That's different. And, there's supposed to be an increase in '09. Casualty, (inaudible) minus 5 to 8%. Property is flat.

There were some substantial hail loss in that area and that's tightened up the companies a little bit and the exposure units are flat to down 5%. In Minnesota, workers' comp is relatively flat. There's supposed to be a 5% rate increase in '09. Not sure about that. [Gilinato] minus 5 to 10. The economy, it's okay. Flat to maybe slightly off. Except for construction and that's off 15 to 20 and manufacturing is kind of flat. If you go out west, still the most competitive part of the United States for retail, was minus 12, it's now minus 8.1. Las Vegas is kind of a waste land in terms of what's going on there. The rates on the property and casualty are down 5 to 10%. The economy though, is really bad. Building has kind of gone to the bow wows and contractors are closing their doors. In Oregon and Washington, renewals, minus 5 to 15% but the downdraft has slowed. The economy in Portland is flat. Seattle, economy is slightly positive. California, workers' comp down 10 to 12, was 25 to 30, 90 and 120 days ago. Supposed to be a rate increase January 1. Not probably going to happen. But it is changing.

Rural west in California, New Mexico, Colorado, there are flat renewals and particularly little bit up in agricultural risk. Colorado, New Mexico, renewals are 5 to 10 down and the economy is not too bad. It's flat to down a little bit. One thing I would mention, we have a profit center in St. Louis, called PIP, personal insurance plan and what they do is they do cargo insurance for small and middle sized and some larger businesses. It's B to B, business to business, and some B to C. In the last five years, only five months in the last five years have we had down shipping and four of those five months, that's down shipping, same month previous year, four of those five months were in '08. In January it was off .4 of 1%. These are the shipping, mammoth shipping. April, minus 3.6. July, minus 2.7 and September minus 9.1. So conclusions. There is some slowing in the pricing downdraft, maybe. Number two, the economy is not good and varies with the area of the country. And three, acquisition opportunities, okay on that. Powell? Thank you, Hyatt. Brokerage was down 17% this quarter and as you know, have greater volatility typically than retail in a down part of the cycle and typically greater upside in the hardening part of the market. Property transactional property rates we're seeing down 10 to 25%. Casualty premiums are impacted, one, by standard market pressure and the premiums over $100,000 are down typically zero to 20%. Those premiums under $100,000 in premium would be down zero to 25%.

Construction accounts across the country we're typically seeing exposure units down zero to 20% and on top of that they're looking for rate decreases of upwards of 20% as well. Professional liability, typically accounts over $100,000 and under $100,000 in premium are seeing reductions from zero to 20%. Anything in a financial institutions, real estate or mortgage space seeing rates up typically 15 to 20% or more. In the binding authority business, in Florida rates are down zero to 10% with continued standard market intrusion. Personal lines in Florida, we continue to see the non-rated carriers and Citizens impacting that business. National binding authority business is down 10 to 15% and the standard market continues to have an impact there. Professional national programs is up 4%. Lawyers, the rates are down 5 to 10% and dental typically flat.

In the other national programs with accounts over 75,000 in premium on an individual account, typically those are seeing rate decreases of 10 to 20%. But as you know, many of the premiums in national programs are smaller than that. In special programs, we're up 9.2%. Public entity business, rates are down in Q3, 15 to 20% and professional liability on public entities typically down zero to 20%. FIU this quarter was up. Wind rates continue to stabilize. Citizens multi-peril policies continue to be all over the board and ex-wind business is very, very competitive. Proctor Financial was up again in Q3. That's our forced placed bank coverage and we continue to see opportunities there in a segment of our business is somewhat counter cyclical. In the services arena, finally, as you may remember, we had an account that took a portion of their business in-house a year ago and that has run through the numbers and all of the operations are in line with expectations. So with that, I'll turn it back over to you, Hyatt.

Okay. All right, thank you Hyatt and Powell. For 2008 the third quarter continued a very active acquisition period for Brown & Brown. In the third quarter, we announced 11 transactions. This included a book of business for our $22.1 million in forward annualized revenues. For the year, we -- in our announcement we indicated there were 44 transactions. This includes a number of multiple entities within a given agency, representing some 34 agencies, 34 agencies year-to-date, purchased for $99.6 million in forward revenues for the year 2008. This compares to 26 transactions for all of 2007, and all of 2007 was $104.6 million.

The average size transaction for 2008 is about $3.2 million, as compared to the $4 million plus in 2007. This change in size is primarily the result of purchasing a greater number of fold-in opportunities in 2008 versus the prior year. Such fold-ins occurred generally at a higher margin personally than the free-standing locations and are very attractive to us. The agencies require capital and cash flow and Cory mentioned before that we are well-stocked with powder to use to acquire if and when we need to. In addition, for 2008 as he mentioned, there's approximately $175 million in free cash flow with the vast majority of this that will be used for purchasing agencies forward. At the margin level, at which we purchase agencies requires $1.50 to $2-- $1.50 to $2 to purchase a dollar of new annualized revenues. When we're talking to agency to join us, there's several factors that tends to be leading to this increased activity. The soft market as we've described is certainly one of those.

The question about the forward economy in terms of now or later for those agencies looking at selling at some point and there's continuation and perhaps reality of a change in the tax environment in terms of capital gains out there that may impact the net proceeds to the seller. In addition to that, there is the various publications on agency activity indicates that there is a reduction in acquisition activity for banks and by venture capital firms in the cases there's less buyers out there in the market than previous. To summarize, the agency M&A environment, this is the best of times in a couple sense. Number one, we have an ample supply of motivated sellers and number two, we are purchasing revenues at a lower point in the insurance market cycle compared to higher rates. We will continue to exercise our disciplined approach and as we have for now some 25 plus years, we will stay in our core competence. With that, I'll turn it back over to Hyatt.

Thank you very much, Jim, a good report. And, Elizabeth, we'll open up the floor to questions.

(OPERATOR INSTRUCTIONS) . Our first question comes from Keith Walsh of CitiGroup. Please go

Hey, good morning everybody. I guess first question for Hyatt, in your pricing commentary a lot of talk about flattening. Maybe just generally overall, like what -- how would you tie this all together? What's causing -- are we at a bottom here on the pricing cycle? And then to follow up on that, maybe any gains in pricing, is that going to be offset by slowing of exposures due to an economic slowdown and then I have a follow-up, thanks.

Okay. Number one, don't forget salespeople have a tendency to be optimists and so when I'm hearing this pushback, it's there, but is it a momentary thing as a result of all the things that have been happening in the financial markets or is it truly a change? And we're not really sure at the moment. It seems like it's a change because a number of the companies are looking at higher combined ratios, some over 100, particularly on an accident year basis. So that's that piece. It is definitely changed. That's the first thing. Second thing is, relative to the economy itself, that's a really difficult question to answer. We are looking and we have been -- don't forget, this downdraft in building didn't just start last month. It's been coming on now for six to eight months. So we've been having downdrafts on renewal pricing really, probably since the first of the year but it's gotten a little worse. So what do I think about the economy? I think the economy is going to continue to be fairly difficult in Florida, Arizona, Nevada, and Southern California. Elsewhere, it seems to be different. And so it's very difficult for us to try to say okay, if the flattening is truly flattening, but the downdraft in the economy is down 5 to 10, what's that really mean? And we have no way of prognosticating that. So my sense, though, is is the economy is going to probably bottom out in this quarter, meaning Q4, and then next year is going to be kind of tough but it may be trough-like for the whole year and if so, and if the rates are truly sort of bottoming, then, you can draw your own conclusions.

Okay. Thank you very much. And then just to follow up, for either yourself or for Powell, specifically on AIG, maybe talk about the impact they are having on pricing, just by maybe reducing capacity as a different entity now and how much of your placement is through AIG and how much of that do you think you can move? Thanks.

Well, first, Keith, this is Powell. I would tell you that we have not seen a reduction of capacity with AIG. So that's the first thing. And number two, AIG is doing everything in their power to retain their business in terms of-- they price their accounts very competitively, typically, and in some parts of their business more than others, they have competitive advantages or defenseable positions, i.e. in markets like the Lexington where they write a lot of primary property in coastal communities.

So I think to answer your question succinctly, one, we have not seen a reduction in capacity at the present time. Two, their pricing continues to be as competitive as it has ever been, if not more so. Three, we do write a large portion of our business about 5% of our total written premiums are with the AIG companies. And we continue to write business with them, new and renewal business, as we have before.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS). Our next question comes from Michael Grasher of Piper Jaffray.

Good morning, gentlemen.

Hey, Mike.

Jim, I wanted to follow up with you, a couple things. The revenues at a lower level, could you explain that in a little more detail?

Well, as I mentioned, the average transaction size is lower and, so, it's not we're buying smaller agencies necessarily. For 2008 we had a greater number, we had 14 fold-in opportunities, so this would be -- already have an office in a community and there's perhaps a small local agency there that we're able to fold in and those typically are smaller. Under about 2, $3 million, it's difficult for us to set up a new location but we can fold in either books of business or smaller agencies into an existing location and that's very attractive. So we're not targeting or looking at anything different or any size characteristics, it's just included more of these fold-ins in 2008 versus 2007.

Okay. And then just to follow up on that, in terms of the size component, what is the -- or is there sort of a qualifier, I guess on one end, and then what would be considered sort of too large for you to take a look at?

Well, on a free standing location today, we really need about 2 to $3 million on the low side as to a new free-standing location to have enough revenue for the resources to fit our model. On the upside, there's really not. I mean, we have looked at a number of opportunities and some of those are very evident. There's been traded ownership the last few years. But in those is one where the price becomes so competitive, whether or not it's accretive to the standpoint of our shareholders, does it really command that we take our resources and go purchase a large chunk of revenue that frankly doesn't deliver the earnings, as compared to doing 25, 30 smaller transactions compared to that larger one.

So really has to do with the sustainability, the quality of earnings, not as to size. But we're not -- the Hall transaction a couple years ago was about a $64 million transaction and it blended very well, so it has to do with sustainability, risk, the larger the risk and generally the larger has-- the pricing is more competitive on the larger deals.

And do you find the pricing as it -- the larger -- okay, so it's more competitive at that point but from the standpoint of retention, does that -- is the pricing impaired more because of the retention factor on the larger the deal size?

No, I think it's just the competitive. You have more players willing to go after a larger deal with that and so --

With no regard for uncertainty?

Well, I would -- I think certainly they're trying to evaluate as we are too but if you look at the transactions that's been announced this past year by others, you'll find in there that they're -- the purchase value compared to trailing earnings was very, very aggressive, meaning the multiples were still probably north of 8 to 9 times and that's -- that pricing model really just doesn't fit for us.

Okay. Fair enough. And then Hyatt, just wanted to follow up with you, your comments around workers' comp in California, if you could expand on that. I think you were hinting that perhaps there would not be a rate increase?

Yeah, that is what I'm hinting at. What I'm saying is the -- there's no question about the fact that the downdraft on renewals in terms of pricing has slowed. We've actually even seen, I think, two accounts where the renewal price has been the same, which-- that's not happened for four or five years. But there is a recommendation for a rate increase. We don't see it as of January 1. We don't see it being adopted.

Interesting. Okay.

And our next question comes from Nik Fisken from Stephens, Incorporated. Please go ahead.

Hey, good morning everybody.

Hey, good morning.

I don't know who wants to tackle this one but if I look at the last several quarters, you guys have been down year on year on earnings per share and I wanted to just kind of have you guys walk through how confident you are that those year on year decreases are behind us?

Well, I think I can answer that question. We don't know just like no one else knows and the bottom line is is the game plan is the game plan. We continue to emphasize growth and margins. We're not going to satisfy -- we're not going to sacrifice margins for buying something that doesn't produce margins pretty quickly going forward. The economy, now, though, Nik, is the joker in the deck. That is the piece that has occurred during the last year that has been sort of a surprise. So we are no less optimistic about the future today than we've ever been.

However, what we know is, is that the economy is the joker in the deck and for the next year, going into '09, it's going to be difficult. Now, having said that, it's also a positive for us and the positive is is that, A) we are under leveraged. B) we have a substantial amount of cash flow. And C) we've got the people who can make it happen. And we are seeing an increase of people saying well maybe we might ought to join up and the advantage of doing the smaller deals is that we have an understanding on day one after the acquisition of exactly how it's going to be operated and what the changes are going to be and et cetera, et cetera.

In other words, an understood game plan with the seller as opposed to a much larger operation where you can't really get your arms around all the various locations and because of the fact of the size and generally because it's being hawked by some investment people, we can't get inside it like we do with the most of our acquisitions. So we're kind of positive about the future, to the contrary notwithstanding that we're running into a headwind that is fairly strong from the economy and when that turns around, then things are going to be good.

Thank you. Jim, on the M&A pipeline, is the pipeline slowing at all or is it still as full as ever?

No, it's not, Nik. It's been very active. I think I don't -- you hear this from so many different people there, but if you look at our transaction count, it's up. We've seen no reduction in that. Hyatt touched on the fact that there is probably more people that is calling and say look this is the time. The fact that we can acquire in that under 3, $4 million revenue size agency out there is an extremely important advantage to us, because that area is the greatest count as you well know.

There's still some 20,000 plus of those agencies out there, many of which really don't have a long-term game plan as to how do they perpetuate and we become their best option so we're going to continue to feed off that opportunity with that. We're very bullish on that. Summarizing Hyatt's comments, if we-- $150 million transaction revenue versus the, say, 50 that represent 150, the latter meaning 50 transactions is a much less risky play than the one big one. So doesn't mean we wouldn't do it. But I tell you what, in this market, we'll take the onesy-twosys, generate earnings and go forward.

Great. Thank you.

Our next question comes from Mark Hughes of SunTrust. Please go ahead.

Thank you very much. Could you give me a snapshot maybe of the employee retention in light of kind of the volatility with the stock, particularly thinking of companies or brokers you might have added to the stable two or three years ago, how should we look at retention?

Well, retention is about like it's always been, although it's probably a little stickier today. One of the reasons it's stickier today is everybody is kind of concerned about the future and they look around and see all of the companies that have been taken private and of course then the employment has been slashed in a very bloody fashion. And then you look at all the financial services businesses that have gone broke, Brown & Brown looks pretty good. And so, frankly, retention is not a problem.

One of the things we are finding is, we're having an increased number of people coming to us, looking to move from another place for various and sundry reasons and we're looking at some pretty good people. We have to be very careful because people bring to us a culture and where they come to us from a failed culture, that's not a good thing. And so we have to be careful. But lots of good people out there and we're going to take advantage of some of that.

How should we think about the organic growth in the fourth quarter? You've got an easier comp, maybe a flattening market, still choppy economy. What should we think about?

Well, we're still thinking about it. That's the answer.

And then finally, outlook now for further contingent earn-out payments for acquisitions you've done in prior quarters, what's the -- kind of the remaining balance?

Okay. Cory?

From a -- if every acquisition were to max out, we still have about $224 million. For instance, in the fourth quarter, there's $41 million that, quote, could be earned. I can tell you, that's not going to earned so there won't be much payout in the fourth quarter. For '09 we'll probably have somewhere around $63 million but I bet you 16 to $18 million of that clearly is -- won't be earned because of the downdraft in the market and then going out to '10, '11 and '12, those earn-outs are just really getting started but every quarter in the Q we'll have a schedule so kind of roughly just off the top of my head, we're probably in the 30, $30 million range in '10 and maybe around the $80 million in '11 and '12 will be around $4 million. So those are some rough numbers of those earn-out potentials.

Thank you.

Our next question comes from [David Louis of Raymond James]. Please go ahead.

Good morning, gentlemen.

Hey, David.

Some of these questions have already been asked but I'm going to go at it a little bit different angle. Start with you, Jim. First following the bank problems out, there was discussion that any of the major banks that have brokerage operations would look at a divestiture?

Well, I think there's in the case of Wachovia, before Wells came in, as you're probably aware, Wachovia's insurance operations on the market, we have purchased last year, '08 and '07, two different bank on agencies, nothing large. We have another we're talking to and there's rumors out there of others. So I think that could very well be an opportunity. We have seen issues inside these agencies, I mean, the bank on agencies about how they connected to the bank. Perhaps they've not really as well as they'd planned. So I think that will be an opportunity going forward. We have contacted several, indicate that we're an answer for them if they choose to sell those properties and we would like to look at them. So, there will be an opportunity.

The Wachovia situation, does that mean that given the Wells being the new acquirer, they're going to take that off the market or what have you heard?

Yes, they have. We understand they have taken it off the market.

Okay. And then also on the M&A side, is there an acceleration in activity and talks before the potential changing of the guards and a likely capital gains raise as we go into '09?

Yes, there has. As a matter of fact, we're getting calls and saying look, we can -- can you hurry up and do something before 1, 1 or certainly in the first quarter of next year because of the election and some pending changes, almost seems now that the -- a lot of prediction is that we'll have next year -- the change in the capital gains rates, it is very much on the minds of a lot of sellers as to how do we go ahead and if we're going to do this, now is the time to do it. So I think we're going to have a very continued active I think end of year and into next year as well.

That's helpful. Hyatt and Powell, AIG, I understand the professional liability underwriters or at least some underwriting groups have moved to Berkeley and brought a lot of business over. I know, Powell, you indicated you're continuing to write and will continue to write with AIG. I guess my concern is that you're going to see more underwriting teams pull out. I know that wouldn't necessarily affect you, but clearly they're going to go to good, solid competitors that would have strong balance sheets. But don't you get a sense that AIG's probably going to ultimately lose 20 to 40% of their business over the next 24 months?

Well, David, you know, that would be speculation on our part. We would say that if people do leave and I know that there are certain groups that are leaving, that will obviously impact their business. It's something that they're obviously very sensitive to. And we, as an agency, have to do what's in the best interest of our clients. And so we're bringing them options and an option may be AIG, where it may also be one of those other carriers that you've named. But we have -- we haven't speculated on how it will impact their business.

There are lots of people out there, not only in the investment community but in the insurance marketplace who are speculating on what their ultimate end game will be and if in fact they will have to sell any of their core insurance operations. We are not speculating on that but many people out there, as you know, are saying in order to pay back the loan, you're going to probably have to sell some of the core operations, if not all of them.

Yeah, I agree with that. When you talk to risk manager, a business owner, and they're kind of looking at keeping the risk within AIG, my guess is the longer the tale, the more cautious they're going to be, versus a shorter tale. It's kind of what I'm hearing out there, is that your sense as well?

I think that's a very fair statement, David, and as I said earlier, some of their business they have built a bunker around it and so for example, as you know, they are the lead carrier on a lot of directors and officers' liability on large financial institutions. Well, their second option, meaning from a buyer's standpoint might be 30 or 40% higher in premium. So that risk manager and/or buyer is weighing, one, what they think is the long-term viability of this company, and two, their ability to pay in the near to short-term in the event of a loss.

Sure. Shifting gears, kind of overall pricing environment, if we look at I guess -- I guess the question is are insurance executives going to become a little more cautious with their capital, one looking at the AIG situation but more importantly, their investment portfolios? I mean, is that part of the reason that we're going to probably see pricing at least stabilize to some degree as we go into '09, any thoughts there?

Well, this I Hyatt. We don't know that those prices are going to stabilize, David. We obviously would like to see them stabilize. But we'll believe it when we see it. But, I can tell you that the insurance company executives that we talked to are getting antsy and are they antsy enough to really put up a front and then execute? I don't know.

But when you put together everything that's happening, don't forget, in an economic downturn, one of the things that happens, which doesn't appear right up front, but it starts to appear quickly, is you have more workers' comp claims and the reason is because people get laid off and just before they get laid off they have a back injury or something. So there's going to be an increase in loss ratios and the one line of insurance and you get it from my remarks that is the most competitive, country-wide is Workers' Compensation. So once that line starts to turn, then a lot of things happen.

So. (inaudible) We've seen some workers' comp companies and disability companies say they don't think their claims are economically sensitive. This will be the first time in my career.

Me too.

Cory, a couple of-- number of questions for you. My guess is if we kind of looked at the flattish to down pricing environment, that's going to imply that we're going to see some further margin pressure in 2009. That's one. Two, any thoughts on the contingent commission outlook for '09? And three, maybe give us current run rate for '09 amortization and separately depreciation. Thanks.

Well, the margins, if the rate decreases continue the same level in the five to six, yes, there will be. As you get flatter to even close to flat or maybe just down a little bit, then I think the margins don't get compressed as much. So leave it at that. On the contingents if the loss ratio are going up, then that basically translates into less contingents into the future. And then third, the run rates on amortization because the acquisition activity has gone up, it will -- the current quarter, your current quarter is the best indicator of that going forward. So I'll leave it at that. And next quarter we'll kind of give an update of what our budget process kind of reflects.

Hey Cory, what were those fourth quarter run rates again for amortization and depreciation?

It will be very comparable to the third quarter here.

Okay. And so 2009 contingents given soft pricing and deteriorating profitability, assuming no future acquisitions, obviously, so would we look at contingents probably down 10%?

It's anybody's guess. I think they're going to be down because of the loss ratios, but --

that would --

we don't have our budget for contingents because it's very difficult to project it.

That's probably not unreasonable starting point; right?

If you're comfortable with it, I'm comfortable with it. (LAUGHTER).

Thanks very much.

Okay, David.

We can have only one more question because we have a 8:30 meeting we have to go to.

Last question will come from Keith Alexander of JP Morgan.

I'll make it easy on you guys. All of my questions have been answered.

Okay, we'll take one more question, then, if that's true.

We have [Scott Holeniac] from RBC Capital Markets.

Okay. Scott. You're on.

Okay. Good morning. Just wondering if you've seen a change at all they the seller's expectations, I guess over the past couple months and what kind of impact that's having on pricing at all for deal multiples, any impact at all there or is pricing pretty much the same as it was a quarter or two ago or is it sliding down noticeably?

We have noticed that there is some sliding down of the pricing. We've tried to be a factor in leading that and there's probably a couple deals that we prolonged them because we've gone out there with a multiple that we need to stay with or reducing it based upon expectations, so I think the -- a few of the brokers out there involved in the transaction business for agencies, their indication is they've seen some retrenchment of pricing and we've experienced that as well.

So is that just in the last month or two or is that just kind of -

No, I think it's probably the last-- maybe the last quarter to six months at most.

Okay. And then the program business was up nicely. Just wondering if you could elaborate on that, what kind of lines and territories you're seeing the growth there.

Well, the major growth, Scott, this is Powell, continues to be Proctor leads the clubhouse. If you look, Q1, Q2 and Q3, they had -- they're the area that's grown the most because as you know, that bank forced place cover, which is counter cyclical. So that and FIU has not only flattened, but it's gone up slightly. So those are the two areas right off the bat where you're seeing some of that.

Okay. And then finally, the Florida takeout companies buying more policies from Citizens, could you talk about the commission differential there? Are you getting a higher participation rate of that business and just what kind of impact in general are you seeing or do you expect to see from this? I would assume there will be more of these coming.

Well, first of all, as you probably know, in order to form a take-out company, you have to have $5 million through an investment group. So it's not that significant relative to the financial stability of an A-rated insurance company. They are not rated and we don't do business with carriers that are unrated, typically, and they do not have support of the Florida Insurance Guarantee Association. So there are policies being taken out by Citizens to takeout companies and in the event of an insolvency of one of those carriers where they have pushed policies into a takeout company, there is not an obligation on behalf of the agent because of the insolvency of that carrier.

Having said that, when Citizens pushes personal line accounts into one of those takeout companies, we will do business with them. Otherwise, we don't have assurances from the State of Florida based upon their financial stability or solvency going forward. So the premium-- or the commission, I'm sorry, is typically in line with the ENS marketplace, but that's a long-winded answer of saying we don't do a lot of business with takeout companies because of what I just said.

Fair enough. Thanks a lot.

Thank you. Okay. I think that does it. Thank you very much. Thank you, Elizabeth.

Thank you. This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.