Brown & Brown Inc (BRO) 2008 Q4 法說會逐字稿

Good morning, and welcome to the Brown & Brown, Inc. earnings conference call. Today's call is being recorded.

Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance and that such statements are intended to fall within the Safe Harbor provisions of the security 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 the number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and that actual results and events may differ from those indicated in this call. Such differences may be material. With that said, I will now turn the call over to Mr. Hyatt Brown, our Chairman and Chief Executive Officer.

Thank you, Rochelle and good morning, everyone. We have Powell Brown and Jim Henderson and Cory Walker here, and we're going to lead off with Cory for the financials.

Thanks, Hyatt. Our net income for the fourth quarter was $33.4 million, which was slightly more than the $33 million we earned in the fourth quarter of '07. Total revenues for the quarter were up 6.8% to $232.1 million versus the $217.2 million in the fourth quarter of '07. Commissions and fees for the quarter also increased by 7.8% or $16.7 million of net new commissions and fees. Total core commissions and fees, which excludes profit-sharing contingent commissions, for the fourth quarter of '08 increased $15.8 million over last year. However, within that net growth number is $25.7 million of revenue from acquisitions.

The good news is that we had another excellent year in terms of acquisitions. The bad news is the continued soft market and now the weaker economy that's created another quarter of negative internal growth in the core commissions and fees.

The net loss of $9.9 million of core commissions and fees on a same-store sales basis reflects a negative 4.7% overall internal growth rate, but that's an improvement from last quarter of negative 5.1%. The specific internal growth rates by business segment is listed in the press release, and Hyatt and Powell and Jim will talk about that in a little bit.

Moving to our investment income, we earned $1.7 million less in 2008 fourth quarter compared to the 2007 quarter and that's exclusively due to the financial market meltdown that caused us to move most of our cash investments into the safest available vehicles that carry little or no interest returns.

Other income was $1.3 million compared to $1.4 million last year, and again, most of these gains relate to sales of various books of businesses that we do in the normal course of operations.

Our pretax margins for the fourth quarter of '08 was 23.4% compared to last year's fourth-quarter margins of 24.6%. That's a reduction of 1.2 percentage points. As we have mentioned in previous quarterly earnings calls, as long as we are in a soft market that creates negative internal growth, you will see a slight margin compression.

Looking at the employee compensation and benefits, it increased 1.8 percentage points to 52.5% of total revenues, and that represents $11.7 million of net additional cost over the prior-year comparable quarter. The employee compensation and benefits relating to just the stand-alone acquisitions that we've done during '07 and '08 that weren't there in the comparable quarters, that accounted for $11.1 million of that $11.7 million.

Therefore, on a comparable same-store sales basis, we had an aggregate net increase in same-store sale compensation of only $631,000, which is really more than accounted for by just the fold-in acquisitions we did that go into the normal operations Brown & Brown offices that is not included in that $11.1 million I was talking about.

As of the end of '08, we did have 5,398 full-time equivalent employees. 489 of those employees came from the 2008 acquisitions. And so when you compare it to the 5,047 employees that we had at the beginning of the year, we actually had a net reduction of employees in the same -- in the offices that existed at both year ends of 138 employees.

The one area that we do not reduce is for new salaried producers, who we are constantly bringing into the Company to train. The cost of salaried producers generally increase each quarter and this quarter it was $1.3 million more than the fourth quarter of '07.

Our non-cash stock-based compensation cost was $1.8 million in the fourth quarter of '08, which is an increase of approximately $400,000, and that is due to the new performance stock plan grants and incentive stock options that were granted in February and April of this year.

In the current quarter, our other operating expenses decreased by 0.9 percentage points to 15.2% of total revenues, which represents approximately $400,000 in net additional cost over the prior-year quarter. Other operating expenses that again just relate to the stand-alone acquisitions, when you carve that out, those accounted for $3 million. Therefore, on a comparable same-store sales basis, we had a reduction of other operating expenses of $2.6 million.

Now that cost savings really was broad-based and across the board and it started from lowered T&E, less insurance costs, less supplies, et cetera, just across the board. And this is really the true benefit of a decentralized organization and just great leadership at each of our individual profit centers.

With this economic downturn, we really have focused on every nook and cranny of our business and how to operate more efficiently and our ability to grow every day. And so as we came -- coming out of this economic cycle, whenever it does occur, we are confident that we're going to come out strong, better and stronger than when we came into this cycle. Although it's been a painful process of going through this.

Moving on to amortization and depreciation expense, of course, that increase is due to increased level of acquisition activities we had this year. Our interest expense was slightly higher, as it has been the last three quarters, due to the increase, the $25 million borrowing that we did back in February of '08.

Our effective tax rate this year was 39% compared to about 38.4%, just a slight increase and that is just due to higher average state tax rates in the states that we operate in.

So therefore, if you look at the total year, our total revenues for the year were $977.6 million, which is up 1.9% over '07. And our pretax margin for the year was 27.9%, which is off 320 basis points from the 31.1% margin we had in '07. And of course, that does exclude the $18.7 million of gain that we had in '07 on our Rock-Tenn stock. So when you exclude that plus we did have an unusually large year of sales of business in '07 and that accounted for probably about $0.05 to $0.06 there. So really, when you take those two components out, this year's $1.17 is really only about a 4% decline from ongoing about $1.22 from last year. So with that summary, I'll just turn it back to Hyatt.

Thanks. Good report, Cory.

Looking into the retail business, and talking to our various profit centers and also attending sales meetings in profit centers, I hear the following question, which is a little different. And the question is, is that the best you can do? That is a question being asked to underwriters who are trying to either flat rates or increase rates slightly. So let's talk about Florida and then we will move around the country and the retail and the Powell will talk about programs and wholesale, et cetera.

Looking at the Daytona Jacksonville, let's say Upper East Coast, property tends to be flattish. Casualty is flattish; it's down just a little. Exposure units down 10 to 30% in some cases. New business, and this is true around the country -- if you are going to get a new account away from someone, you are going to have to be 15% to 25% below expiring. And there are situations where that occurs, because an account moves from let's say nonadmitted to admitted or there is some change in the exposure units and et cetera. So it may not be quite as virulent a downslope as you might think. Autos are flat.

The same thing going up into the Jacksonville across the northern tier of Florida, which is generally a more -- a less competitive area from the standpoint of prices either going up or going down. They have always been a little more stable in that area.

Exposures are down. Market for general liability is eroding, maybe 10% to 12%. Large condos are flat. The umbrella market is down about 10%.

Moving into Orlando and the spine of Florida, there is business still moving from nonadmitted to admitted. Renewal rates on casualty is fairly flattish, and maybe down to 5%. Exposure units, however, are down in the case of the contractors, are down substantially, although we are now starting to see where we were down 35% last year on a contractors/workers comp, and this year, maybe it's only down 10%.

Orlando Regional Airport offloadings were down 2% to 4% in the last couple of three months. No lines at the restaurants in central Florida.

Moving over to the Tampa, St. Pete area, if you look at Tampa/St. Pete all the way to Naples, you kind of see the same sort of thing, and so I'm going to kind of broad brush it just a little bit. In the Naples, let's go all the way to the southwest, renewals on property are flat to up 6% or 7%.

Citizens, country or statewide, is flattish unless the insured value is more than $10 million, and then the Citizens rates are up 2% to 3%. In Naples, exposures are down 20% to 30%. They have gone down -- they started going down later in Naples than they did in, for instance, the Fort Myers area.

Casualty is down 5% to flattish. General property, generally, is flattish. There's an awful lot of people there. There doesn't seem to be any reduction in the snowbirds and so they are spending money and that's good for that economy.

Fort Myers is a little bit different deal. The Citizens, of course, in that area, there's been some strange Citizens rates in a couple of counties. That's one of them, Lee County. As I mentioned, if it's above $10 million, it's up a little bit.

Property is down 4% to 5%. Condos, ex-wind, was a bottom of $0.08. Now, on certain condos with a particular company, believe it or not, pricing is $0.04, which is unbelievable. That won't last very long. That is ex-wind now.

Exposure units are down 10% to 15% to 20%. That doesn't mean they moderated in terms of what's happening. It just means we are catching up with last year. And the Lee County Airport was down about 14% in travelers in December.

Moving into Georgia, renewals on condos are flattish unless it's a frame condo and they move to a standard market, and then they are down 10% to 12%. There's a lot of competition, but it seems to be a little bit less virulent and it is kind of flattish on renewals.

If you look at the workers' compensation area, it is firming, anyplace from a plus 3% to a down 6%. Auto fleet are up a little bit -- 3%, maybe 2%, 3%, 4%. So there is some flattening. Good accounts. Countrywide -- they are commanding reduced prices.

Going into South Carolina, the renewals are soft. There is a difference in the economy in the last 90 days and that has to do I think with the fact that they are hooked to the auto industry there. Exposure units are down 10% to 40% if there's a contractor. And in some cases, if you have any kind of connection with the automobile business, those exposure units are down substantially.

Workers' comp, there is some tightening, meaning flattish. There is one company that decided to put the pedal to the metal, so that's kind of an outlier.

In the Spartanburg area, the economy has softened in the last 60 days. Exposures are down. If, on workers' comp, if the mod is 1 or better, then those prices are still going south. If it's 1 or more, then those prices are flat to up a little bit. Auto is down 5% to 10%.

In Virginia, over along the coast, Norfolk, marine is flat. Vanilla business is down 5% -- and that's not marine, the vanilla. It's just vanilla business is down 5% to 7%.

Workers' comp, rates on 4/1 are supposed to go up a little bit from a minus 2% to a plus 4%. The more difficult marine risks are kind of flat to maybe off 10%.

Getting into sort of middle Virginia, Manassas area, et cetera, rates are going down there 10% to 15%. They had not been doing that prior to really 90 days ago. It just has to do with the marketplace and it has to do with the fact that that area has a lot of regional companies.

So moving into Pennsylvania, eastern part of Pennsylvania, renewals are down a little bit, 4%, 5%. Some of them are flattish. Exposure units, however, again, 90 days ago, the economy really didn't seem to have too much of a negative impact. Now they are down 10% to 20%.

Condo markets, and this is different from what you're appearing elsewhere, these are frame, and joist and mason condos. And this excludes wind, the rates were $0.08 and now they seem to be moving up to $0.10. So that's -- you can say that's a 25% increase. Workers' comp pricing is flat. If you have the workers' comp that doesn't have a good loss ratio, you're going to get soft.

Moving on to New Jersey, renewals are kind of down 4%, 5%. They had been a little flat there to down 10% or 15%. So it's kind of a mixed bag. Exposures are now off a little more than they were 90 days ago. Workers' comp seems to be more aggressive in terms of pricing down 5% to 8%. And this would mean that in those cases they're going to have 5% to 8% that are getting managed care credits that they weren't getting before.

Umbrellas seem to be soft in the primary layers, but you get into the upper layers, where they are already pretty doggone pared down, those could be up maybe 5% to 10%.

Moving into upstate New York, Syracuse, Rochester, Buffalo, those areas did not experience a big up in the economy and they are not experiencing a big down now either. And a broad brush across northern New York State would be that those prices are flat to down 5%. Exposure units are down 5% to 10%. That's a little different, but not that much.

It's kind of interesting, workers' comp, there is a bunch of business that was in a trust in New York State, and a lot of those trusts are shutting down because of the joint and several liability and a couple other problems, and so we are writing more business. And we are doing pretty well in that area. The exposure units have changed, though in terms of upstate New York and they are down maybe 2% to 5% more than they were down 90 days ago.

Looking into the Connecticut area, renewals are flat to maybe down 8% -- 7%, 8%, 9%. It is a market where, in the Connecticut and Massachusetts area, companies are resisting going down on price, but in fact, if you get pushing and shoving, those are still continuing to go down 3% to 5%.

Looking over into the more center part of the United States, Illinois, Indiana, Wisconsin, Minnesota, a broad brush of that area is that renewals are down 2% to 5% to some are up 2% to 5%. Exposure units though, particularly in the Chicago area, seem to be going down much more rapidly from 10% to 25%.

Now again, when I'm talking about exposure units, don't forget that when I talk to various and sundry profit centers, they don't ever talk to me about the fact that there are some that are flat or even up. For instance, in social services, those tend to be flat. Governmental entities tend to be flat. Condominiums, the casualty piece is a small piece and so property values aren't going down. So this is sort of a mixed bag across a large retail book.

Looking into Oklahoma City, down into Texas around in rural Oklahoma, renewals in Oklahoma are still flattish, a little up in some cases, particularly if it involved trucking. The economy there is still good, and the reason it's good is because it's still the oil patch. And workers' comp in Oklahoma has gone up about 4% or 5%. Umbrellas are flat. The oil patch still has hasn't really started to react to the lower prices.

Looking down into Texas, going into the San Antonio area, renewals there are down 7% to 10%, maybe 12%. Workers' comp is very, very aggressive in that area of Texas, 12% to 18%. A couple of new -- a couple of companies who are more aggressive.

Looking into Louisiana, Citizens of Louisiana has taken a rate increase in Tier 1; that's south of I-10. So the nonadmitted companies there are flat to up 2% to 3%. Workers' comp is soft, 5% to 10% down. Tier 2, above I-10, prices are down about 5%. And the oil patch still seems to be going pretty good.

If you look into the West now, looking at Albuquerque, renewals are down about 15% there. Very aggressive price reductions in some respects. Workers' comp is off 10%. Exposures, flat to maybe plus 2% to 3%, except for contractors, down 10% to 15%.

Looking in the Denver, Colorado area, renewals are flat to down 5%. Workers' comp, minus 5% to 10%. Exposure units, down to 10% to maybe 12% to 15%. Some companies are 0%. Of course, all of this excludes -- when I'm talking about companies that are flattish on exposure units, I'm not including contractors. Aviation seems to be flat. There are a lot of aircraft that are on the market, as we all know.

Looking into Phoenix, now, Phoenix, Las Vegas, and the L.A. basin are the most competitive middle market places in our system as we speak. And, of course, there's a couple of double whammies, price is down and also exposure units down. So in the Phoenix area, renewals are down 10% to 15%. However, workers' comp rats are up a positive 4%. And there's a couple of other things happening in workers' comp that could be helpful to us there. Exposure units, though, are down, and it just depends on the kind of business, but 20% to 30% to 40% is not unusual.

In Las Vegas, the renewals there are either flat because of not good experience or down 10% to 12% if it's really good experience. Workers comp is a decrease of about 4%. There are some changes with companies using loss cost multipliers. So that makes it a little different. But if you look at vanilla business, that vanilla business is down 10% to 20%. There are a couple of new competitors there, companies.

In Orange County, renewals average is about 10% down. Not seeing much flattish. Workers' comp is still going down, believe it or not, 10% to 12%. Exposure units are down 10% to 15% except contractors, and contractors are all over the board.

Moving up into the Santa Barbara area, now, that's a little different situation. The market there, it seems to be a little flattish to maybe down 5% in terms of pricing on renewals. Workers' compensation, rates there are down 10% to up 2% to 3%. And exposure units aren't too bad, down 5% to 10%.

Moving up to the Seattle area, Boeing is just laying off 4,000 people. And of course, we all know about Washington Mutual. The renewals there are down 10% to 15%. That's a change from 90 days ago. Exposures, not too bad, down 5% to 10%. There is no workers' comp there because that's a monopolistic state. Marine is down 5%. And the travel business is basically kind of flat.

So with that, Powell, would you like to talk about programs and wholesale?

Sure. Thank you, Hyatt.

On transactional brokerage, cat property in Florida, rates are down slightly to flat. Underwriters are beginning to push back on additional underwriting data and some insureds are buying less limits. In the Gulf Coast region, rates are flat. Underwriters are pushing for underwriting data. Insureds seem to be trying to keep premiums flat -- they are either buying less limits are having higher deductibles.

Carolinas and Virginia, that's lagging slightly. Rates are down 5% to 10% and there continues to be standard market intrusion there. The quake market out in the West is trending up. Casualty across the country is very soft, down 10% to 25% and exposures are down. Professional liability is soft, down 5% to 20%, except if you are a financial institution or a mortgage-related company, where they are flat to up.

In binding authority in Florida, property is flat with slight firming. Casualty is flat -- rates are flat. Exposures are down, typically there. In the personal lines arena, the lowered value of homes, rates tend to be flat with Citizens and the takeout companies continuing to be very competitive. And the higher valued homes are firming somewhat. The binding authority in Florida for professional liability, rates are up slightly, but exposures are down.

In Texas, the rates are soft except the property rates in the Houston area. The mid-Atlantic and the Western United States, rates are soft.

In professional and national programs, it was up 4.8% for Q4. The lawyers' rates are down 5% to 10%. Dental rates are flat and other national -- other professional programs' rates are typically down 10% plus with exposures down as well. And special programs were up 7.8%. Public Entity rates across the country in Q4 are typically down 5% to 15%.

At FIU, wind rates were stable in Q4. Citizens is fairly consistent on their pricing. The ex-wind business continues to be under considerable pressure. And the Florida Hurricane Cat Fund is having some impact on capacity in Dade and Broward County at the present time.

Proctor Financial, which is our lender-placed or force-placed coverage for financial institutions, primarily banks, had a very good fourth quarter and really good new business year. As many of us know -- we all know that foreclosures are up, so the REO business is going to be up in that segment.

In services, we were up 4.1%. And United Self Insured Services was up in Q4. And NewQuest, our Medicare set-aside company, was the winner in services in Q4, being up just under 20%.

Finally, I would like to reiterate something that Cory said that we at corporate have allocated $10 million to recruit new production talent and that's really 50% of the total cost or $10 million would be borne at the local office level. So in combination, we have about $20 million allocated to recruit this new talent that is out there. Many of those people are from other industries, and we view this as a unique opportunity to get access to some very fine talent that we might not otherwise see in any other circumstance in the economy.

So with that in mind, I will turn it back over to you, Hyatt.

Thanks. Before I ask Jim to talk about the mergers and acquisitions, I would like to also include an insertion relative to employee benefits. As you all know, about 15% of our revenues, country-wide, are employee benefits. The norm is that a risk bearer will come in with a 9% to 15% up and then there is, of course, a lot of negotiation. Employee count is down in many areas. And so when you get into the employee benefit final revenue base, it's really down 2% to up let's say 4% or 5%. So it's kind of in that range. So, Jim, do you want to talk about M&A?

Thank you, Hyatt, and good morning, everyone.

The M&A activity continues to be a success story for the growth of our revenues and earnings. 2008 was the most active year in the Company's history in terms of the numbers of transactions with the closing of 45 agencies. In a recent publication, Brown & Brown was listed as representing 13.4% of all announced transactions on agency acquisitions in 2008.

In terms of purchase revenues, 2008 was the third-largest in company history with $115.4 million in forward annualized revenues. Forty-three of the 45 transactions were in the property and casualty and employee benefits retail agencies. Perhaps the most important quality of these acquisitions is that the earnings performance are in line with our expectations and margins comparable to the existing operations.

2008, we continued to strengthen our M&A transaction capability. We have added to our staff, increasing the number of individuals in our legal, financial, and quality control teams to handle an increased number of transactions, given the opportunity.

With respect to deal pricing, we have experienced a moderate improvement in pricing of agencies with the multiples of EBITDA in 2008 in the range of 5.5% to 6.5%. This compares to a range of some 6% to 7.5% that was in the market in 2006 and 2007.

With respect to other acquirers, the number of announced deals by banks and thrifts decreased in 2008 to some 41 transactions compared to 50 announced in '07 and 55 transactions by this group in '06. And, indeed, some banks have made decision to exit the agency business. In 2008, we did end up owning two different operations previously owned by banks.

The soft market conditions and a challenging economy have driven down the agency's top-line and target revenues and earnings. The result is that this is a very good point in the market cycle to purchase agency. Caution has and will be exercised to pay, though, for actual delivered revenues.

My last comment on the M&A is that in the current environment, cash is king. Our higher margins and resulting cash flow is a perfect companion to our long-standing M&A program. In 2008, we made cash payments of $263 million on acquisitions. $238 million of those payments was funded from operations with only $25 million from new, borrowed funds. With substantial cash flows and substantial lines of credit, we have adequate dry power to continue to finance our acquisition program.

With those comments, I will turn it back over to Hyatt for wrap-up and then open for questions.

Thanks, Jim. Good report. Looking into the future, anybody's guess is what's going to happen on the exposure units. The economy is a question mark, and we don't know how to forecast the economy.

As regards market discipline, that seems to be firming. And there is another little piece of that that is going to have an impact. And that is that the regional companies, and particularly those that are kind of in the middle part of the United States, have had some cat losses that they did not expect and that were greater by some sort of multiple than any other year in recent history. So that has caused some oops kind of things, and therefore, there is a feeling maybe this is a good time to be a little more conservative. So we will see how all that works out.

Acquisition opportunities, there seems to be a lot of those, and the economy is driving some of them. But others are just looking to join a middle market firm that has an excellent record, and that they identify with our core values.

So we are feeling pretty good. This coming year is going to be a difficult year, but so what. Having said that, we will open up, Rochelle, the question-and-answer period.

(Operator Instructions). Mark Hughes, SunTrust.

Thank you very much. What do you think the effect in Florida will be from State Farm pulling out? And then what are the prospects for Citizens raising rates in 2010?

Well, number one, the pulling out of State Farm has caused a lot of turmoil. We are getting, as everybody is, lots and lots of phone calls from our rate State Farm policyholders. And we do have some capacity. Although, a lot of business is going to go, by definition, into some of the takeout companies that substantially higher rates than what are being currently charged by State Farm. Now, currently, the situation is that we think that the Citizens is going to raise rates 10% in '10, 10% in '11, and 10% in '12. That's not done yet. So, we will see.

Now, there is a substantial angst now occurring in Florida among the bankers of Florida for the simple reason that it does not appear, and I guess Jim can talk to this a little later in our teleconference, there is a substantial fear that by having more and more homes and other properties go into Citizens and the fact that the state currently probably can't raise the money to pay for a bad hurricane, then what happens to the banks who our kind of holding the bag out there, waiting for someone to pay them?

So, we have a little bit of angst going on. The pull-out of State Farm, I think, is going to occur over a two-year period. I haven't really found out and I'm not sure exactly who knows about that yet, but it's not like tomorrow, they're all gone. It's going to be phased out.

And then, if you could sort of aggregate your comments from across the country, what do you think the impact from rates versus exposure units was in the quarter, when you look at your organic growth?

Well, if I had to guess, and we don't have a statistical ability to get into that, I would say that across the country, exposure units were a greater impact than rates.

Thank you.

Matthew Heimermann, JPMorgan.

Hi, this is actually Keith Alexander. My first question is, how would the proposed changes to the FHCF impact your company over the next year?

Okay, you want to take that?

Well, the Hurricane Cat Fund is an increase of some $29 billion with a tickle layer over $30 billion. Discovery is that now that likely the state of that unit could not borrow funds to match its obligations in the short term to the companies it's reinsuring. So with that, there's discussions about possibly reducing the Capacity Cat Fund back to a level, which in fact can be bonded and can be supported so the carriers know exactly where they are at. That component likely represents an increase in rates in the state of Florida to achieve that. So, the cycle there is that the governor specifically has indicated he is not happy about that outcome with it.

So, whether -- it is unlikely that the Cat Fund, with the total level of capacity offered, cannot offer immediate liquidity to the reinsurers on the current structure. So, different avenues is looked at as to either additional assessment capability or prefunding to provide that capability.

So, in the meantime, it would appear that the pricing would maybe have to go up some in order to deal with removing capacity currently offered by the Cat Fund in the longer term.

Okay. And that last quarter, you guys mentioned that looking at '09, you're starting to get a little bit better of a rosy picture. Is there any change to your view as things sit now?

I think going back -- this is Hyatt, Keith. Going back all the way till January of '08, we kind of thought by year end, the pricing would firm, and therefore, the market would become a little more favorable. Pricing has firmed a little. But, the exposure units are way down relative to whatever we thought was going to occur.

Looking into '09, we think it's going to be a tough year. But, strange things happen, and, what's going to happen in the economy? Well, will the stimulus package have effect the last quarter of the year? Gosh, anybody's guess is as good as ours. So whatever it is, we are prepared to handle it.

Okay. And my next question is about the program business, which seems to be a bright spot. Can you tell me briefly what trends are driving this business?

Powell, you want to talk about that?

Sure, Keith. When you really get right down to it, it is selling more business, when you get right down to it. And, as I said earlier, the leader in the clubhouse has been Proctor Financial, which is somewhat countercyclical, as we've talked about in past earnings calls, relative to a lot of the forced place business. But really, in all the programs, both professional and special programs, it's selling more business and the winner is Proctor Financial.

I think also, in some of our program business, the units, the actual businesses are smaller. For instance, in the dental area, the average premium for a dental package is $2800 to $3000. That's kind of hard for someone to get at in terms of competition. And the pricing has been sort of flat. It was down 10% last year but it's flat this year. So that's another component. But every one of the programs, as Powell said, has got to grow and they are, in many cases, most cases.

All right. Great. Thanks for that, guys.

Eli Fleminger, Stifel Nicolaus.

The $20 million you have allocated for, plus the recruitment, about how much of that have you already recognized in your income statement?

Well we've --

All of it.

Well we recognize that as we expense it, and we're talking about prospectively, we've always had a pretty aggressive recruitment program. One of the things that we are finding today is that there are very good people from other businesses that are available to us, who already have business experience. They're just not in the insurance business. So we find that as a very fertile hunting around.

Do you expect to expense more than that in the first half of '09?

Well, we're going to use it up and even exceed that based on our ability to acquire those people. And of course, this is a country-wide sort of recruitment. It varies by location based on the size of the location and the ability for that location to mentor new people. We just don't bring in people and drop them. There is a training program. We have ramped up two additional Brown & Brown Universities. We have one in Orlando, Tom [Fenwal] is responsible for. We now have one in Syracuse, New York, that Bob [Messina] is responsible for. And we, this year, recently cranked up one in Orange, California, where Mark [Zahorian] is responsible.

So, we're trying to make doggone sure that when we bring in these quality people, that we give them an injection very quickly of A, the culture; B, what you need to learn and how you need to learn in order to be a competent insurance person; and then C, getting them used to soliciting business, which is, in some cases, the most difficult part.

Okay, another question. I was wondering if you could speak a little bit about your outlook for contingents in 2009 and any contingency shift from 1Q '09 to 4Q '08?

Well, number one, contingents are contingents. And we don't know what they are going to be. We think they're probably going to be okay. Cory, do we know of any shifting? I don't think we do, do we?

No. If anything, maybe the fourth quarter will be a little bit less than what we had this fourth quarter. And then, of course, the question is, I think the first quarter of last year, we had a pretty good amount come in. That could potentially be a little bit less.

Okay. And just lastly, can you speak a little bit about the declining payrolls and policy cancellations on your reserve for commission refunds and what are you anticipating for 2009?

No, you know, our reserve is relatively conservative approach. We take an actual four-quarter running cancellation amount. And, so I don't really see that significantly change. And if it does change, it changed slightly over a quarter. I think it will be interesting for you to compare our level of reserve to some of our competitors, and I think you'll see that it's pretty conservative. So I don't think you'll see a big change for us.

Thank you very much.

Nik Fisken, Stephens, Inc.

Listening to all the exposure unit talk on the call, is it -- would you think that internal growth can be better in '09 versus '08?

That's anybody's call. We don't really know. Maybe, it might be a little better, but that's a maybe. And the thing that is a question mark in our minds is how quickly is the stimulus plan going to start to stimulate.

And on the earnings front, you guys are basically down a little bit '08 versus '07 on that apples to apples that Cory gave. How about an outlook for '09? It appears as though it's going to be tough to have earnings flat or up.

Of course, we don't really know, but I think -- haven't you estimated $1.12?

Correct.

Okay, well, everybody's got to save their money and take their choice, and you all are the ones that are really very capable of figuring it out. And we're just going to do what we are going to do.

And can you give us some commentary around Florida workers' comp?

Yes. The reason for that strange thing happening, Nik, is that the Supreme Court overturned a portion of the law having to do with the involvement of the plaintiff's bar. And now the plaintiff's bar is back in with all kinds of opportunities and that is going to force losses up. And so, we think that the rates are going to go up 6% to 7% as of April 1 based on that change in the law. But, it hasn't happened yet. We're not there yet.

And then lastly, on pricing, we keep on hearing from the underwriters that pricing is improving, but we really haven't really seen it through your commentary, Hyatt. What would be your response to all these carriers saying that pricing is getting better?

Well, you know, with what you -- what they don't tell you, and you already know this, Nik, is that they only talk about the pricing on what they renewed; they don't talk about the pricing on what they lost.

And secondly, on a new account, where they discounted it 20% or 25%, less than a renewal that's sitting right beside it, they don't give you that comparison either because it's a brand-new piece of business. So the answer is, they are trying to be more disciplined. There is no question about that. And in some places, yes, it is having an impact. It is probably -- we never had as big a down-swoop in some of the less metropolitan areas in terms of pricing. And so we're not having this big pressure up. So there is greater stability in some areas.

And, of course, what I think is sitting out there, I've always believed that when you had a downturn in the economy, that you get an increase in workers' comp losses. And so far, that hasn't shown up or at least it hasn't been reflected in pricing. I think that's going to be something that's going to hit the risk bearers in the back of the head, and it happens almost overnight. And they say my golly, all of a sudden we have these awful losses, and then rates kind of go awry. So that's the area that I think is going to be the most sensitive in the next 12 months to maybe 15 months.

Thanks.

Scott [Heliniak], RBC Capital Markets.

Just a quick question to you about the commentary you made around the increase in the budgets to hire more internally. Just wondering if you could talk about kind of any areas of focus there, geography-wise. And is that really going to affect your M&A plans? In other words, are you going to allocate more toward internal and pull back on acquisitions? Or would you be able to do both, do you feel?

Scott, this is Powell. The answer is yes, we can do both and no, it doesn't impact our M&A plans. We don't really have a regional specific plan on the allocation of those funds. We are in the talent business, and we want to get it wherever we can get it into our system and bring high-quality people into the team. And so we are not -- I would want to clarify -- we're not out looking for teams of people from other insurance brokers. That's not our style' I know you are aware of that.

But we are looking -- these are people -- many of them have significant work experience in other industries, who understands sales and understand about building and breaking relationships, and we believe that they have talent and we want to bring them on our team and get them on the street selling insurance.

So, in summary, no, it doesn't impact our M&A ability. Two, it's not a regional thing. And three, it's all about talent and we're not out searching for people from other firms.

Okay. So you still basically -- the outlook for M&A is kind of unchanged from the last quarter then, still pretty optimistic about what you are going to do this year?

Correct.

All right. Just one other question too. The reduction you talked about in full-time employees, was that -- you sort of evenly weighted throughout the year. Did you see more in the fourth quarter as the economy started to slow down? Or was that just kind of -- based on the acquisitions you made?

It's not based on acquisitions. Those were on offices that were here both years. That's a gradual process that occurs every month as each one of our leaders at our profit centers look at their operations and try to become more efficient. And a lot of -- I would suspect that the majority of those are just through attrition, where people have left for a variety of reasons. And the profit center leader and their department leaders have kind of made the choice to say hey, during this tough time, let's just see if we can do without that one person that left and we will pull together and you take this and you take that and they just become more efficient. So that's really where it comes from.

Okay, makes sense.

Scott, this is Jim. I guess a tag on that is that as the top line continues to receive pressure on growth, in fact, we go back and really take a look at the budget on a quarterly basis or sometimes monthly, and then readdress people and operations and business segments based upon the revenue base there. So this environment really mandates that we go back and do this even more frequently during the year in terms of assessing redundant staff.

Okay. And then just one final question. I'm just wondering, are you seeing a lot of customers just drop coverage altogether? What kind of impact have you seen in the fourth quarter? Have you seen much of that at all?

No, we've had some bankruptcies, just like everybody has, but it's not that broad-based. We are -- when you say drop coverage, there are some people who have had umbrellas that have gone from $10 million to $5 million, that sort of thing, but that's not substantial.

The other thing is the exposure units, if a person has a payroll of let's say $2 million and that payroll is estimated for this coming year at $1.5 million, then basically, the premium, that's workers' comp I'm thinking of, probably is going to be about 25% less. However, one of the things that we are, and I'm sure you know this, we are very, very sensitive to Accounts Receivable, and we have not had an increase particularly in our Accounts Receivable. Now we're watching them closely, but it just hasn't happened. And, of course, for any company where they give extended terms, that -- this kind of a marketplace is pretty difficult. We don't do that. We finance insurance premiums when people can't pay them and those are financed without recourse to Brown & Brown.

All right. Thanks for your answers.

Mike Grasher, Piper Jaffray.

Just one question I guess with everything else being addressed. The M&A pricing, Jim, you spoke to a little bit, I think you said 5.5 to 6.5 times. What's the rest of the market looking like? Or maybe you can talk a little bit more about the competitive nature of the deals?

Well, it seems to be less players out there. Mike, this offering numbers that really are just outliers when banks made a big push to get into the business, they were really paying extraordinary numbers for our foundation agencies to establish a home base. And then likewise, the venture capital money paid extraordinary multiples to establish their base.

Those two components have -- are pretty much out of the system right now, so you are back to more traditional buyers at agencies, the public brokers and then regionals and local fold-in deals. And that multiple has backed off without those outliers being in the market.

So, obviously we're very cautious on the pricing. And we have been able to -- we've been traditionally a 6 times player. In '06, '07, we had to go a little above that, 6% to 6.5%. We stopped there in our pricing to transactions. We're now able to get back to more of our traditional pricing.

That's helpful. Thanks very much. And then Powell, I don't know if anybody had asked earlier or not, but any thoughts around or I guess information on the impact that AIG maybe is having in the marketplace right now? I know it's something we spoke about last quarter, but I don't know that anybody has said anything right now.

Sure. Mike, we hear, as you probably do, about these outliers, where they are being very, very competitive. We hear about that periodically, but we are not seeing them doing something that is unusual or different for AIG. They are a strong competitor. They are, in certain areas of their business, evaluating the limits that they are able to put up, where, in the past, they may have put up a $50 million umbrella limit. They may be evaluating that and saying they can only put up $25 million. Or if in property historically they put up $30 million or $25 million, maybe they're putting up $15 million. Those are in certain instances.

But they continue to be very competitive. Obviously, there have been some people that have decided to leave and go to other carriers, but they have a lot of good people that are still on that team, and we continue to do business with them. Not a lot of change, Mike, since we talked in Q3 or after Q3 on AIG.

So, if I understood you correctly, it sounds like the transfer of talent equates to the transfer of risk.

The transfer of talent presents more options ultimately for our clients, which is, we want to make sure and give our clients options. Some of those people, when they go to these new places, are not yet so-called up and running with their suite of products. So some of that will come online later in the year.

But AIG is going to have their own position on risk and how much they want to retain. And then some of that is going to be driven by them and some of that is going to be driven by the market. And then there are these people that have gone to other places that will also drive options in the market, which many of those will be competing against AIG, we believe.

Fair enough. Thanks very much.

Steven Labbe, Langen McAlenney.

No, sorry, all my questions have been answered. Thanks.

There are no further questions.

Okay. Thank you very much, Rochelle, and thank you very much, everyone, and we will be talking to you in April. Bye.

That will conclude today's call. We thank you for your participation.