Brown & Brown Inc (BRO) 2009 Q1 法說會逐字稿

(Operator Instructions).

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 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 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. Please go ahead, sir.

Thank you, Vicky, and good morning, everyone. Powell is here, Jim and Cory. Powell is going to do National Retail and Western Retail. Jim is going to review brokerage program services and M&A. Cory is going to do his normal financial report, and then we'll have a little conclusion. So first of all, let's lead off with Cory for a financial report.

Thanks, Hyatt. We had a good quarter, considering the continuation of the very soft insurance market environment that we are in and the slowdown in the economy.

Our net income for the first quarter of '09 was $48 million, which was down 7.2% from last year. Correspondingly, our net income per share for the quarter was $0.34, down 8.1% from the $0.37 we earned in the first quarter of '08.

From a revenue standpoint, our commissions and fees for the quarter increased 4.1% to $264 million. That's up from the $253.5 million we earned in the first quarter of last year. Included in the press release is our normal table that summarizes our total growth rates and the internal growth rates from our core commissions and fees.

The first big story of the quarter was that we only received $29.9 million of profit sharing contingent commissions, which represents a decrease of approximately $6.4 million from the $36.3 million that we received last year in first quarter. Of this $6.4 million decrease, $5.7 million related to reduced profit-sharing commissions in the retail division. $4.3 million was a reduction in profit-sharing commissions in Wholesale Brokerage. But then in our National Programs division, we did have an increase in contingent commissions of $3.6 million.

Our best estimate of how much profit-sharing continued commissions we received for the remaining nine months of '09 is between $14 million to $16 million, is our best guess. How that would fall on a quarterly basis, we would estimate that we would probably get about $3 million to $4 million in the second quarter, somewhere around $8 million to $9 million in the third quarter and maybe another $3 million and $4 million in the fourth quarter.

Now looking at the internal growth schedule, we had a negative internal growth rate of 2.2%. Our total core commissions and fees for the quarter increased 8.7% or $18.7 million in total new commissions and fees. However, within that net number, we had $23.4 million of revenues that came from acquisitions. That means that we had $4.7 million less commissions and fee revenues on a same-store sales basis.

Proctor Financial, in our special programs division, was a highlight, and they had $19.8 million in core commissions and fees in the current quarter versus $9.3 million in 2008 first quarter. And that's a $10.5 million increase with Proctor alone.

Hyatt, Powell and Jim will talk about the activities in each of these business segments in a minute.

Well moving on to our investment income, it decreased by $1.7 million, which is due to the significant reduction in investment yields in the current economic market. For our other income, we had an aggregate loss this quarter of $700,000. That's compared to a gain last year of $1.2 million in the first quarter of '08. Both the loss in the current year and the gain in the prior year is the result of sales of certain books of businesses that we do periodically.

So again in summary, between our reduced contingent profit sharing commissions revenues and the net reduction in our investment and other revenues, we lost, effectively, $9.5 million of our revenue. And this does impact the expense ratios as a percentage of total revenues.

So then now, going down and looking at these expense ratios and expenses and our pretax margins, our pretax margin for the first quarter of '09 was 30.1% compared to our pretax margin of 32.9% in the first quarter of '08. With that said, however, if you exclude the impact of the less contingent commissions, of which approximately 85% of it falls to the pretax line, and the investment income and other income, which does not impact our normal operating expenses, our current pretax margin really is only about 11 basis points lower than the first quarter of '08.

Looking at employee compensation and benefits in the first quarter of '09, it increased 5.1% while the related commissions and fee revenues increased 4.1%. The total increase in employee compensation and benefit expense in the first quarter of 2009 over the comparable quarter in '08 was approximately $6.1 million in costs.

Of this net additional cost, we had $9.9 million that came directly from our stand-alone acquisitions that we've completed since the first quarter of last year. Therefore, when you exclude the impact of these stand-alone acquisitions, we actually had$3.8 million less compensation on a same-store sales basis, which really came from lower profit center bonuses, lower salaries, and then less producer commission expense.

In addition to these lower bonuses that were given out at the end of last year, our top 200 leaders, which are really the corporate executives and our profit center leaders, had no salary increases from 2008.

Our non-cash stock-based compensation cost was down slightly from the prior year. So for the whole year, we expect that the total cost will be approximately the same as the 2008 cost, which was about $7.5 million. On our other operating expenses, it increased 14.9% over the 2008 quarter, and that represents about $4.7 million of additional net costs. So again, taking the stand-alone acquisitions, they added about $2.4 million of new costs for the quarter. And, therefore, our existing same-store offices actually had an increase in their expenses by $2.3 million.

$1.6 million of that increase came from higher E&O insurance claims activity and reserve balances. $950,000 came about because of increased bad debt expense. While a lot of the other expenses pretty much just netted out to zero.

Amortization and depreciation increased $1.4 million over last year's first quarter and that was due just as an increased number of acquisitions since the second quarter of last year. Our interest expense increased about $200,000, and that just reflects the net increase in costs due to the $25 million that we borrowed from our bond facility back in February of last year, so there is one additional month of interest this year. And then our effective tax rate for 2009 is currently expected to run about 39.3%.

And so really just to conclude, we ended up with $48 million of net income and that's about a 7.2% decrease from last year. And that really finishes the financial overview, and I will just turn it back to Hyatt.

Very good. Thanks, Cory. Good report.

Now let's talk about Florida retail. Last quarter of last year, fourth quarter, we were down a negative 9.7, and now we're down a negative 11.6, so that's almost 2% worse.

Looking at the various geographic groupings, if you were going to do that for insurance purposes in Florida, let's take North Florida, which is Jacksonville, Tallahassee, and west, maybe halfway to Pensacola. This is the most competitive part of Florida in terms of pricing. And one of the reasons is that actually Jacksonville is really west of Orlando; a lot of people don't realize that. And it is considered to be fairly hurricane free, hurricane potential there is much less. Renewals in that area are down, and this goes all the way out into west Florida, down 10% to 20% except on the water.

Property on the water is flattish. Admitted market property, now, some of that is now being written in that area, and, of course, that means that prices will go down 10% to 15% on property that is moving from non-admitted to admitted markets.

Also, rates are leveling out. Exposure units are down generally 10% to 20% and sometimes 30% except health care, and of course, property risks. There is pressure all around the state for lower appraisals on buildings, which, of course, reduces the amount of insurance, which reduces the price or the cost, I should say, to the owner.

Workers' comp went down 16% as of the rates as of January 1. But as of 4/1, they went back up 6% or 6.1%. But there is a bill in the Legislature now that would change that. And so whether or not it's going to pass or not, I'm not sure.

Looking then down sort of in the space coast, and that would be Daytona Beach, Volusia, etc., south really, a little farther north from Volusia down into Brevard, coastal properties south of St. Johns County, which is St. Augustine, is down 5% to up 5%, unless switching to admitted markets. Auto fleets, flat. Umbrellas, flat. Downdraft on new business was 15%. It's now 20% to 25%. That's a little different. Property on condos ex-wind was $0.08 to $0.09; it's now $0.04 to $0.05, if you can believe that. That's crazy.

And so exposure bases are down 10% to 35% or 40%, depending on what it is. Again, healthcare and certain others are not down. In Central Florida, there are certain manufacturers are not down either.

We are seeing layout credits, and this applies across the entire United States. Layout credits on fleets, which basically is where an individual company will lay up a third of their fleet and, therefore, they are getting the credit for the liability coverage.

In the Orlando, central spine of Florida, renewals are dropping 5% to 10. Exposure bases are off 20% to 30% to 40%, excepting in healthcare.

Property rates, though, are flattening. And one of the things that we are seeing in Florida is that there seems to be a greater intensity to write new business, and that means pricing is lower on new business, and a greater propensity to hold fast on renewals.

St. Pete, Tampa area, property renewals are flat to 5% up. There is one outlier company that's in that area that's doing some crazy quotes on property. We will talk about that. The workers comp exposures are down 10% to 20%. Umbrellas are up 5%.

Looking at the Sarasota, Fort Myers era area, property renewals are plus 5% to minus 5%; that sort of means flat. Except ex-wind, and the ex-wind there is going from $0.09 to $0.07.

Auto is flat to up maybe 5%. Condo is flat. Casualty is 10% to 20% down. Companies are pushing hard to flat rates for summer renewals. Exposure units, minus 10% to 35%. And, of course, you know workers' comp is down 16% and up 6%, so that's true state-wide.

Fort Lauderdale and Miami renewals, casualty is off 10% to 30%, more aggressive than it was 90 days ago. Auto fleets, most competitive now. That's different from the rest of the State. Renewal property is flat. Maybe up a little. One property company recently sent an e-mail and said as of 4/1, all property rates are going up 25%. Good luck on that. Some condo property is up maybe 2% to 5%. Umbrellas, not as soft as the casualty. Exposure units, payrolls, etc., are down 10% to 35%, and of course we are getting a lot of lay-up credits; that's sort of a way of life in Dayton and Broward County.

Employee benefits state-wide are sort of the same. The companies are moving in on renewals at 15% to 30% up. But then there's negotiations down 8% to 12%. And then some more changes in coverage, and, so it ends up being 3% to 7% increase before the employment list comes out, meaning if there are fewer employees, obviously, premiums going down. So the greatest reduction in employees and in Florida is in Dade and Lee County. And Lee County, of course, is Fort Myers. So that's sort of a potpourri of Florida and I'll turn it over to Powell to talk about National and Western.

Thank you, Hyatt. National Retail is down 5.8% and Western Retail down 15.9%. And I'd like to give a potpourri of comments around a bunch of offices around the country in the Southeast, the Atlanta, South Carolina area, property rates are flat, where GL rates on renewals, construction and non-construction are also flat. Exposure units there are down 10% to 50%.

In the automobile area, flat rates and exposures are down a little bit, maybe less than 10%. Workers' compensation rates are flat to down 10%. Nonconstruction payrolls are down 10% to 50%, and construction payrolls are -- I'm sorry, nonconstruction are down 10% to 15%. Construction payrolls are down 10% to 50%. The economy seems slightly worse in the Atlanta area than Q4.

In the Louisiana area, property rates are firming south of I-10. Multiple carriers are now participating on large schedules south of I-10, whereas there before, maybe there was only one carrier writing the whole schedule. It continues to be soft north of I-10.

GL rates are flat to down 5%. With the exposure units, nonconstruction are flat. Construction exposure units are down 10% to 20% and oil and gas is down 20+%.

Professional and liability, specifically in the nursing home arena, sees down -- rates down 5% to 10%. Marine is very competitive and the work comp arena is very soft in Louisiana.

In Houston, property inland actually in Texas is down 10%. But coastal property is flat with deductibles improving, meaning better terms and conditions. General liability and nonconstruction is flat and construction are flat for rates. Exposures are down 10% to 30% nonconstruction and down 50% or more in construction. Automobile rates are flat. Exposures are down 10% to 25%. Workers' compensation is soft, where payrolls are down 10% to 30%.

Inland, San Antonio sees property rates down zero to 5%. GL, nonconstruction is down 2% to 3%, and construction is down 5% to 7%. In rates, exposures are flat to up 2% to 3% in construction.

Automobile rates and exposures are flat. Workers' compensation rates are down 12% to 15%. Payrolls are flat to down 5%, maybe up a couple points in the construction area, interestingly enough.

In the Phoenix area, property rates are down 5%. General liability, nonconstruction, down 10% to 12%, and construction rates are down 10%. Exposures are down substantially there, 20+% in nonconstruction and down 30+% in construction.

Automobile rates are down about 15%. Exposure units are down 25%. Work comp, rates are flat to down 10%. The standard market is getting very competitive there. Exposures are down. Payroll is 10% to 40% and workers' compensation. The economy is worse in Phoenix than it is in Q4.

In the Denver area, property rates are down about 5%. In GL, rates are flat to down 5%, with exposures in nonconstruction down 10% to 30%. Your exposures in construction are down 50% to 70%. Automobile rates are down 5%. Whereas people are taking autos off their schedules, nonconstruction about down 15% and construction is down 30% to 50% or more.

Workers' compensation is down 15%. Payrolls, nonconstruction down 15% to 30% and construction is 40% to 50% plus. The economy seems to be similar now in Denver as it was in late December.

In Las Vegas, property rates are flat. General liability rates, construction are flat, and nonconstruction exposure units are down 10% to 30% in nonconstruction and 50% to 75% in construction. Automobile rates are flat to up. Exposure rates are down 20% to 30%.

Work comp rates are flat to down 5% and exposures are down up to 50% or more. Small business is getting really hit hard. Number of small businesses in that area are going out of business.

In the Orange County, California area, property rates continue to go down 20%, 25%. GL rates are down 15% to 30% in construction and nonconstruction. Exposure units are down 30% to 50%. Automobile down 5% to 10% in rates and work comp rates are down 15% to 25%.

Just up the road in Santa Barbara, property rates are flat to down 5%. General liability rates are flat to slightly up in both construction and nonconstruction, while exposures are down 10% to 15%.

Automobile rates are down 10%. Exposure units are flat. Work comp is flat to down 10%. And exposure units are down 10% to 15%. The economy is slightly down from Q4 in Santa Barbara.

In Portland, general liability rates are flat to down 8%. Exposure units for nonconstruction are down 10% to 20% and construction exposures are down 20% to 50%. Automobile is flat to down 5%. And rates, workers' compensation is very competitive and their exposure units in comp payrolls are down 0 to 20%.

In the Seattle area, property is flat. General liability for construction and nonconstruction is flat to down 10%. And rates, exposures, down 10% or a little more in nonconstruction and down 30% to 40% in construction exposures. Auto is flat. Rates with exposures, down 10% or more.

In the Midwest, in Indianapolis and Michigan, and we'll start with Indi. Property is up 5% to down 20, depending on the experience of the risk. GL is similar, up 5% to down 20%. Nonconstruction exposure units are down 15%. Construction exposure units are down 40+%. In the autos, they are up 5% to down 20%, and exposure units are down 20% to 30%.

Work comp rates are up with exposure units or payrolls down 10% in nonconstruction and 40+% in construction. The economy is down but better than in December in Indianapolis.

In Michigan, the economy rolled off another cliff in Q1. Property was flat to down 15%. GL rate -- those were rates. GL rates were flat to down 15%, but exposures were down 25+%. Automobile rates were flat with exposures down 25+%. All of residential construction is effectively gone in the Michigan -- Fenton, Michigan and Detroit area.

Into the Northeast, Hartford, property rates are down 5%. GL rates are down 5% with exposure units down 10% to 15%. Automobile rates are flat to down 15% with exposures down 20%. Work comp rates are down 5% to 10% with exposure units down 15%. The economy continues to slow with layoffs continuing.

In Rochester, General liability rates are down 5% to 10%. And nonconstruction exposures are flat to slightly down. Construction exposures are flat to slightly up. Automobile rates are flat. Work comp is very competitive in upstate New York with exposures flat to down 10%.

In New Jersey, GL rates are down zero to 5% with exposures down 20% to 40%. Automobile rates are down 5+%. Work comp is flattish with exposures down 20% plus. In summary there, the economy continues to get worse in areas like the Midwest and the Northeast relative to our view of the business.

In employee benefits, as Hyatt mentioned earlier, in the Northeast, we are seeing covered lives flat to down 6%, 10% with rates probably up, five% to 9%, 5% to 10%. And in the West, covered lives are flat to down 10% plus. These are all averages, obviously, with rates up 0 to 15%.

So with that, I will turn it over to Jim Henderson for the rest of the presentation.

Thank you, Powell, and good morning, everyone. I will comment on the nonretail operations, including the brokerage division, services and the programs division, as well as comments on the M&A activity.

First on brokerage, brokerage accounts for some 18% of our total Company revenues. For the quarter, the organic revenues for this division, the profit centers, was the negative number 8.5%, showing improvement from the negative 14.5% experience in the full year 2008. This improvement is attributable to some stability of rates improvements, especially on property, masked in part by continued challenges on the economic side for exposure units.

Our brokerage business is comprised of binding authority offices, about two thirds of our brokerage business on small risk and then transactional offices, the more medium and larger accounts representing one third. These comments specifically relate to binding authority. Many of the companies are making attempts to stabilize property prices on the binding authority with mixed results, except for coastal Texas and with lesser or older construction, where pricing has increased.

New business with no losses can command rate reductions on new players competing on the account. We had experienced an increased number of risks, where the negative economic units are trumping the rate change to reduce premium by as much as 20% to 30%. We have experienced a greater than usual number of midterm cancellations, further exacerbating organic growth, due not only to reduction in the current period, but reflecting current portions from the prior period as well, and resulting in reduction in overall premium and commission income.

Florida condo business is still very competitive. However, we have had success on new or better-built properties, and competition is still plentiful on condos.

In Texas, Louisiana and Oklahoma, binding authority business is stabilizing compared to 2008. Property rates in Harris County, Texas, for example, are up some 30% to 35%, representing the results of the storms last year. And wind dedcutibles are up from 1% to 2% to 3% to 5%.

On California, Colorado and Oregon, we continue to experience a softening market with aggressive admitted markets taking business from the non-admitted sector and very limited flow of business from contractors.

Now with respect to the transactional offices, the medium and larger accounts. For layered property accounts, carriers are seeking rate increases and are committing reduced lines, hoping to come back in on the risk of upper layer and pick up additional premium by mixing their layer participation with smaller layers.

At the recent CIAB wholesalers conference, several carriers were very expressive in meetings, both public and nonpublic, on the need for additional rate to cover their increased losses on combined ratios and their cat reinsurance costs. I certainly hope they're able to secure those increases. Some umbrella pricing has experienced rate increases, and we continue to expect further hardening in this area. Most other liability lines that continue under rate pressure. Financial institutions are experiencing increased pricing, especially for executive risk coverage.

With respect to the services division, they just keep on keeping on. This division continues to outperform peers and generated a positive organic growth of 1.9% for the quarter.

And now onto the Programs division. This division accounts for some 19% of our revenue. Both the professional and the special programs business units generated a positive organic growth in the first quarter and combined for a 27.6% organic growth for the two units combined.

On professional program offices, dental rates were flat, stable, and were able to generate small organic growth through additional sales. On the large professional rates, continue under pressure but are firming compared to 2008. There are some new players in this product line, as well.

And now to the special program offices, the leader in the clubhouse and the most outstanding performer for the quarter is Proctor Financial. They continue to be benefited by the increased coverage for bank force place real estate programs and generated results that Cory reviewed earlier. Fourteen of our 17 profit centers in special programs met their revenue budgets for the quarter ending first quarter of 2009.

For public entity coverage, we continue to experience a very competitive market, with some new players entering this sector. Schools, counties, and cities are looking at ways to deal with decreased tax revenues, and where possible, to spend less on insurance.

For our parcel insurance plan unit, we have experienced a slight increase in rates. However, this has trumped more than that number by a reduction in the shipping units resulting in less revenues. This unit is an interesting barometer of middle market business. And the number of shipments in the first quarter of 2009 is down 17% compared to the prior years.

Our sports and recreation unit, American Specialty, continues to encounter price reductions coupled with reduced exposure units. We are pleased with our expansion of lines of coverage that we feel can help grow the top line for this business unit.

Now I will turn my comments to the M&A activity. M&A continues as a core strength of Brown & Brown, helping to add consistently to the earnings of the Company. We're pleased with the four new agencies that joined us in the first quarter. Although this was not a robust quarter, we are very optimistic on the prospects from our promising inventory of high-quality agencies. We continue to experience some improvement, to our benefit, and the pricing of deals, with multiples returning closer to historic ranges.

For 2008 and first quarter 2009, we were able to fund substantially all of our acquisition activity with internally-generated cash. Our industry-leading cash flow margins provide a low-cost source of funding acquisitions. In addition, we maintain an ample line of credit to do a larger deal if we choose to do so.

We are exercising caution in the current economic environment to purchase deliverable revenues and earnings. Historical performance may not be the best indication of the current value if there is or might be a significant drop in revenues. Our long-standing valuation model is to purchase on actual delivered earnings. It served us in the past; it will serve us tomorrow.

With that, I turn it back to Hyatt for a wrap-up and for Q&A.

Thanks, Jim. Very good report. Conclusions. First, Midwest and Northeast, the economy is worse than 90 days ago. Secondly, rates except on new business, there is less of a downdraft. Third, pushback on the pricing is more aggressive from almost every carrier.

The outlook for the rest of the year is more of the same until '10. So with that, Vicky, we will turn it back to you to open the floor for questions.

(Operator Instructions). David Lewis, Raymond James.

Thank you and good morning. Hyatt, you just made a comment that the push-back is greater on rate reductions. So are you saying that people are trying to firm up rates?

Yes, they are. They are pushing harder. And that's slowing it down a little bit. That's why we're getting the flattening thing.

Right. Willis made some comments yesterday that they think the market is right to turn hard. However, the competitors have been looking to pick up share from the financially weaker companies like AIG. And, therefore, some are remaining competitive on price to kind of pick up share in the short run here. One, are you seeing that in your book? And if so, do you think this process is kind of a winding down here over the next six or so months?

Well, number one, there's a difference between push-back on renewals and the bloodthirsty hunt for new accounts. And so as you could hear from what Powell's report was and my report in the Retail area, and Jim's report in the wholesale area, if it's a new piece of business, and it kind of fits the niche, then it is very competitive.

And to move -- and this is in the middle market retail now -- to move an account, unless there is some pain, and the pain would be a claim that wasn't adjudicated to the satisfaction of the insured, or some hooker in the coverage, something like that, unless one of those things occurs, then what we are seeing is very aggressive pricing. And I -- everybody talks about the fact that things are going to change next week and next month. And we think it's probably '10 before that happens.

Hopefully the earlier part.

Well maybe but --

Time will tell.

The bottom line is that there is a second piece of this. And if prices go up, I'm talking about rates now, then in many companies, what are they going to do relative to their insurance costs? They're going to reduce coverages because there's only a certain amount of dollars that they can afford to spend. So just rate increase doesn't mean that all of a sudden there's going to be a robust increase in the brokerage revenues.

I understand. Just one last question. Has there been any update on Citizens' proposal to raise rates roughly 10% per year during the 2010 through 2012 period on property?

Well, we've been following that pretty carefully and it is moving in both the House and the Senate. There's a lot of yanking and jerking going on. There is a portion of that bill which you are referring to, which has anyplace from a 5% to 10% rate increase the first year and then more the second year and they are supposed to get actuarily sound rates sometime after January 1 of '10. And none of this is supposed to occur until January 1 of '10.

But there is a second piece, and the second piece has to do with Florida Hurricane Cat Fund. There's two layers to the Cat Fund. The first layer is about $17 million, which is the front vision, which is the primary layer. The second layer is $12 billion, which is called the TICL layer. And TICL stands for Temporary Increase in Competitive Layer, Casualty Layer.

So the bottom line is that the bill all (technical difficulty) the TICL layer, the excess layer, over a period of three to four years.

Now, first of all, right now, if a bad hurricane occurred, the state really doesn't have a way of funding the TICL layer, unless they go to Washington and ask for a loan. It is thought that by scraping and yanking and jerking and the fact that this credit market is a little better, that the state could fund the primary layer, not for sure, but probably. And there A.M. Best and Demotech have indicated that they are going to downgrade companies who are going to require the TICL layer to fill out their reinsurance because they don't think the TICL layer is collectible. So there still very much -- it's very cloudy as to what is going to come out in the legislature.

There is a general feeling in the legislature that prices are going to have to go up in Citizens. And so no one really seems to disagree with that other than maybe some political kinds of discussions. But the question is, how quickly can it be done at a time when the economy is not good at all? So I think, I think, that there is going to be a bill passed that will allow rates to float up starting in '10.

That's very helpful. Thank you.

Mark Hughes, SunTrust.

What do you think the base level of contingents is? I see that the outlook for the balance of the year is flat to up slightly with Q2 through Q4 last year. Is that because of the distribution of the payments or is that flattening out perhaps?

Well, actually, I think it's going south. And so last year we had about $20 million in the last three quarters in round figures, and this year, we're guessing, somewhere between $14 million and $16 million. So what that is reflective is the fact that insurance carriers are not making as much money. It's pretty simple.

Okay. I must have gotten the numbers wrong on that. How much, at the end of the quarter, how much weaker, when you kind of take into account the economy and pricing, if you look at the trajectory through the quarter, how much weaker at the start of Q2 as opposed to the start of Q1?

How much weaker is the economy?

Yes, kind of the combination of the economy plus pricing?

Well, we are seeing downdrafts in the Northeast and Midwest that we hadn't seen. Those, I guess, Powell, would you say that of all the places where the economy seems to be the most stable, in terms of not as much of a downdraft, would be upstate New York? Would that be right?

Yes. I would also say the Pacific Northwest seemed to be immune until the end of Q4. And then into Q1, it really started down; and I'm talking about Portland, Seattle area.

Right.

But yes, I think that that's -- and it would be in pockets in upstate New York. It's not exclusively.

Right.

So I think, Mark, to answer your question, pricing is flattening, particularly on renewals and there is still very significant competition on new business around the country. But the economy is a bigger impact now than it probably was 90 days ago just in aggregate.

I think he's right.

Okay, thank you.

Mike Grasher, Piper Jaffray.

A question for Jim. At the end of your presentation, you kind of talked or spoke a little bit about the M&A activity in terms of the deliverable revenue and earnings. And the number of transactions in the quarter, four, versus I think 12 a year ago, is that the direct function of a change in terms of the reliable revenue and earnings stream that you are finding out there or comfortable with? Or is it more the pricing environment with regard to the sellers?

Well, I think the environment is, as described -- in other words, be cautious about what is there. But our acquisition activity is always lumpy. So the fact that there was more last year versus this year is not a special reflection upon either of those circumstances. There is a -- we probably talk to five or six, we get it down to probably two or three and we do probably one in terms of account, that ratio.

My comment on the revenue level is just the fact that we are being very cautious about buying what can be there, to try to answer your point, is that that particular characteristic has not stopped us doing some deals in the first quarter just because of that issue.

Okay. So then overall, the actual pricing environment has not changed materially in that regard in terms of what their expectations are on the sales side.

Well, I think there is maybe a little bit more risk that you leave on the part of the seller in case of looking at a low-end price or a top-end price. We'd probably reduce the low-end price there so that the seller can take some of that risk.

Okay. That is helpful. And then, Cory, I wanted to come back to you in terms of the commentary around that -- I think it was $9.9 million came from stand-alone acquisitions in the quarter. What was it relative to 1Q '08?

On stand-alone acquisitions?

Right.

You know what? You'd have to go back to the conference call. I don't recall off the top of my head. I mean, there would have been probably more so because we had a pretty active year in '07 and '08.

Okay. And then just I guess to follow up on that, the $3.8 million in terms of the comp and benefit, $3.8 million less than a year ago, if we take a step back and pull the $9.9 million out, is that about as -- is that, in terms of a run rate, about as good as we can get to? It doesn't seem like you can squeeze much more out of that on the comp and benefits side.

No. And you know, there is no direct -- that is the one important thing you have to understand about our decentralized culture, is there is no direct overall corporate dictate that we say we've got to do this. This is all being done individually by our profit center leaders.

Two of the components are tied to the operating profit, which are bonuses and producer commissions, okay? They are tied to the revenue stream and the earnings process. The other salaries are normal operational decisions made by our profit center leaders. And it may be a combination of not replacing somebody when somebody naturally leaves, or they have made some changes. So --

And what percent is that of the total in terms of just the salary?

Oh, the salary? I would estimate that is probably about 40% of the total.

Okay.

I think one other thing, Mike, that you might be aware of is we really have more pressure on our various profit centers to hire high-quality people. We have increased that, and we've increased the amount of money that is available to help finance them. And we are getting some very, very high-quality people who are coming from other businesses because the other businesses are not there, or they are in very substantial financial hurt.

So on the one side, we are being very careful about our operations. But on the other side, we are doggoned aggressive about being able to find good people. And anybody who is, in our opinion, a high-quality person, we are going to find a place to put them and then let them run up the ladder.

Okay. All right, thanks. That is helpful.

Dan Johnson, Citadel.

Two questions, if you would. Can you talk a little bit about the outlook for contingents the rest of the year in terms of quarterly distribution? And then on Proctor, the increase in the quarter, how much would you say was coming from, say, new accounts or new bank relationships versus just growth with the existing relationships?

Why don't we do this? Now, Cory did go over the distribution on the contingents. Why don't you just review that again?

Yes. Basically, Dan, we think that there will probably be another $14 million to $16 million for the rest of the nine months. And that would fall just generally -- again, these are all estimates because we don't really know until the money comes in, but $3 million to $4 million possibly in the second quarter, $8 million to $9 million in the third quarter, and $3 million to $$4 million in the fourth quarter.

Okay. Relative to the Proctor, Jim, do you want to --

Yes. Well, of course, we did write a number of new accounts this past year, and the flow of business coming in helped the first quarter. But, frankly, the biggest component of that was, in fact, increased activity with existing customers, where the issues around defaulting on mortgages obviously spilling into the insurance coverage, that in fact then -- what falls in place is coverage that we provide to the bank, and therefore the growth in the premium and the commission on that. So the greater share of that increase is from increased activity with existing customers.

Great. And can you just remind us roughly what Proctor's business split is between prime and subprime?

I don't know if I would have a number you could -- if not, we can certainly circle back and get that to you on it. But it is -- we obviously have a mixture of each of those business -- I can circle back and get the number to you. I think it is about equally split, but we can confirm that with you.

Great. Thank you very much.

The one thing I think is important to remember is that for the next nine months, the Proctor will have maybe up a little bit. It won't probably have quite the dramatic changes they had here in the first quarter. And so I wouldn't project out that type of same growth, because in the financial services area, you also have a lot of buying and selling of various entities. The FDIC is helping out on some of that stuff, too. So there is a lot of uncertainty in that whole arena.

Understood. Thank you.

And I think the whole definition of prime and subprime has gone through quite a transition as well, drawing the line as to what represents each piece.

Nik Fisken, Stephens, Inc.

Can you all tell if exposure units got worse by month, like January, February, March, April?

I don't think, Nik, we have that information. I think it is more aggregated over the quarter. And I tried to, particularly on the National Retail and Western Retail, give you sort of just a sense where we were in March and April versus December. And I know that was kind of not every office, but some offices thought they were the same, just general economic feeling in that community. Others thought they were worse. Others thought they were slightly better. But we don't have that information in terms of a month-by-month incremental deterioration.

And Hyatt, on Florida, it sounds like the organic's probably going to stay around the minus 12, just kind of encompassing the pricing exposure unit talk. Is that the takeaway on Florida?

Well, it is kind of hard to say. It's a little bit like trying to forecast unemployment. Now, we think that the unemployment rate, which is around 9.8% or 9.9% in Florida, probably is going to go a little higher. I haven't seen the current University of Florida estimates. But I think it is going to go a little higher. And so if that is the case, then there is going to be some pressure.

Now, we are writing new business, and so it's -- Florida is still under stress, and I would be hesitant to give you an estimate because it's just -- it's too cloudy right now to see clearly where we are going to be 90 days from today.

So if I take out exposure units, how do you think pricing plays out in '09?

Okay, I think -- now, you are talking about Florida now?

No, just all over the place.

Well, boy, that's a toughie. Powell, do you want to take that?

Yes, sure. Nik, I think there is going to be continued pressure -- well, if you back up and you hear all the indicators in the insurance industry, which you know better than we do, loss ratios, reinsurance costs going up, investment income going down for the insurance carriers, that all points towards a potential firming. But we don't know of anytime in the history of the world where there has been an increasing rate environment when the macroeconomic indicators have been going down. It has usually been flat or up on the economy, which is in line with this uptick in the pricing.

We would probably say that it is going to probably continue or it would seem to look like it will continue to firm or try to firm throughout the rest of this year. And it will be interesting to see what 7/1 reinsurance renewals do for the large standard carriers and specifically the smaller regional carriers. So that is a kind of peripherally vague answer, I know, but it really -- we are getting more and more pushback daily on pricing from underwriters.

Your next big data point is 7/1 renewals?

Correct.

Keith Alexander, JPMorgan.

Most of questions have been answered, but I was just wondering, have there been any changes in the classification of contingents in the quarter?

No. The only change really already occurred last year, and that is when the five major carriers moved to the GSCs. And from that standpoint, there is really little change. I think the average quarterly GSC accrual that we had last year was probably somewhere around the $3.3 million mark. And so this quarter, we may have had, say, $4.2 million, about $1 million more. But that's -- it's really, on a comparable basis, about the same.

Okay. And the other question is more for Powell. Powell, are you planning any changes in the management composition to coincide with Hyatt's departure? And are you thinking about reviewing the Company's operating strategy or make any strategic changes as part of the transition?

No. We are actually very pleased, Keith, with the senior leadership team. We have elevated several people in the last year into senior leadership roles, which were announced -- Colin Lowe and Sam Boone -- which you are already aware of. And our system is pretty simple, and we want to try to keep it that way -- traditional middle-market focus. It's all about good people. We try to grow in individual offices and a decentralized method by getting lots of inventory in the system and renewing our existing customers and trying to also grow through acquisition. So we don't have any big plans of changing something dramatic when Hyatt goes to part time at 60 hours a week in July.

Well, just to sort of piggyback on that, Keith, I don't know that I'm going to be working 60, but I ain't going away. There is one thing that is important. About six or five years ago, Powell identified the fact that if we were going to increase our capacity to grow leadership, we were going to have to increase our ability to bring people up. And so we have -- and something that Powell and Tom Finwall and others put together, Brown & Brown University. And then that has now expanded from a location which is Orlando to now a Brown & Brown University that is focused out of Syracuse, New York, and one that is starting to be focused out of Orange, California.

The point of all this is that as we continue to grow and expand and in acquiring in the middle market, there are several reasons that people sell their businesses, one of which is that in the next two to three to four years, they want to retire and go to the beach or go to the mountains or wherever they want to go. And so we have to be in a position to grow the people that they have inside. And if there is no one inside who is capable of running that business and growing that business, then we have to bring in someone who can do that.

So that has been a major focus of Powell's for a long time, and it is now paying substantial dividends because we are seeing people that were in the program three and four and five years ago who are now profit center leaders and are doing very well. So that is not a strategic change, but it does mean that we have the capacity, because of our size, and we will continue to expand that capacity, to spend the money to do what is necessary, and it affects our margins to a lesser degree.

Meyer Shields, Stifel Nicolaus.

I guess one last question on -- well, last for me, at least. I am trying, I guess, to understand the difference in the organic growth from the fourth quarter of last year to the first quarter of this year.

Is it specifically as to Proctor?

Yes.

Well, they had the organic growth last year, but certainly not the magnitude that we had this year. The special programs division, first quarter of last year, grew 13%, 9% for all programs. So this year it was 27.6%. So they still had growth, just not at the same level.

Okay. All right, that's fair. Within Florida specifically, is there any measurable impact of State Farm customers coming to Brown & Brown offices looking for competing personal or small commercial coverage?

Well, I don't know that it's measurable. We are getting business, but everybody is getting business. And I might also mention one other thing. There is a bill that is in the legislature that has had some uplift. And it has been, as I understand it, there has been neutral testimony on this bill from the insurance department. And basically, what it does, it defines carriers who would be financially solid and would allow them on personal residential risks to file rates and they're approved immediately unless the rates are, A., discriminatory, which is in the law today, or B., too low.

Now, if that bill passes, then the ballgame has changed as regards State Farm and maybe some others. So will that pass? Who knows. I would say less than 50-50, but I can tell you it's gotten a lot of interest.

Now, in the case of State Farm, the thing that is now starting to resonate in Tallahassee and elsewhere is that State Farm, over a long period of time, because they have been here since the '30s, have a lot of very old properties insured, and they are insured at rates that aren't even close to what those rates should be today. And so as those start to roll out, there's going to be a lot of pain and anguish, and that is going to fall back on some folks have made some decisions that maybe in retrospect would have been not the best decisions.

So we're hoping that there's some way that State Farm can stay in Florida, because to have them pull out just further exacerbates the capacity problem. And so we are benefiting, and the area that we are benefiting is in the personal lines area. And it really has to do with the larger personal lines that are those that the top three companies like to write. And these are homeowners where the amount of insurance on the home is $500,000 to $750,000, as a minimum, up. So yes, we are getting a little increase from those people.

Okay. That is very thorough. And lastly, have we, I guess, finished the trend of insurance companies paying higher commissions on a year-over-year basis?

Well, I don't know whether it is exactly comparable. They are still paying extra commissions. But did that start -- I don't think it started in the first quarter necessarily, or at least it wasn't broad-based in the first quarter of last year. But by certainly the July quarter, it would be, yes, it's sort of comparable. So if they're paying still an extra 2% or 3% or 4% or 5%, then it is probably the same as last year. But again, it varies with the area of the country, and it varies with the line of insurance, and it varies with the company. So I would say that in the rest of the year, it is probably going to be somewhere close to flat. I don't think there is going to be a reduction.

Great. Thanks so much.

Scott Heleniak, RBC Capital Markets.

Just a couple quick questions. First is the comments that were made or remarks about doing a larger deal possibly, if you so desired, with prices down and competition a lot lower than it has been in the past couple of years, what is the appetite for doing a larger deal than maybe you would have done in 2007 or 2008 just because of the circumstances? Are you seeing a lot of opportunities there? And what would you consider to be a larger deal?

Well, first of all, large, small, middle size really doesn't mean anything to us. The only thing that means anything to us is, what will the results be or what will the anticipated results be? And so as you know, the largest deal we have done in history is about a $63 million revenue deal.

We would think that a large deal is $50 million and up. And so we have the same amount of aptitude and attitude about going after those accounts as we have had in the past, which is we are interested.

Now, the bottom line is, if you had a $200 million acquisition and you had 20 $10 million acquisition, we'd pick 20 $10 million. Most everybody else would pick the $200 million because they don't have the structure to put it together, nor can they handle a decentralized environment. So we would anticipate that as time goes along, an opportunity will present itself. And as you know, we have a lot of financial dry powder. And we can probably do whatever we want to do.

We would prefer, however, to be the [three Rs] in a cloud of dust, because, number one, we can acclimate and acculturate those people more rapidly, and secondly, it doesn't present the economic risk that a much larger acquisition presents.

And then the only other thing I had was, the plans for the cash usage, you've built that up pretty nicely Q1 versus Q4. I guess a lot of it is because you did fewer acquisitions, but can you prioritize how you are thinking about the cash use, acquisitions versus hiring, debt paydown, or would you just consider keeping the high cash balance until the right opportunities come along? How are you thinking about that?

Well, we just keep the powder dry. I think on the people side of it, the barometer there really is the number of high-quality people and the mentorship -- the approach in terms of how many people can you get in the system, how fast can you most effectively get them up to speed. So that process is pretty much set. We have committed additional money this year to continue to do that. Cash is obviously the piece of it.

So we will generate, again, cash. The particular quarter in terms of being active, more active, less active, is something that is very characteristic of our Company. We have had some that are low, some that are very, very high. So the cash will be sitting there to use and at the right time for the right acquisition.

Ken Billingsley, Signal Hill.

I just have a few follow-up questions. One, on the State Farm impact, Hyatt, you said that you would like to see State Farm stay. I just had a question. If there is reduced capacity, would that help to drive rates up a bit faster in the Florida market?

Well, it would have seemed to be that the answer is yes. But the market has been so screwy in the last several years, couple of years. And for instance, if the state of Florida decided that they were going to have Citizens take over all of the State Farm business, then that would be something that would be of real interest.

So I am being a little flippant about your question. I don't mean to be that way, Ken. Here is the bottom line. Yes, it would put a substantial additional amount of pressure. There are a substantial number of takeout companies -- and I think you probably know what that means -- that are operating in Florida and have been recently capitalized. One just went broke, unfortunately. And so they are not going to be able -- well, they are availing themselves, I think, in many cases of the TICL layer and the hurricane cat fund. And it is my understanding that both Best and Demotech are probably going to downgrade anyone who is relying upon the TICL layer, because they don't think it's collectible.

So all of this turmoil creates some opportunities. And so just where that is, I think the opportunities, frankly, may come more in the nonadmitted area than in the admitted area. And of course, all of -- well, almost all of State Farm is admitted. So I think the answer to your question is yes. But exactly how all that happens I don't know.

Okay. And Powell, when you talked about nationally about exposure units being down, and I know this is going to be a pretty broad-based question here, but how much further can exposure units be taken down from the insurance standpoint before they start becoming underinsured?

Well, when I think of exposure units, Ken, from an underinsurance standpoint, I don't know if that would be the right way to look at it. Think of it this way. If your payrolls were $10 million in '08 and your payrolls are $5 million in '09, then your rate is going to be driven off the $5 million in payrolls. If your sales were $40 million and your sales are $17 million, it's going to be driven off sales. The underinsurance might come if you had a $10 million building and you tried to insure it for $5 million. We are not seeing that.

I think the most significant or pointed example would be, depending on where you are in the country, the discussion around construction. And what I mean by that is, whether you are in Las Vegas, you're in Chicago, you're in upstate New York or you're in Southwest Florida, you're going to get an interesting discussion around, obviously, residential construction. You're going to get an interesting discussion around commercial construction other than infrastructure work. And then you're going to have an infrastructure-type construction discussion.

And so if you think about it, you could have a concrete contractor that had 400 people on their payroll last year in Arizona, and all of a sudden they've got 70 this year. And they are bidding on a big job, and all of a sudden in the next six months they are going to go back up to 200 or 300 people to handle that work.

Conversely, 70 might go down to 35. So all of a sudden, they're going from 400 to 35. So you have lots of variety in that segment in particular. And it is not uncommon, depending on who you're talking to, is to say the pipeline looks pretty good in construction through the summer, and then it's a little unclear in terms of the jobs that are going to be out there in the future. Some, then, would say, well, wait a minute; we're going to have more infrastructure jobs and work, so you're going to have road paving, underground utility contractors and electrical contractors and everything. But interesting discussion around exposure units, particularly construction, but it affects everybody.

And last question. On revenues from acquisitions, did they come in a little bit lighter than you expected on the recent group of acquisitions? And if so, can you talk about maybe why that may have happened?

In terms of the numbers being -- the numbers for the quarter?

For the quarter, right, when you separate out the organic versus what may have come from recent acquisitions. My guess -- my quick analysis was that they may have come in a little bit lighter than maybe what had initially been expected. Is that true or false?

Well, if you look on the average for the quarter, yes it was. But it is not indicative to any systemic change with respect to either sourcing or quality or inventory out there, really. It just has to do with you get deals where you've got partners involved. You've got delays that inevitably happen with a deal, timing of closing. So those really are the factors that shape the first quarter, not anything systemically about anything else that we are doing.

Yes, Ken, I think you might be talking about -- the other side of it is, is, are the acquisitions that we did in '08 that rolled into '09, are they performing at the expected budget level. And the answer is yes. And the other part -- the second part of what Jim is talking about is that clearly the number of acquisitions that we did in the first quarter is on an average lower than we have in the last four quarters. And so that is where there is some revenue that you may have budgeted in your model that wasn't there. But that's just from an acquisition.

And there was the former, more of the '08 rolling into the '09.

Yes, think they are performing the same as -- very close to the rest of the group.

Okay, so there's no need to look at goodwill impacts or anything at this point.

No. And we look at goodwill every year at November. And there was no impairment issues at all. And nothing has changed during the quarter that would cause us to think that you ought to look at it again.

Ken asked a very popular item, obviously, with the public accountants, looking at the balance sheet, [how do you afford] that which we carry in others. And we're very pleased about performance of the acquisitions.

Dan Farrell, Fox-Pitt Kelton.

I actually just have another follow-up question on special programs, and I relate you've touched on it in a few questions, but I was hoping to get a little bit more clarity. Of the growth in the first quarter -- and I realize this might be a tough question to gauge -- but how much do you think is sort of a sustainable level? And what I am trying to get at is I think in fourth quarter you still had the benefit, to some extent, of the forced placement and also foreclosures. That benefit probably accelerated in the first quarter.

But I want to just try and understand that a little more, because your comments also said that you think that falls off as we head through future quarters this year. Is that growth rate maybe the 10% to 15% level that we observed in '08?

And then I guess just the final question related to that -- is there anything related to specific accounting for this business, where revenue recognition or re-estimation or anything like that might have occurred, or a lag in the revenue versus the trends that you are seeing?

Well, Dan, trying to identify on special programs, we have indicated that we think there will be a drop-off in '09 from -- certainly in the first quarter of '09 for the balance of the year. And in fact, we have also indicated that we suspect there is going to be a drop-off even compared to what we experienced in total for '08 with that. And so that is not anticipating new sales. We are certainly going to be shooting to do better than that, but we are not betting on the continued growth there from the meltdown in the mortgage -- in the residential mortgage market there, which has helped feed that revenue growth.

As to programs, we do anticipate a tapering off that in the second, third and fourth quarter of '09.

Now, that was your first question. What was the second?

Just I wasn't sure if there's any -- the accounting for that business, is there anything to think about with regard to revenue recognition relating to maybe lagging the trends? I'm just trying to see if there's anything there to think about with regard to that.

Well, there is definitely a revenue recognition that we pay special attention to there. We feel that is conservatively stated. So that revenue which we have recognized, we feel very good about the fact that we have earned and that we certainly don't anticipate any future repercussion from that.

Okay, I guess does that conclude?

It looks like we do have one other question.

Ron Bobman, Capital Returns.

I had a question as it relates to Proctor and the prospect for Demotech or A.M. Best being, I don't know, proactive or whatever, downgrading some of these smaller at least Florida homeowner companies. Have you gotten any indication, or has Proctor gotten any indication from the carriers that support it or their clients as to what those banks will do in the event that the small homeowners' companies get downgraded and the implications for whether it is an acceptable carrier or not? What do you think will -- A., any indication, and B., Powell or Hyatt, what do you think might happen?

Well, I guess that is a good question.

Yes, we don't know, is the thing, meaning the answer, Bob, is we don't have an -- meaning -- Yes, that thought process is a very rational one. But once again, A.M. Best and Demotech have said that there are a group of companies as of May 15 that if the issue with the Florida hurricane cat fund hasn't been clarified or addressed, they may downgrade them. Having said that, then you have to know who their insureds are, which in turn may be force-placed back onto financial institutions or REO portfolios.

And so that is a long-winded answer on saying that Proctor's business is middle-market and larger regional financial institutions. And so to the extent that they have exposures in Florida with lenders that are currently -- or borrowers that are currently covered, insured by some of these companies that may be downgraded, that may or may not impact that ability to be forced onto their REO program because it depends on if they default. Remember, it is about the borrower as opposed to the insurer, because they can go and get other insurance from another takeout company. Does that make sense?

Yes.

Bob, I think also the state of Florida has demonstrated through -- if you look at the meltdowns of the takeout companies from the '04/'05 storms, and particularly the largest insolvency in the history of the state of Florida, in fact Citizens and the state took over that business to handle the runoff. So from that viewpoint, the banks appear to be relying upon regulatory support for those takeout companies rather than just their Best rating or Demotech rating.

Okay. And I'm sorry if you provided this -- is there a particular carrier that supports Proctor? Is it Lloyds or is it a particular insurance carrier?

Lloyds is one of the carriers, but there are several we use, depending upon, obviously, the cat exposure, the mix of business, the class of business and simply not having all the eggs in one basket. We are using multiple carriers for their business.

Got you. Thanks a lot, and best of luck, everybody.

Okay. Thank you.

Absolutely, gentlemen. Go ahead and do any closing remarks you possibly have.

Well, the closing remarks is, we are finished.

All right, perfect. And that does conclude today's teleconference.

See you all in July.

That does conclude today's teleconference. Thank you all for joining, and have a wonderful day.