Brown & Brown Inc (BRO) 2009 Q2 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 events results and events or otherwise be forward-looking in nature and reflect your current views with respect to future events. Including financial performance, such statements are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of 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.

With that said, I will now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.

Thank you, David, and good morning, everyone. Q2 was another interesting quarter. The economy continues to have the biggest impact on our numbers, and rates are under pressure all over and all around the country, as we continue to watch Washington, DC with great interest relative to health-care reform.

Today, Jim, Cory and I are in Troy, Michigan at Proctor Financial for our quarterly Board meeting, and Jim will discuss Proctor's success later in the call, but now on to Cory.

Thanks, Powell. Our net income for the second quarter was $40.7 million, which was slightly up from the second quarter of last year, where we earned $40.4 million. And, of course, our earnings per share for both quarters was $0.29.

From a revenue standpoint, our commissions and fees for the quarter increased 2.4% or $5.8 million to $244.6 million. Now, that's up from the $238.8 million we earned last year in the second quarter. Included in the press release is our internal growth schedule, and in that schedule, you will see that we had $6.8 million of profit-sharing contingency commission in the second quarter of '09. And that's up $1.4 million from what we earned in the second quarter of last year.

For the rest of the year, we estimate in the third quarter of '09 that we will probably earn somewhere between $8 million to $9 million of profit-sharing contingent commission, and they will probably only earn about $1 million in the fourth quarter. Again, those are just current estimates.

When you look at the internal growth schedule, our total core commissions and fees for the quarter increased 2.6% or $6 million of total commissions and fees income. However, within that net number was $17 million of acquired revenues. So that means that we had $11 million of less commissions and fees on a same-store sales basis and hence a negative 4.7% internal growth.

As the schedule indicates, the vast majority of the negative growth is still broad-based impact from our retail -- primarily from our retail and wholesale operations.

Now moving on to our investment income, it decreased by $1.4 million, and that's primarily due to substantially lower interest rates that we are earning on our short-term money market accounts. Our other income we had $1.3 million, which is primarily gains from the sales of a few books of businesses that we had during the quarter.

Looking down at our expenses and our pretax margins, to start with, our pretax private margin for the second quarter of '09 was 27.2%. Now that's compared to prior-year second-quarter margin of 27.6%. So we actually had a slight reduction of 40 basis points. As we have mentioned on previous quarterly conference calls, as long as we remain in a soft cycle and a weak economy that creates this negative internal growth, our margins will continue to compress a little bit. But you will notice that this particular quarter, our margin compression is less than it has been in really any quarter in the last two years.

In the current quarter, our employee compensation and benefits decreased marginally 10 basis points to 49.8% of total revenues. The total dollar increase in the total employee compensation and benefits was an aggregate of $2.1 million. But within that number, $5.1 million was attributable just to the stand-alone acquisition that we have done since last year. So when you pull that out and you look at just the other offices that were here last year, including any fold-in acquisitions they may have had, they had an aggregate reduction of employee compensation and benefits of $3 million, of which approximately $2 million actually came from employee compensation, commissions and bonuses, and another $1 million came from a positive adjustment to our self-funded medical plan.

Our non-cash stock-based compensation costs was $1.7 million in the second quarter of '09, which is consistent with the estimated costs of the last few quarters.

Moving to our other operating expenses, they increased 30 basis points to 14.5% of total revenues in the second quarter of '09, and the total dollar increase in other operating expenses was $1.2 million. However, again, $1.5 million of this aggregate total was attributable to the new stand-alone acquisition since last year. And therefore, when you look at just the same-store sales basis including those fold-in acquisitions, those particular offices had a net reduction of their other operating expenses of about $300,000, the majority of which really is probably just lower T&E.

Amortization and depreciation expense on a combined basis increased approximately $1.1 million, and that's just due to the number of acquisitions we've had over the last 12 months. Interest expense has been consistent with the expected quarterly expense of about $3.6 million. Additionally, our tax rate for the quarter was 39.3%, which is really similar to prior year's effective tax rate, and no real changes there.

On a six-month basis, the trends are really the same. We talked about first quarter last time, and I just gave you the changes for this quarter. And so really just end with the fact that for the six-month year to date, we ended up with $0.63 earnings per share, which is a 3.1% decrease from the $0.65 we earned for the six months in '08. So with that overview, I'll turn it back to Powell.

Thank you, Cory. Great report.

I'd like to talk about Florida retail now. Had negative 8.6% internal growth versus 11.6% negative in Q1. Starting a little bit around the state, in Jacksonville, rates were flat to down 20%. Exposures down 5% to 25%.

Daytona Beach, property flat to down 10%. GL rates down 5% to 10%, and auto liability down 10% to 25%. Exposures are typically down 10% to 20%.

In the construction area, job lists are bare with many contractors after September. Nonconstruction payrolls are down 10% to 20%.

Brevard, very similar to Daytona Beach. Fort Lauderdale and West Palm Beach in southeast Florida, property rates are flat to down 5%. GL rates are 5% to 10% down. Auto is down 5% to 15%. Exposures on all those lines are down 5% to 15%.

In construction, rates are flat, but exposures are down 25% plus.

Southwest Florida and Naples, the market continues to be very, very aggressive on new business. Exposures are down slightly on renewal business.

In Tampa Bay area, exposures are down 10% plus. Property is flat to down 10%. General liability rates are down 10% -- I'm sorry, down 0% to 20%. Payrolls on workers' compensation, down 5% to 15%. Any type of residential builder, obviously, in Florida, exposures are down huge if they are still in business.

In the Orlando area, commercial construction, meaning general contractors, rates are down 30% plus -- I'm sorry, exposures are down 30% plus; rates are flat. Rates on nonconstruction GL and auto are flat to down 5%.

In the center part of the state, general liability is flat to down 5% with exposures down 5% to 25%. And up in the Panhandle, rates are similar, flat to down 5% and exposures are down 10% plus.

On a national retail basis, we were down 5.6% internal growth versus negative 5.8% in Q1. Starting in the Northeast, upstate New York, you will hear that most carriers are trying to get slight increases on their packaged business, up 1% to 5%. That's where they start. That doesn't mean that's where it ends, but that's what they are trying to get.

In Rochester, property rates, property GL, auto and work comp is flat, and exposures tend to be somewhat flat as well except in the construction area, where exposures are down 10% to 20%.

In Syracuse, property, GL and auto, also flat with exposures down a little bit more, 5% to 8% down. And the commercial construction rates, GL are up ever so slightly just a couple of percentage points.

In the -- right outside New York City, Garden City area, property is down 0% to 5%. GL, auto and work comp rates are flat to down 10%. Exposures other than construction are down 0% to 20%, but commercial construction is down at least 20% to 50%.

In that construction, in and around the city, you can have exposures up slightly to down 50 as I said in Garden City, but also rates could be down 10% or even a little more.

In New Jersey, Florham Park area, overall rates are down 8% to 10%. GL, auto, down typically 5%. Work comp, down at least 10%. Exposure units are flat, except in construction, which are down probably 10% plus.

Down on the coast of Jersey, Marmora area, property and general liability rates are down 0% to 10%. Automobile rates are typically flat. Exposures are down 5% to 20% in GL, auto and workers' compensation.

Contractors, everybody is converting to a paper general contractor until the work comes back. Obviously, on the automobile fleets, we are starting to see in this area people take lots of units off their schedules until their business comes back.

In Bethlehem, Pennsylvania, rates are down 5% to 10%. Every once in a while, we will see one -- a random one-off go down 25% or 30% in terms of rates. Packages generally are typically down more than 10%. Work comp is not as aggressive as it has been. And for the first time in a while, quite some time, we are seeing a large social service account in New York City with losses that no standard market will quote. That means it has to go E&S. In the most recent past, there's been at least one or two standard markets that would pretty much quote any account.

In Manassas, Virginia, property, GL and auto, rates are down. They are either flat to down 10%. Exposure units are down 20 to 40% in all lines, except contractors, which could be down substantially more than that.

Coming down the coast south of Atlanta, property, GL and auto and work comp rates are flat. Contractors, general liability and auto liability, rates are down 15% to 20%. Exposures in those lines of business are down 5% to 10%, except the construction, which is down 25% to 40%.

In Greenville, South Carolina, very competitive renewals. General liability and auto rates are down 15% to 20%, while exposures are down 5%. Work comp, not uncommon to see an additional 10% plus scheduled credits put on to existing accounts. New general liability and automobile rates are down 25% to 30% off of expiring.

In the Midwest, in the Chicagoland area, construction exposures are down 10% to 20%. GL and work comp rates are very soft. Auto is flattish.

Here in the Michigan area, rates are down 15% to 20% with exposures down 10% to 30%. As you may be aware, unemployment here is currently at 15.2%. And depending on who participates or who is counted in that unemployment number, it can go as high as 22.5%.

In Arkansas, the center part of the country, accounts over $100,000 in premium, you can make the general statement are down 20% plus. Accounts under $100,000 in premium are somewhat flat, and accounts under $50,000 they are looking for slight increases.

Exposures, contractors are down 25% to 40%. Manufacturers are down 10% to 15%. And retail is 20% to 30% down. The regional carriers are going great guns in Arkansas. That is going to be a common theme you will hear about regional carriers around the country continuing to be very, very, very competitive.

In Louisiana, specifically Lafayette, Louisiana, tier one property, that would be south of I-10, continues to firm up. Property north of I-10 continues to be otherwise very competitive. GL and work comp are soft. Automobile rates are holding flat. Exposure units in GL and work comp are down 10% to 30%.

In the Houston, Texas area, property rates are flat in tier one and tier two. Away from the coast it continues to be very competitive. GL and comp are very competitive, down 5% to 10%, maybe even 15%. Automobile rates are flat. Exposure units there are typically down 20% plus.

In Western retail, we were down 14.8% internally in Q2 versus 15.9% in Q1. Denver, rates are down 5% to 10% in property, GL, auto and work comp. Exposure units are down 5% to 20%. Regional carriers continue to be very, very competitive in the Denver area.

In Las Vegas, property and auto are flat. General liability rates are down 0% to 15% and work comp, more and more scheduled credits on the comp programs today. Exposure units are typically down 20% to 40% except for construction, where construction, as we all know, in Vegas is way down. It's not uncommon to have half the vehicles taken off in automobile schedule and workers' compensation, payrolls down 30% to 70%.

In Phoenix, property, general liability and automobile rates are down 7% to 8% plus. Workers' compensation rates are down 10% plus. Exposures on other than construction are down 20% to 30% in the Phoenix area. Contractor exposures are down at least 50%.

In Southern California, in Orange, property and general liability rates are flat to down 20%. Automobile, on a clean automobile account, rates would be down 5% to 25%. Work comp rates are up 5% to down 25%, while exposure units in GL and work comp are down 15% to 30%. Automobile exposures seem to be flattish. Contractors down 25% plus.

In Santa Barbara, California, we are seeing some midterm negotiations on property renewals. GL rates are flat and auto is down 5% to 10%. Exposure units are typically down 0% to 25%.

In Portland, Oregon, property is down 3% to 5%. General liability and auto liability rates are down 5% to 10% while exposures are down 10% to 20%.

Finally, Seattle, property is up about 10% on tribal business. General liability in auto is flat to down. Renewals across the board there are flat and the economy is beginning to slow down.

From an employee benefits standpoint, when clients get done modifying programs, rates tend to go up between 5% and 15% nationally, while exposures are down either they are flat to down 25%.

So with that, I would like to now turn it over to Jim Henderson.

Thank you, Powell, and good morning, everyone, and greetings from Troy, Michigan. We're here today. As Powell mentioned, our Board is arriving within the next hour plus. Hyatt and all the Board members we are meeting here. It's part of a continuing tradition we have of taking our Board out to different profit centers and let them really see what happens at ground level with respect to our operations.

I'd like to review with you the highlights of our nonretail, the divisions for programs, brokerage, and services as well as give an update on our M&A activity.

The programs division continued a stellar performance in the second quarter. A very special thank you in recognition to Linda Downs and to Ken Masters, two of our senior leaders that heads up those divisions.

We had a positive organic growth in all programs of 9.7%. That was 12.3% for the special programs and 2.1% for professional. Special recognition certainly for Proctor Financial. They continued a great performance. Proctor provides insurance and services for banks and principally for mortgage forced-place coverage. Their increase in revenue is a result of new business they have written, as well as increased exposure units on existing customers, resulting from the current mortgage environment.

The other programs I would like to recognize as well as far as growth, FIU, our condominium facility in Florida, had organic revenue increase in the first six months of the year and the second quarter. We do have some good news and some less good news there.

The good news is we are looking at some rate increases in Florida. Able to write onto those increases that's been announced by Citizens; that is a competitive writer. Therefore, we do get the advantage of writing those rates up with Citizens.

We are looking, however, that arranging capacity principally in the Tri-County area of Florida is a tough play currently. We are not looking at an increase, perhaps even a reduction in capacity in the Tri-County. There is also increase for the reinsurance costs for coastal property as well for the year.

Another program that incurred -- produced organic growth was CalSurance. Their Lancer claims unit -- they're involved in providing professional products to securities, dealers and agents and generating additional revenues both unfortunately on claims, but also on the placement and pricing of the coverage.

Our national dental plan also produced organic growth with new distribution partner and new sales. Acumen Re, which is our facultative facility, on new sales and some rate improvement was able to generate growth.

I'd like to offer special recognition to two of our public entity unit, [Apax], which is our placement facility for public entity business, as well as our operation in Ephrata, Washington, that handles placement of public entity trust business. And management of that business in the state of Washington had a great quarter and great six months.

Sigma Underwriters is really part of the whole operation. It's an underwriting facility also in our brokerage operation. John Traber and his team did a great job in growing revenues the first six months.

So, summing up for programs, we are very fortunate to have this type of business unit in our company. It is smaller ticket items and, frankly, has weathered better than the retail side in dealing with the economy and also with price changes.

For the following for the next six months, quarter three and quarter four, we are forecasting really moderate organic growth of flat in programs for the balance of the year.

The next division is the brokerage unit. Tony Strianese and Mike Reardon, the two senior leaders that heads up the respective units on binding authority and transactional, continue to do an outstanding job in probably an area of our business that has the most headwind.

The brokerage business, in addition to the economy and pricing, has a third headwind, that is business that vacates E&S lines and moves over to the standard market. That being said, there is a positive trend, if you will, in this organic challenge, the negative organic growth we have.

For the quarter, it was 7.5%. Comparison to same quarter for 2008, that organic reduction was 13.9%. So if you will, the reduction is lessening over time. It's been some three years since we've had organic growth in brokerage. This is a more cyclical, more volatile pricing area than retail, and we are pleased to see that we are beginning to close that gap back towards perhaps either flat and starting to look forward to organic growth in this division.

The -- there's a lot of great things though inside of these numbers in brokerage. And that is that the cost containment, if you will, the reduction in cost and the improvements in margins with smaller revenues is a great feat for the leadership team there.

With respect to pricing, we are seeing rate improvement in coastal property. Inland property continues to be very, very competitive. Some of the most competitive lines continue to be auto and low risk primary casualty.

We believe that the E&S companies are a bit more disciplined on pricing than the primary companies, but in fact, if the business vacates and goes over the primary market, then we are still losing revenue under that scenario.

The economic impact is also felt, obviously, in the brokerage area.

Our submission activity in the brokerage operation actually has increased compared to the previous year and previous quarters. However, the submissions to binding are specifically down, so we are looking at a lot more risk to, in fact, write the risk that we are writing.

Exposure units continue to erode in the brokerage, anywhere from flat to 30%, and not just in contractors, but in service industry, bars, taverns, restaurants, as well. And the standard market, as I mentioned, continues to be very aggressive in writing business away from the E&S markets.

In the services division, Sam Boone and his leadership team continues their excellent performance and yielded a positive organic growth in the second quarter of 3.5%. This team, we believe, will continue to deliver moderate organic growth on a forward basis.

Now turning to talk about M&A activity, the closed deal activity for the first six months of 2009 was seven deals and $17.6 million in forward revenue. This is less than a very, very active period we had in 2008 and our historical six-month numbers are about $40 million to $45 million.

Although the closings are less than last year, the offerings and the sales interest remains brisk and encouraging to us.

We feel the most significant cause that we've experienced in the delays in closing is reality of the reduced pricing for the businesses caused by less revenues and earnings. If an entity -- an agency loses perhaps maybe 10% of its revenue, in fact, it may lose anywhere from 30%, 35% to 40% of its operating profit, and, therefore, obviously affecting the price.

The sellers are very concerned about the tax environment. There is some proposed changes on capital gains. This is causing interest as well. And I think that the reality of pricing, they are what they are. The deal count will return to more normal levels.

We looked at some deals in 2009 that simply went back on the shelf. The owners decide, did we want to see perhaps if rate improvement or the economy will result in better performance and a better price. I'm not sure if that is going to happen soon enough for them, and we feel that those will have a chance to probably look at those deals on a forward basis.

In the meantime, we continue to accrete cash. We will hold it and use it for really the best opportunities where we are not taking an inordinate risk on purchasing an entity, in fact where revenues may be falling.

So with those comments, I will turn it back to Powell for a wrap up and then for Q&A.

Thank you, Jim. Great report.

In conclusion, the economy continues to deteriorate in certain places around the country, obviously. New business continues to be very, very competitive regardless of region. Regional carriers are driving price decreases.

Employee benefits' reform is obviously front and center. And we look for much of the same throughout the rest of 2009.

With that said, David, we will turn it back over to you for Q&A.

(Operator Instructions). Mark Hughes, SunTrust Bank.

Following up on your final commentary there about regional carriers driving price decreases, could you give a sense of just overall discipline of the carriers, including the national carriers? What's your sense of where we stand today at the start of the third quarter versus say six months ago?

Well, Mark, a couple quick comments. We as a group, as you know, we've talked about, write a lot of business with regional carriers, and we write a lot with national carriers, as an observation, number one.

Number two, there is a bifurcation, I think, that somewhat is going on right now where carriers are very, very aggressive on new business and are trying to do everything they can to get rate or maintain rate on renewal business. That doesn't mean it's occurring, but that is what they are trying to do.

In certain parts of the country, we are starting to hear of carriers that will say no more. We can't go any lower. That doesn't mean there won't be one carrier that can't go lower, but a group of carriers. So the incumbent and three or four or five carriers will all be bunched up around the same price rates for the said exposures, and yet, there will be one carrier that would drop it whatever that is in that particular part of the country.

So, is there a significant difference now to six months ago? I don't think there's probably that much difference in the ultimate outcome, but how you get to the ultimate outcome is more difficult in terms of negotiating that rates decrease or with the incumbent or with the new carrier because people are less apt to push it down on renewals. That's number one.

Number two, one thing that we hear around the country from our team is that lots of people talk about, meaning outside of our business, they proposed change in rates with carriers because some of the carriers did not have as good a year last year as you would hope they might, and therefore there would be upward pressure on those rates, and yet we haven't seen anything to really indicate that other than coastal property.

Thank you. How about if -- one more question. If the acquisition pace continues to be pretty modest here, will you get a bit more aggressive on your investments or look more to buy back shares?

No.

That was Cory. No. Mark, as we said, we have not historically -- we have not ever done a stock buyback and we haven't really looked at that now, but obviously, we are looking to allocate our capital with good acquisitions. And we believe that there will continue to be good acquisitions, but there has been a slight lull, and we think that will come around.

Thank you.

Dan Johnson, Citadel.

Great. Thank you very much and good morning. You guys have done a great job of offsetting the environmental headwinds in retaining as much margin as possible. But I guess the question is if the environment, whether it's units or rate per unit isn't about to turn around anytime in the near term, what levers are left to pull to sort of offset future margin degradation? And then I have one other question please.

Well, Dan, good morning. The obvious question really is the ability to write additional new business. So obviously you want to do everything you can to retain your existing business with your good clients, meaning all of your clients, and do your very best in terms of writing new business. But relative to additional levers that we haven't pulled, or to think that we have some secret extra thing that we can draw on, there's no secret extra thing.

We are -- that's the beauty of a decentralized organization. Obviously, the decisions are made at a local level as you know in our system. And we try to make sure that we are one, appropriately staffed at all times, so we can do what is in the best interest of our clients in to grow our business in a thoughtful manner at that local level.

With -- I guess does that mean that our success to date so far with holding margins at least at a level they've been haven't come from any, I don't know, bigger programs, but just sort of individual levels at the local level?

And I guess really I go back to the question that, do we have visibility that if we end up in an environment where it's tough to grow organic in 2010 if, whether it's for price or for units, whether or not we can still fight to hold margins flat and if that's the more direct question.

And the first part of your question is yes, which is, it is a local office by office review if you want to call it that. And so those individual leaders obviously own their own businesses per se, and they constantly and consistently review their needs from a staffing and investment standpoint. And so, obviously, if in fact, the rate and economic environment continued into 2010, then those decisions would continue to be made at that local level, and we believe that that will continue to produce the results that we have seen in the past.

Then my other follow-up is with carrier profitability under pressure easily over the next couple quarters, what should we be thinking about in terms of headwinds and tailwinds for the 2010 contingent?

Well, if you want to make a broad statement, Dan, typically, when loss ratios go up, as we know they have, meaning last year, and I'm not as familiar with first two months or two quarters of '09, but when they go up, contingencies and profit sharing and [GSCs] typically go down. That's a very broad statement because we can't tell you how much they go down as a result of that, but as a general rule, we would say that.

Conversely, if profitability went -- with loss ratios going down, profitability going up substantially in carriers, you can make the same argument that profit-sharing should go up, but we can't tell you how much it would go up. But to your question, it should go down but we don't know how much.

Keith Alexander, JPMorgan.

Good morning. I just wanted to follow up on that last question about expenses and ask directly, were there any changes to staffing or office levels in the last quarter?

There was. As I'd mentioned, that for the quarter, employee benefits and compensation went down a total of $3 million, and so $2 million of that really did come from staff salaries and commissioned producers and a little bit of bonuses. And so -- but as Powell mentioned, we have no corporate dictate that said okay, every office has to put people up against the wall and shoot every fifth one. There's nothing like that that we ever do. This is all done on a decentralized basis and generally where those cuts are, if somebody retires or leaves, generally the profit center leader, as I've mentioned before on conference calls, generally pull their team together and say look, we've got one less person. This is still not a real good environment. Let's see if we can't handle all the business without replacing that person right now. And really the teams kind of come together.

And as Powell mentioned, that is, right there, the beauty of a decentralized organization. And the fact that Brown & Brown has leaders in each one of those offices that are business people and run their own business and we have essentially 180 high-quality leaders that make those decisions every day. And they don't have to look to the Southeast to Daytona and bow at 4 o'clock in the afternoon and ask what to do. They do it. And that's where the margin stability comes from.

Keith, it's Jim. I think a little color on that is to your question about margins, maybe going back to Dan's question as well, is that our leaders, if they lose let's say $1 revenue, that immediately there is some producer cost that comes out of their cost side.

Then, there is a lot of execution dealing with what about support staff, what about rent, what about other costs in terms of getting that margin back in line. And one of the drivers that -- the drivers there is in fact those offices are so impacted by their respective profitability and their margin driving their compensation, that they are so much on board with you and with us in reshaping that margin.

The brokerage area I would say did that in spades this past year. Because they had a lot of revenue that disappeared the last year, the first part of this year. And it took them really a number of months after that event to redefine many offices and some niches of business that were in to vacate those that would not produce margins. So that's part of the remodeling that goes on to get those margins back in line, which they do so well.

Okay. Just following up on that. I was wondering if you could comment on customer counts and how retention of clients is changing versus a year ago.

Keith, what we have seen -- we haven't seen any unusual retention changes barring the increased number of bankruptcies. And you can't -- I mean you can't ignore that. And so depending on where you are in the country, if you are in Las Vegas as an example, you see -- hear lots and lots about bankruptcies.

In Florida, depending on the classes of business that you write, some offices have more of that than others. So really it's a regional thing, but we haven't detected or seen anything that would be abnormal relative to retention of existing clients other than bankruptcies impacting that.

All right, great. I'll get back in the queue for further questions.

John Fox, Fenimore Asset Management.

I have a couple questions. First, do you have the FIU revenue?

Sorry say again?

The revenue for FIU?

John, for the quarter, FIU's revenue was about 4 point -- you know, almost $4.9 million.

Okay great. And (multiple speakers)

Versus (multiple speakers) for last year same quarter.

Right. And could you talk about canceled rewrites and do you see those running at the same pace? Do you see them abating? Just talk about the impact of the economy and the canceled rewrites and what you are seeing there.

John, that's a very good question. And there is an upfront hit that you take when you do a cancellation rewrite. So in a quarter that you have a let's say half the exposures disappear, half the premium -- well that entire half flows into your current quarter revenue stream, and there is that upfront hit.

What -- the impact of that with respect to looking at the trends on the negative organic is pretty difficult to measure. I think as I mentioned to you in the past, I saw members, particularly on a carrier as to how it hits there because it's even more dramatic. So there is some upfront. When exposures are decreasing dramatically, there's the return premiums negative sitting on the top of in fact reduced revenue base for the renewal itself. So it takes really maybe a couple quarters to really shake out what is the ongoing revenue base and decrease with respect to the customer base? I'm not sure if that target is there, but there is a -- there is in a quarter, it can be pretty dramatic. You have to look probably more than one quarter or two quarters to judge what is happening on the revenue shrinkage.

Right. I mean obviously the reason for my question is we are now in the third quarter of -- at -- of least severe downturn in the economy and probably five or six quarters since it started. So I'm wondering if people are parking their trucks or letting their payroll heads go. Does that cycle through at some point and we get more to an even comparison?

I think we do.

But we haven't gotten there yet, John I don't think.

Probably not.

We keep hearing, do we -- do Jim and I -- do Cory, Jim and I hear significantly more about canceled rewrites? I don't think so. I think it will probably be about a normal amount. You only heard me say canceled rewrites I think in one area. I referred to that in Santa Barbara, California.

But, relative to your point, which I think is a very good one, we still hear about down on top of down on some of those, but I don't think it comes through all the way in a 12-month cycle on a contractor or manufacturer. That contractor that had 10 vehicles last year might have six of them or five of them on the road today.

Does that mean next year they're going to still have five or they are going to have 10? Well we don't know yet because that -- the work list or their job list right now in most parts to the country is not that good into the fourth quarter of this year. And so there's kind of a wait and see on that.

Right, but I guess my question is if they just stayed at five, you would have better internal growth than during the period of time when they went from 10 to five.

Yes, easier comps.

Yes, correct, but the question is does five go to two or three (multiple speakers) or does it go back up? And we just don't know. And a lot of those contractors are kind of wondering that same thing.

Okay. And then my last question is, I think Jim made a comment about E&S submissions are up, but the number of policies they are binding is down. I'm just wondering if you could talk about what's the reason for that.

I think because the pricing -- everyone out there is still looking for reduced pricing. And to make sure that any avenue is pursued, we are seeing the count coming in from the retail agent into our wholesale operation that is going up. We are not binding as much, and I guess the number one reason would be is that a lot of that business is, in fact, still moving over to the standard market at reduced price and, in fact, improved coverages. So we're just having to look at a lot more risk. So there is still very, very competitive markets out there that's willing to compete with the E&S that were standard markets willing to take on new risk that historically may have been pretty much pure E&S.

So if you take a bar and tavern with higher let's say revenue receipts for liquor, would be a classic E&S risk, today, you can find a standard market that will write that class in certain areas.

So the agent is shopping it, submitting it to E&S, he finds out the price is still higher in E&S and he brings it back and writes it in a standard market. Is that basically how it's working?

That would be a very typical scenario.

Okay. Thank you very much.

Nik Fisken, Stephens.

If exposure units in 1Q was a five on a scale of 1 to 10, 10 being bad, what was 2Q?

Can you repeat the question, Nik?

Yes.

Yes, can you just repeat the question?

Yes, I'm just trying to frame up exposure units sequentially. If 1Q for exposure units was a five, on a scale of 1 to 10, 10 being bad, what was 2Q?

I would say it's probably five; depending on the region could be six. There could be a trend into the negative in certain places, Nik. There are places that we've talked about that didn't really know about the economic slowdown until Q1. Those places might be certain places in central Texas, Portland, Seattle, Charlotte, things like that. In some of those places, it's starting to slow down a bit. So that is compounding what was already down in other areas around the country. In some of those areas, it may be down even more.

And we don't get the easy comp until October, November, right?

It would be easier, yes, which really, the third -- the fourth quarter of last year began the more significant downturn cycle.

And Powell, how would you answer that same question on pricing?

You know, Nik, it's funny. I would tell you that in all of my calls this year, or this time this year, you -- there is a stability in certain instances and yet you have these one-off scenarios where you hear about dramatic decreases. And so I don't think that that's different than what we've been saying in prior quarters, but I think it's just more pronounced in my mind because you kind of expect there to be some flattening across the board, and yet you keep hearing about certain markets that continue to press down on rates. So I don't think it's dramatically different, Nik, but there might be just sort of a feeling or an expectation in your mind that you think boy, you would think that there might be some flattening or even maybe slightly up in certain areas, but we are not seeing that.

Nik, I think the E&S companies we are seeing, and it's a very general statement, perhaps more discipline on their part than the primary writers. There's still some reduction, but not at the same aggressive level as with the direct -- the primary writers.

And the last thing I've got is, are you seeing any dramatic changes from the underwriters in reaction to the exposure units falling off the cliff?

I tell you what people are trying to do, Nik, and trying and actually doing can be different. What they really want to do is they want to keep the premium flat some how, some way, which, as you know, is not really happening. So if your exposures were down 10, is there a way to get a slight lift in the rate to offset that? And the answer is we're just not seeing much of that happen.

Sounds good in their mind. The intent is there, but typically the rates come down or the rates stay flat and the exposures come down so their overall premium is down.

That's it. Thanks so much.

Meyer Shields, Stifel Nicolaus.

Can you hear me? Powell, congratulations, first of all. Jim, I guess I want to start with a quick question. I don't know if I'm reading too much into the comments in the press release that talked about the current economic environment explaining part of the M&A slowdown. Is there anything else that is a significant factor? Or is it just the normal lumpiness?

Well, I think normal lumpiness. It always is lumpy, but that's really the only factor that there is a little bit of a pause and say well, the capital gains is that this year is the next year. And so we've got a little bit more time. That's not true for everyone, but there's a certain sector where that is very material.

But we've had several deals that we like them, we like to do it. We looked at the volatility of revenue in the last six months, last year and going forward and we are saying look, we would like for you to take additional risk on the pricing, you, the seller, to make this transaction work because of the forecast. And they said no, we think we will just kind of go back and do our thing for a while and we would like to talk to you later.

So, if there's any common theme out there or single theme that we have encountered, really to give you some insight on that activity, there's still a lot of people looking. They've got to come up with a game plan. They don't really have an out, so we just have to be patient there. And we have a theory is you can never underpay for a bad deal. And so sometimes, in fact, reducing the price on something that is going to be threatening from being accretive or, in fact, it may be impaired at the end of the day, we simply want to avoid that if we can.

Oh, okay; that's very helpful. And two quick numbers questions if I can. Cory, the medical plan adjustment in the quarter, is that an account adjustment or is that a recurring cost save?

That's just a periodic adjustment onto the actuarial projections of the current plan. And so our folks have to calculate that every quarter. So generally, it's kind of flattish, but we had a lot of offices at the end of last year get off a identified plan on to our self-funded plan. And so we didn't know how all those numbers would shake out based on the premiums that were collected. And so based on the first four or five months, this was the adjustment that came out of it.

Oh, okay. And, Florida retail, I guess there was sequential improvement in organic growth. Is there any idea how much of that stems from the workers' compensation peek-a-boo rate change?

The answer, Meyer, is we don't know, but we don't think really any.

That's a good handle for it.

Yes, that's a great name though.

Thanks a lot, guys.

Steven Labbe, Langen McAlenney.

Hi, good morning. First a quick one, what is employee headcount today?

We ended the year roughly at 5400 people.

Okay. Would you say it's higher or lower than where you ended the year at?

It's slightly higher because we've had a little -- we've had a couple of acquisitions.

Okay. And the second question is what percentage of your business is for healthcare right now? And what are your thoughts on the potential positive and negative impacts on that business from the proposed health-care reforms?

Right. Last year we did about $150 million of revenue as a group. And obviously, there are so many different plans that are floating out there, a lot of it would be purely speculative, Steven. But to take the kind of what's the most positive scenario and what's probably the most negative scenario, we do believe that there is going to be reform. We just don't know what that reform will totally encompass or include. The potentially most damaging thing would be -- to the brokerage business -- would be a national carrier. A national carrier could, depending on how it's set up, could dramatically impact the business that is written by the private insurance market.

Will that be a part of this health-care reform or not? We don't know, and part of that would be dictated by could agents sell that program? Would there be commissions paid on that program? And would they have actuarially sound rates? Those are all question marks; or would it be subsidized?

But, the things in terms of reform, there is discussion about modeling pieces and parts of national healthcare reform after the Massachusetts plan. Then the Massachusetts plan, as you know, everybody has to have coverage, so that would be increased potential participation on existing clients. And once again, every day, there is discussion about different scenarios that present themselves. So we don't really know, but we watch it very closely.

Okay. And the last quick one, is Citizens raising rates for commercial policies in 2010?

Yes, this is Jim. Yes, there's -- some of our business, in fact, for condos and the like is under A rates. But there is a -- as a matter of fact, they are conducting a study looking at the rates, the adequacy and to increase those. So the answer is yes, they are looking at doing that.

It's not the automatic 10%. This happened over -- primarily the individual single-family dwellings, where they have a 10% limitation on a per policy base. They also had a 10% reduction limitation on those where, in fact, rates were redundant. So we --

Okay, so there's nothing automatic like for homeowners in 2010. It's something that they are still looking at.

No, no. For homeowners, it is automatic.

I'm saying unlike homeowners, there's nothing specific for commercial stated?

No, that's correct.

Okay. Great. Thanks for the help.

Beth Malone, Wunderlich.

Thank you. Good morning. Just a couple quick questions. Could you just give us an idea, you've been through other recessions. Do you think this one is materially different from other recessions you've experienced and how you are dealing with it in your own market?

Well, Beth, I guess when it's been through several of those is that everything we rate out there that this is the most dramatic we've had I guess probably in what, the 25 years, maybe going back to post-World War II. But if you have this sitting on the tail end of a very severe pricing cycle for our industry as well. So yes, it is a brand-new ball game.

In our 70-year history, frankly, up until this past year, we never had a negative organic growth in the Company. If you could take the economic issue out of play in fact, we would have -- we would have maintained that record, even with a very, very severe pricing market. So this is a brand-new ball game for everyone.

The ability to remodel yourself dealing with the economic downturn in terms of finding ways to grow, and dealing with the cost is a new challenge. And we are very proud, obviously, of what we are doing with that challenge.

Okay, and just another question for Powell, back at the [AFA] conference earlier this year, you mentioned that A.M. Best was looking at stop rating a number of smaller property-casualty companies in Florida. And has that happened or has it had any impact on the market for you?

Yes, Beth, what I think I said was A.M. Best and Demotech I believe were the two that came out and said that if, in fact, the Citizens question mark, meaning the collectibility on the reinsurance -- I'm sorry, not Citizens, the Florida Hurricane Cat Fund reinsurance collectibility -- was still in question that several of those could be potentially downgraded.

We are not aware of any carriers that have been downgraded as of yet. However, the last thing I read that was that there were 10 to 15 carriers. That was something I read and I think Business Insurance of the national underwriter, that they have thought were possible candidates for a downgrade if it was not specifically addressed to their liking. But I am not -- Jim, are you aware of any?

No. There is I think no new news on that front.

Okay. And then just one final question on acquisitions. This recession and the pressure it's put on all kinds of businesses, it sounds like it hasn't really created a windfall of opportunities for you to pick up more brokers. But could that be an outcome of this?

We think it can. I think there's -- there will be the opportunity to look at deals and then certainly picking and choosing the best ones that yes, this will create -- especially when, in fact, the seller realizes that this so-called recovery probably is not going to be fast enough to deal with their own life planning, whether or not it's when they want to retire, when they want to get out, when they want to sell, when their partners want to take over.

So yes, I think we are still very optimistic about opportunities that will come out of this. That being said though, is that what revenue base are we buying? So we've historically been conservative. We will continue to. But I think that activity will return probably to more historical levels.

Are you finding a lot of competition for these acquisitions among your competitors?

No, Beth, I think as a matter of fact, we've never seen the current environment because the banks are, for the most part, except for a couple players, BB&T and maybe sometimes Wells, other banks are really not in the game of buying agencies as they were.

The venture capital money and leverage money is out of play. So the USI and Hub and other deals, that money is going to be very difficult to come by today, tomorrow to buy those deals.

So we are in the catbird seat to look at I think the best opportunities with cash and with capital at a cost that we can continue to acquire, so we feel -- and we have seen in fact a number of deals where the brokers who are representing the sellers coming in to say look, Brown & Brown is moving towards studying a more realistic and old historical pricing on the deal, and you probably need to realize that and go ahead and address that when you are talking to them or to others. And certainly that's one of our goals is to get pricing back to historical levels that we know that's accretive to our shareholders. So the competition is less.

Okay. Well, thank you very much.

I do show we have three more questions in the queue. Do you want to go ahead and take those, sir? Keith Alexander, JPMorgan.

Hi. Thanks for taking my follow-up. I just want to go quickly back to special programs and in particular, your comments on flat to moderate organic growth for the rest of the year. Is that to say that the recent strength has been a bit of a one-time trend? Or I'm just trying to get an idea of the sustainability there.

Well, yes. I think in Proctor specifically, we did have revenues in the first, second quarters. Some also in 2008, that we are cautious about forecasting the continued increase in their customer base and also the units of exposure on repossessed properties by banks. So at what point does that curve flatten with respect to their customers? So Keith, that's what we are really pointing at.

The other program units are -- they are pretty much on course. They're probably more flat to moderate growth. A lot of the growth has come from Proctor from CalSurance, some from FIU. So that's why we are -- we want to send a signal out there that foregoing additional growth -- continued additional growth at Proctor, the programs division makes the moderate growth are flat.

Okay. And my last question, I just wanted to ask if you were seeing any change to the competitive environment from a broker perspective. Are peers changing their commission schemes or emphasizing different products or market expansion?

Relative -- did you say are carriers changing their commissions? Is that what you said, Keith?

I'm sorry. Are peers changing their commission scheme?

You mean how they pay their peers, meaning our competitors paying their producers differently?

Yes. That and I just wanted to see if they were changing the amount of commission they are receiving from the carriers -- the commission rate.

So that they are taking less commission to be more competitive on the pricing?

Yes.

I've not seen that.

And now, I mean, remember, Keith, as you know, the vast majority of our businesses is commission driven, so ultimately, when we see our competitors pricing, it's an all-in number, so if they are reducing their commission or not, we very, very rarely know that. We just know ultimately what our prospect may be presented with. So don't know that answer.

Keith, our commission allowance from carriers actually has increased some even in this reduced pricing market. So particularly in certain lines like work comp and others, where the company sees a profit opportunity and they are saying we are willing to pay you more commission on this niche of business. And we are seeing that happening still today.

All right, great. Thank you.

Mark Hughes, SunTrust Bank.

Thank you. Two quick ones. Proctor, do you have the mix of prime versus subprime?

It's about 20% subprime, about 80% of non.

Okay. And then the --

Their business is characterized by a lot of the regional banks. We do have a large customer in a division of the government, the US Government. But for the most part, they look at the medium, not the jumbo banks, the regional banks in terms of servicing their portfolio.

Right. And then Florida property. you described coastal price increases inland a little more pressure. When you look at that in aggregate for your mix, what's the trend or what's the Florida property rate environment now?

It will be net up if you combine those.

Okay, thank you.

Next, we'll go to our final question from Mike Grasher with Piper Jaffray.

Thanks very much. Just a follow-up from earlier conversation around the investments. Cory, what are the options out there in terms of the potential to move that yield a bit higher, particularly given the M&A environment seems to be in a backlog here and uncertainty around how much time that may unwind?

Well, given the backdrop, the fact that we never really know exactly when the next deal will close, we follow a policy of keeping all of our investments essentially seven days or less. And so we keep it -- we keep the vast majority of our money in primarily tax-free money markets that are supplied by SunTrust or Wells Fargo. And those are the two primary banking sweep operations that we have. And we kind of rely on them to make sure that we are in the best AAA categories.

So moving money outside of that for a longer term is something that we just I think is shortsighted, and we just have to kind of bear with the current yield because we're just not going to put our cash or the clients' cash at exposure. And there's still a lot of uncertainty. And even with the municipalities, we've got to kind of watch what's happening with those bonds currently too.

So realistically, I don't think we're going to -- you won't see us make any real movements to stretch out to get another 10 or 15 basis points unfortunately. We just have to bear with the market right now.

But, as Jim mentioned, I think the deals will ultimately come because it's a cottage industry. We have got a lot of cash and we are ready to do it. So (multiple speakers)

I agree with that. I just I see the amount that you have accumulated, and then when I consider the size of the deals that you typically engage in, it just seems to me that there might be some certain amount that you could actually wall off and go into a bit longer term.

Or he prefers a mattress but we won't let him keep it there.

Got you. Thanks for the question.

Mr. Brown, I show we have no further questions.

All right, David, well thank you all very much and thanks to everybody for attending today and we'll look forward to talking to you next quarter. Have a great day.

That concludes today's conference, and we thank you for participating.