Brown & Brown Inc (BRO) 2009 Q3 法說會逐字稿

Please stand by. We are about to begin. 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. Such statements are intended to fall within the Safe Harbor provision of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including those risks and uncertainties that have been given, or will be given or identified from time to time with the Company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the Company's business and [prices] 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, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Jake. Good morning, everybody. Q3 was another interesting quarter. Shrinking exposure units continue to be the biggest impact on our numbers, greater than decreasing rates. Rates are under pressure everywhere, except we see some flattening in coastal areas. We continue to watch the healthcare reform debate take shape in Washington.

And I will tell you that Jim and Cory and I are here in Daytona with a special invited guest, Hyatt, decided to sit in with us today, so he'll be in the room as well.

And now I'd like to turn it over to Cory for the financial update.

Thanks, Powell. Our third-quarter results look remarkably similar to our second-quarter results. Our net income for the third quarter of 2009 was $41 million, which was up slightly from last year's third-quarter net income of $40.6 million. And our earnings per share for both quarters was $0.29 per share.

From a revenue standpoint, commissions and fees for the quarter decreased slightly by 0.3 percentage points or $800,000 to $243 million from the $243.8 million earned last year.

Included in the press release is our normal internal growth schedule that you are used to seeing. And in that schedule, it shows that we had $10.4 million of profit sharing contingent commissions, which was about $700,000 more than the $9.7 million that we received last year in the third quarter. Our best estimate of the profit-sharing contingent commissions that we will receive in the fourth quarter of this year is estimated at about $1 million right now.

Now if you exclude the effects of the profit-sharing contingent commissions and the small books of business that we sold from, that were in the numbers from last year of about 500,000, our total core commissions and fees for the quarter shrunk by 0.4% or $844,000. However, within that net number was $11.3 million of acquired revenues, so that means that we had $12.1 million less of commissions and fees on the same-store sales basis, and hence, the 5.2 percentage points negative internal growth.

As the internal growth schedule indicates, 98% of that negative growth really was a broad-based impact from our retail operations.

Now two quick points that I just want to make about the internal growth schedule is one, as you know is that when we buy a book of business from a producer, or an agency, we exclude that from any of the revenue calculations. And if we end up having a producer come that brings a book of business, that is also considered an acquired revenue, and we exclude that.

The second point is that the last two quarters, Proctor Financial had a very strong revenue base, and it started in the fourth quarter of last year. And this year fourth quarter for them, we probably expect them to be down about $2.5 million from the big quarter they had in the fourth quarter of '08. So I just wanted you to realize that when you project out the internal growth for the fourth quarter.

So leaving that area, Jim and Powell will end up talking about each of the specific divisions in a moment.

Our investment income decreased by $1.1 million, which was primarily due to substantially lower interest rates on our short-term money market accounts. We also had about $575,000 of other income, which is really just primarily the miscellaneous rental and other income, very little sales books of business.

Jumping back down to the pretax income line, our pretax margin for the third quarter of '09 was 27.7% compared with the prior-year margin of 27.2%, which was an improvement of 0.5 percentage points. This is an outstanding accomplishment of our profit center leaders that show an improvement in our margin in the face of the continuing strong headwinds of our lower client exposure units due to the economic downturn and the continued reduction in insurance rates.

In the current quarter, employee compensation and benefits decreased by 0.4 percentage points to 49.1% of total revenues. The total dollar decrease in employee compensation and benefits was an aggregate $2.6 million. However, $2.7 million of this aggregate total was attributable to just the stand-alone acquisition since last year.

Therefore, if you look at just the same-store sales basis, which also includes roll-in acquisitions, but if you look at just those offices, excluding that, we actually had reduced employee compensation and benefits of $5.3 million, of which approximately $4 million came from employee compensation and $1.2 million came from a positive adjustment to our self-funded medical fund.

Our non-cash stock-based compensation cost was $1.7 million in the third quarter, which is consistent with the estimated cost of the last few quarters. In the current quarter, our other operating expenses decreased by 0.1 percentage points to 14.6% of total revenues. The total dollar decrease in the other operating expenses was $900,000.

However, $700,000 in aggregate was attributable to just those stand-alone acquisitions. Therefore, on a comparable same-store sales basis, those offices had an aggregate reduction of other operating expenses of approximately $1.6 million, of which most was available to lower T&E expenses, reduced bad debt expenses and lower operating supplies and fees.

Moving to amortization and depreciation, on a combined basis, that increased only $200,000, and that's due to the lower number of acquisitions that occurred in the last 12 months. Our interest expense is consistent with the expected quarterly expense of about $3.6 million. Our effective tax rate is expected to continue to run at about 39.3%, which is similar to last year's.

The trends for the third quarter pretty much are consistent with what happened in the nine-month year-to-date. And with such, I just want to say that the earnings for the nine-month period was down $4.6 million to $213.7 million, and that was primarily due to $4.3 million and less profit sharing contingent commissions for that nine-month period. So therefore, our net income for the nine-month period was $0.91 or 3.2% down from the $0.94 we earned in the last quarter of last year.

Two other points that we would like to make is, one, we did extend our $200 million uncommitted credit facility with Prudential Insurance Company at essentially the same terms and conditions, and that goes for another three years from here.

And then lastly, I know a lot of you were kind of taken for a loop on the number of shares that are listed in the EPS calculation. And that basically came about because of a new gap rule GAAP rule, FASB 128. The bottom line is that there really is no change in the number of shares that we have outstanding. It was brought about because of our PSP shares.

We have 141 million shares, roughly, 141, 142 million shares, that we pay dividends on and have the ability to vote. And of that 141 million shares, 5.1 million are PSP shares. That represents about 3.6% of those total shares. This new rule basically says that those 5.1 million shares should not be listed in the basic diluted share count or the fully diluted.

However, the earnings per share is the same as it always has been because you have to prorate the earnings, the $41 million, and only take 96.5% of that earnings that is attributable to the 136 million shares, and that's how you get the $0.29. So it is another convoluted GAAP rule that, it just takes a second to kind of understand on a go-forward basis.

So the main thing for you all to kind of remember is that we basically have about 5.1 million shares of PSP shares that have met the first price target and will not be vested until sometime over the next 15 years when they meet the service requirements. And so it's a technical side, and hopefully that explains that 136. So with that overview, I'll turn it over to Powell.

Thank you, Cory. Great report.

I'd like to start with Florida retail, down 12.5% versus 8.6% in Q2. Starting in northeast Florida and Jacksonville, property rates, GL rates and auto rates are flat to down 10%, with exposure units down 15% to 20%. In the construction area specifically, GL rates are down 20% to 30%. Auto rates are flat to down 10%. And in those construction exposures, they are down 30% to 50%.

Daytona Beach area, properties down 15%. GL is down 10%. Auto is down 10%. Exposure units for GL and work comp are down 20% to 40%. That's non construction.

Construction, GL rates are down 15% to 20%. Auto rates are down 10%. GL construction exposures are down 50%. Work comp payrolls are down 10% to 40%.

Southeast Florida, going down the coast to West Palm, Fort Lauderdale, property is flat to down 5%. GL is flat down to 15%. Auto is down 5% to 10%, and exposure units are down 10% to 25% -- that's non-construction.

In construction area, general liability and auto rates are down 5% to 10%, with exposure units, payrolls, down 20% to 70%. Southwest Florida, Naples, Fort Myers, property is down -- is really flat to down 5%. General liability and auto down 7% to 10% on rates. Payrolls. which have already been greatly depressed in Southwest Florida, are down 5+% -- that's non-construction.

In the construction area, rates are down 5% to 10%, with payrolls down 15% to 20%.

Moving up the coast to the Tampa area, property rates are down 10% to 20%. GL is down 5% to 10%, and auto rates are flat to down 10%. Exposure units, down 10% to 15% in other than construction.

In the construction area, rates are flat to down 10%. Specifically, exposure units down 10% to 20% and even 30% in the construction lines.

Moving to the center part of the state in Orlando, rates are flat to down 5%. And exposure units are down 5% to 15%.

In the construction area, rates are generally flat with exposure units down 10% to 30%.

National Retail down 4.7% versus 5.6%. We'll start in the Northeast in the Rochester, Syracuse area. Rates are generally flat, property, GL and automobile, with exposure in units down 2% to 7%. In the construction area, rates are also flat with exposure units down 5% to maybe 15%.

In and around the New York City area, Garden City and on the island, property rates, GL, and auto rates, are flat to down 5%. Exposure units are flat to down 20%.

In the construction area, rates are down 10% to 20% with exposure units down somewhere between 5% and 20% in construction.

In the Connecticut area, in Hartford, rates are generally flat with exposure units down 5% to 15%.

Moving down to New Jersey, property rates are flat. GL and auto are down 5% to 10%. Exposure units, except in workers' compensation, are generally flat. Work comp payrolls are down 10% plus. Very aggressive use of schedule credits in the work comp area in the state of New Jersey.

In construction, GL rates are down 5% to 10%. Auto rates are down slightly. Payrolls are down 10% to 20% in the New Jersey area.

Coming down the Eastern seaboard into Virginia, rates are generally flat to down 5%, but exposure units are down 5% to 10%.

Further south in South Carolina, property rates are down flat to down 5%. GL flat to down 5%. Auto, down 5% to 10%. Exposure units are typically down 5% to 20%.

In Georgia, rates in property, GL and work comp are flat. Automobile, right out of the box, down 15% to 18%, very competitive there. Exposure units are down 15% to 20% across the board, including the construction areas. But automobile is really the one that's under intense pressure in Georgia.

Going West into Louisiana, rates are generally flat to down maybe 10% in general liability. Exposure units are down 5% to 10% because of the oil patch. Construction accounts are very similar in Louisiana.

Moving North into the Midwest, in Michigan, rates are generally flat to off 10%, depending on line of coverage. Exposure units are down 10% to 15%. Construction rates are flat in Michigan, yet exposure units are down 20% to 50%. The 'Cash for Clunkers' had a bump in the month that it was going on, but the next month, there was a significant slowdown, and we are not seeing much stimulus money in the state of Michigan from a construction standpoint.

In Western Retail, we are down 12% over 14.8% in Q2, and we will start in Seattle, Washington, where rates continue to be flat with exposures down slightly, maybe 5%. And in the construction area, exposure units are down 10%.

Down the coast into Portland, Oregon, rates are flat to down 10%, with exposure units down somewhere between 5% and 12%, except in construction. Construction rates are flat but exposure units are down 30% to 40%.

In northern California and Nevada, rates tend to be fairly flat but exposure units are down 10% to 20%. If you move into southern California, property, GL, auto, and work comp is somewhere between flat and down 10%, with exposure units down 5% to 20%. In the construction area, rates can be flat to down 15%, with exposure units down 5% to 30%.

Going into the Las Vegas area, rates are generally flat, including construction, but exposure units are down 20% plus, in all non-construction lines. In construction lines, down 30% and 40%.

In Phoenix, Arizona, the property rates are flat with GL and auto, down 5% to 15%. Exposure units in non-construction would be down 5% to 10%. Very competitive in the work comp environment with scheduled credits used to deviate from rates up to 25%.

In the construction area in Phoenix, rates are down 5% to 10%, but exposure units are down 10% to 30%.

In Denver, Colorado, property rates -- all rates, actually, are down 5% to 10% except automobile. And exposure units are down 5% to 15%; that's including construction.

And finally, into Houston, Texas, coastal property there is generally flat to up slightly, maybe 5% to 10%. GL rates, auto rates and work comp rates are down 5% to 20%. And generally, all exposure units across the board, including construction, are down 20+%.

I would like to point out that all of my comments relative to construction do not include bankrupt or out-of-business clients. These are existing clients that we see with compressed sales themselves or payrolls.

Finally, relative to employee benefits, country-wide, as a general statement, small-group accounts start out of the box with rates up 5% to 12%, and large groups are up 6% to 14% or more on average. However, the number of insured lives is going down, typically, and there's lots of changes in deductibles and plan designs, which bring down the overall increases substantially.

With that said, I would like to turn it over to Jim for programs, services, wholesale, and M&A.

Thank you, Powell, and good morning, everyone. With respect to the brokerage division, the quarter reflected a slight improvement in the net organic revenue challenge in that division. For the quarter, the negative organic growth was 5.4%. This is a trend from 7.5% in the second quarter, 8.5% in the first quarter and some 14.6% in 2008. This unit has the head winds of the economy rates and also business that would vacate over to the direct markets.

I recently attended the NAPSLO Conference in Orlando. Some general comments by the carriers there include that they continue to lose business to the primary writers. The economy is the biggest drag and challenge on their premium growth. Premium writings for many companies we talk to are down anywhere from 9% to 10% for 2009. This is an improvement over their experience of some 14.5% for 2008. Some of the carriers have unused property Cat aggregates and have been more aggressive on a slight basis for certain coastal property.

In this environment, we find it very advantageous to develop strong relationships with the new aggressive markets, manage our expenses down, and, certainly, bring in the new talent that's available in this market.

Next, and turning to the program and services division, this unit again turned out a great performance on organic growth. Most of the units in this division produced both top-line growth and improvements in operating profits. I would like to pay special recognition to several units, including Paul Glantz and his team at Proctor, for continuing to beat budget and prior-year performance numbers.

In CalSurance, Ken Masters and Lynn Johnson for their ability to increase the bottom-line numbers by some 6%, in light of a 2% top-line challenge. And Linda Downes and Susan Heath in our long-standing dental program, where they had a 6% organic growth and a 9% increase in profits.

With respect to our M&A activity, we continue to be challenged by the uncertainty on the revenues, which, obviously, impacts value significantly. The number of reduced deals, M&A deals, for Brown & Brown for 2009 is reflective of the agents and brokers industry. For 2009, the announced M&A deals for the industry stands at 170. This compares to some 264 or a 31% reduction in '09 versus '08.

To add some color in terms of the impact of top line, bottom line, we looked at a particular deal. Revenue trending was down about 10%. When you take this 10% top line, that number falling through, resulting in a 30% margin shrinking to a 20%, suddenly you've got not 10%, but in fact, a 33.3% reduction in value. On this basis, it's difficult to establish value with the seller. This disparity causes the seller to postpone the transaction until there is less volatility.

We feel that with a better economic condition and market pricing that we seem to be heading into, we believe that the M&A deal activity will return to historic levels.

In addition to the current favorable tax environment, there are many of the baby boomers owners in the industry that will need a liquidating event within the next few years. And Brown & Brown is well-positioned to capitalize on this unique opportunity.

Some last comments, really stemming from our attendance of the Council of Insurance Agents & Brokers conference, this is a meeting of some 40, 50 carriers that we have during this event. Most of the carriers reported relatively flat or a moderate decrease in pricing. When you dig into that question, it turns out this is really on their renewal business. And in fact, their retention rates have somewhat suffered to achieve this price stability.

With respect to their new business, the pricing tends to be more aggressive on new business versus the renewals, when measured on exposure unit basis, and comments that their margins are less on the renewal business. The weak economy is the biggest factor driving their reduction in premiums as well.

The primary carriers, their loss ratios for 2009 are reporting at a higher combined than their reinsurers' combineds, due to less Cats', actually, penetrating layers going to the reinsurers. Some carriers reporting that they experienced an increase in severity of client losses and have special concerns regarding their workers' compensation books of business.

Additional commissions are being offered on certain classes of business, including professional liability, nonpublic D&O, EPL, boiler & machinery.

So in this environment, we've always done well in an aggressive market pricing on new business, both on new and protecting our renewals. We're certainly asking for more commissions, and we tend to exclude workers' comp from our profit-sharing agreement.

So these comments, this is a rodeo we've been to before. We feel very confident in our game plan to move forward. With that, I turn it back over to Powell.

Thank you, Jim. Great report. In conclusion, I would like to say our business is a reflection of the broad market economy. Our carriers, both national and regional, that we've worked with, are doing everything in their power to retain their renewals and, thus, a very competitive pricing environment.

We continue as a group to write lots of new business and retain our existing clients, yet the shrinkage of exposure units and rate decreases impact our ability to grow organically. However, in light of this, we continue to be stronger today, and as a result of this, as the economy improves, we will be stronger tomorrow. We are continuing to hire new people in production and invest in our future. And we believe that the real difference -- and Cory alluded to this earlier -- if you look at our earnings between now year to date and last year, year to date, is really about the $5 million of contingencies that we didn't receive this year that we did last year.

Finally, I would say that we look for much of the same into the middle of 2010.

With those comments, Jake, I would like to turn it back over to you, and we'll open it up for questions.

(Operator Instructions). Mike Grasher, Piper Jaffray.

Good morning, everyone. A few questions. First of all, on cancel and rewrites, can you talk about any change in volume that maybe is occurring there?

Mike, good morning. It's Powell. No, we haven't seen any significant change in cancel and rewrites. I know we talked a little bit about that last quarter, particularly in certain areas, i.e., Southern California. But we have not seen, this quarter, a significant uptick in cancel and rewrites.

Would you actually say it's actually I guess moving the other direction at this point?

Well, I don't -- that may be a matter of perspective. We don't hear a lot about cancel and rewrites other than the normal course of business. And so, therefore, policies are just occurring and expiring in the normal expiration date. So I don't know if I would say moving in the other direction. I think it's more normal.

Okay. Fair enough.

And then, just thinking about your commentary around exposures and rates and a lot of it being down for the most part -- if you strip away that aspect of your revenue, your commission lines, and just think about the business that gets generated through new small business development or the lack thereof in this environment, how much would you say that your organic growth is suffering from that aspect of it alone? Or have you really thought about that?

Well, Mike, I'm going to answer the question a little differently, and tell me if this addresses your question. We have said that we believe that two-thirds to three-quarters of the negative downdraft in our business is directly a result of the economy or shrinking exposure units.

The other component would be rate decreases. So if you look at that, we call that the double whammy. And so, depending on where you are in the country, to your point, you go into a place like Las Vegas, small business, meaning accounts that are written at under $25,000 or $30,000 of premium are under incredible pressure. And when I say pressure, I'm not talking about existing. They are just going out of business, as just an example. But we as a group, as I said in our concluding comments, continue to write lots of new business, but it's hard to fill the hole in when you've got the double whammy.

If you were going to take the economy out of the question, which you cannot, we would tell you that this period of time right now seems to look like 1998 and 1999. That was in a period of time where there was a gradual decline of rates, I believe, if my recollection is correct, is somewhere between 4% and 7%.

Exposure units right now, if you believe the averages, are down around 6%. And if the economy is a flat to up in that environment, which it was in '98 and '99, we grow organically. But when you have the shrinking exposure units and shrinking rates, it's very difficult to grow organically. Did that answer your question?

I think, for the most part, it does. In terms of the shrinking exposures, you are just considering the existing small businesses out there, I believe. And what I'm speaking to is just sort of the lack of new small businesses being generated -- new payrolls coming, new business ideas, new companies being established.

The impact on the economy for that is certainly well published. With respect to, perhaps, if you look at the same-store new unit sales, are relatively the same for last year and this year. This is including the fact that perhaps there is less inventory out there, but our people tend to do, and have been doing, a great job of finding new opportunities there on new, new business to bring in. So the new business is a lesser pricing before, but the number of the units are relatively the same on a per-store basis.

Okay, that's helpful.

Mike, if I could also point one thing out, our average new piece of business written over the last four years is somewhere between $11,000 and $12,000 in commissions.

Okay.

So it might be a little larger than what you are talking about, although it's still truly middle-market business. We write start-ups and we write large -- very large -- accounts in the United States. But the average is $11,000 to $12,000 in commission.

Okay. Thanks very much.

Keith Alexander, JPMorgan.

Good morning, guys. I was wondering if you could talk about the deceleration in the special programs business in the quarter. The trends there and how you describe your outlook. I know that you gave some guidance earlier, but can you just talk a little bit more about that?

Well, the activity there really has been driven by Proctor Financial -- is the most significant movement of numbers, both the increased experience in the end of last year, first part of this year and the reduction this quarter, which we gave some guidance on in the previous quarter. So that unit that's involved in the first place business for our financial institutions enjoyed an upsurge because of the rates of activity. That has, in fact, kind of flattened. There's still growth there, but not at the rate we experienced in the first two quarters.

On a go-forward basis, we do expect some continued pressure on growth there. In the division itself, we still expect to be positive organic, but certainly not at the growth rate of the first two quarters.

Yes. Keith, if you look at year-to-date on the special programs, we grew essentially, -- if you take Proctor out, it was essentially flat. And so a little bit of that comment that I made earlier about the fourth quarter, when you start comparing the fourth quarter and the next -- the last year -- to what Proctor would be more flattish this year, they're going to -- on the fourth quarter this year, they will lose about $2.5 million. So it could actually dip into -- that could be a negative growth in the next quarter.

And then, of course, you've got a big quarter in the first quarter and the second quarter for Proctor. So just take that into consideration. But the rest of the special programs, on aggregate, are basically flat.

Okay. I guess I was just a little bit surprised because I looked at the number of foreclosure filings, and it seems to be increasing steadily.

Anyway, my next question is, can you talk about how much of the comp and benefits expense is variable versus fixed? And then how much of the reduction reflects variable factors versus absolute staffing levels?

Well, I don't think we can give you the specifics there. I mean we have, out of the $4 million of compensation that I was referring to earlier, probably about $1.6 million of that really came from producer compensation, which obviously is variable to the reduced premium and commission levels that the agency has.

The other about $2.6 million of that really came from just salaried employees, and most of that is coming from just normal attrition where our profit center leaders are trying not to replace people as they try to get a more efficient operation and get their costs in line with the revenues. So that's the breakdown between the variable and the fixed there on just that compensation side of it.

Keith, this is Jim. I would only add that at the front end, there is a variable, and that is the producer comp. Secondly, there is a wave, on the fact of compensation, dealing with the fact that our leaders look in. If they've got less revenue there, that business has not returned, has not grown, and they deal with the fixed side as well, and they've done that.

For example, especially in our brokerage unit there, that we've reduced expenses relatively at the same level of revenues in the second and third quarter dealing with the events there. So Tony Strianese, Mike Reardon, Bob [McGrew] -- these guys have done a great job of taking cost out almost at the same level as revenues.

Okay. And if I could just ask one more question. In the commentary on the press release, you mentioned promising opportunities in regards to employee benefits, M&A. Could you just talk about that a bit further?

My comment there really stems from what we believe now that there is, certainly, shaping a better definition of our role going forward with respect to if you look at national healthcare. There's a lot going on in terms of the sauces being made in Washington, for sure.

But, in at least a couple different bills, there is a defined role for brokers. We are looking at those avenues where we know we can add a lot of value to the customers going forward, irrespective of what may happen on the national scene.

And, for, if you let backwards the last six, nine months, we've been perhaps a little bit more hesitant to jump into a benefits agency with all of this activity happening, what will the role be. We feel better about our role today, certainly in certain niches. And so are fully prepared to readdress opportunities on benefit agencies.

Thank you very much, guys.

Ken Billingsley, Signal Hill.

Good morning. I just wanted to follow up on the benefit agency question. Do those tend to have a little bit lower margin than some of your other businesses?

No they don't. They have, as a matter of fact, as good or better margins than P&C. Obviously, especially in our system.

If we say in your system, with the HIPAA requirements and changes that are occurring in benefits and healthcare now, do you see additional costs coming in there? Or do you think you can manage those and keep the margins in line with what you are doing in other segments?

We think we can, yes. And this is the way in certain special niches.

For example, on very small groups under let's say 15, 20, 25 lives, margins are probably under more pressure. Above that level, we have a greater opportunity to provide value and some services, the likes of which you just mentioned and make our margins. And a better defined role in terms of value to the buyer.

Okay. Very good. The last question I have is -- and I missed this if you said it earlier, were there any transactions that were completed during the quarter? And how much revenue did those bring in?

Well, just for the third quarter, we essentially have only had really two transactions that really amounted to approximate revenue of about $2.5 million, so very few -- the Camford and the Rousell acquisitions that we issued press releases on.

Yes, Ken, it's amazing, given the number of people we've talked to and the number of deals, we probably got to the eleventh hour, but just did not close for whatever reason there.

Underneath those numbers, there is a lot of looking and shopping and talking, so anyway, we are very encouraged by that, but we have to get back to a basis under which to better close to the valuation gap that we are experiencing right now with the seller and what we would like to pay for it.

And I heard your comment talking about just how just the decline in business, how a 10% decline has a much bigger impact on the value proposition to you, and that's maybe where you are not able to close that gap. Looking forward, I would imagine that would you expect that it's going to be end of this year or end of next year, where some of these companies maybe will be forced to sell if the trends stay the same for the next six to nine months?

Well, I think as the certainty on pricing and the economy, as it strengthens, so too will the closed deal activity. But is that first, second quarter? It very well could be. I think that will be an evolving event into next year.

There is an outlier as well, and that's the capital gains tax that will be sitting out there in 2010 that most likely will disappear at that level in 2011.

When we are talking to interested sellers, I mean that is a motivating factor. That is a lot of money left on the table to send to Washington, so we think that will probably create some activity in '10. Otherwise, it may be just kind of waiting to look at options.

Thank you.

Eli Fleminger, Stifel Nicolaus.

Good morning. Property insurance loss ratios this year should benefit from the lack of hurricanes. Do you expect it to translate into higher commissions next year? Or do you think carriers generally view hurricanes as something beyond their control and, therefore, don't calculate it into their calculations?

Well, Eli, this is Powell. Basically, if you make a general statement in years that have lower Cats, you could make a general statement that the industry would probably receive higher contingent commission payments. However, as you know, it's all based on individual office experience and the losses at that local level. So do they factor it in?

When the carriers create a calculation, they intend to pay as the pay-for-performance type plan. If it performs well, they will pay out under these certain defined criteria. And so in a general statement, you would believe in a year that have had lower Cats, that you could potentially have higher contingencies, but it's all contingent upon the experience at the local level. So if they had lots of automobile losses, for example, that counter catastrophic losses, then they might not pay out as much.

Okay. Make sure just to hit earlier, so you expect 2010 -- right now your outlook for '10 tends to be roughly similar to what it is so far in 2009?

We said that -- and we are not economists. We'd love for you to tell us what that's going to be like, but we think that at least until the middle of next year, we see more of the same.

Okay. Thank you very much.

(Operator Instructions). [Sarah DeWitt], Barclays Capital.

Hi, good morning. Could you update us on the environment in Florida and any developments at Citizens and what this means for Brown?

Sure. You may know, Sarah, that effective 11/1, that renewals -- is it, Jim? It's renewals on 11/1 and new business for 1/1, rates will go up on large properties in excess of $10 million in value, up 20%. And then there are rate increases embedded in the small personal lines business as well.

We, as an organization, write approximately $75 million of premium with Citizens in our retail operations. And so some of that business will stay with them and the rates will go up. Some of it, depending on its location, may move to other markets. But, obviously, the intent of Citizens ultimately is to move back, at least that's our understanding, to what it was intended originally to be, which was a market of last resort. So by doing so, at some point in the future, those rates that go up -- now those, Sarah, that I talked about, there's a 10% rate increase across the board on Citizens' business. There's a 20% rate increase on the very large commercial residential properties, which are the condominium complexes specifically.

And the intent is over the next several years, Citizens can raise rates 10% a year on their entire book. And at some point in the next several years, standard markets -- I shouldn't say standard -- private markets -- would come in and potentially take some of the better risks out of Citizens of thus depopulating the exposure for the state of Florida.

Okay. And you mentioned you rate $75 million of premiums with Citizens. What would be the impact on the FIU business from the changes?

Sarah, this is Jim. This definitely is an opportunity. The question is going to be capacity, and that is aligning carriers that is willing to take on the additional coastal exposure, which we are very busily working on.

The new rate structure does bring into play an ability to probably align carrier capacity at rates that they can - on select risk -- they can make money at these new rate structures, particularly with Citizens, with this imposed 20% increase. So it is an opportunity. Fulfillment is going to be getting the capacity in place, which we are busily doing.

Okay, great. Thanks for the answers.

Mark Hughes, SunTrust.

Think you very much. In looking at Florida, the difference between 2Q and 3Q, how much does the quiet storm season affect your organic growth there?

I don't think the change in Q3 over Q2 is really a function of the quiet storm season. It's more, as you know, Mark, that Florida historically has gone through waves; some people might call it boom and bust periods, but there are waves in the economic evolution of our state. And it's in one of those down cycles at the present time.

As you know, I saw something over the weekend that showed that unemployment in the state had reached 12%. And so areas like Fort Myers and southwest Florida have been poster childs of areas with excess capacity in residential building, and yet, there's lots of units that are starting to move at certain prices. Whereas in southeast Florida, we don't see as many units moving.

So although it's kind of bumping along here in Florida at the present time, we believe that it too will change and improve in the future. So it's not a function of the storms one way or the other because we still sell a lot of business.

I was just thinking Q3 being a little bit weaker than Q2, but I hear your answer.

Would you say sequentially it's still getting more challenging, or are we bumping along the bottom?

Well, I wish we could tell you that. Our instinct is that it would be getting down there towards the bottom, but we don't know. And we keep doing everything we can to deliver for our clients, but when we are meeting with them midterm on their accounts, many of them, and they are telling us we just don't have any more projects on the horizon or we don't have -- our sales have not ticked up -- that it's different by customer base, by location, by industry, by everything.

But we really don't know, but we know that the one thing about Florida that's good is there's a great deal of resiliency in this economy, and we believe it will bounce back, but it just may be awhile.

Have you shared the distinction within Proctor, how much of that is prime versus sub prime?

We did last time, yes. We talked about that in Q2. We said 20/80. 20% sub, 80% prime.

Right, okay. And then finally, Jim, you had talked about -- you had gotten feedback from many carriers that their pricing on renewal was steady, but the new business is competitive. Did you get a sense of how much decline in price there is on those new pieces of business?

Mark, not other than the fact that that gap had widened; that they were paying a greater differential out to attract that business and invest in it. And I was curious; I said, well, why do you do that? And they said well, we're still making money on it; we're just making less money than our renewals. I said well, that's great. We would love to partner with you.

So they're very aggressive. We are having to be very cautious in terms of marketing our renewal business. The opportunity, though, is to hook up with these companies and take business away from others, which we are doing.

Thank you.

With no additional questions in the queue, I will turn the call back over to Mr. Brown for closing remarks.

Well, thank you all very much for your time and we look forward to talking to you next time. Have a great day. Thank you, Jake.

Thank you. And with that, that will conclude your conference for today. You may now disconnect.