Brown & Brown Inc (BRO) 2009 Q4 法說會逐字稿

Good morning and welcome to the Brown & Brown Incorporated earnings conference call. Today's call is being recorded. Please note that certain information discussed during this call, including answers given in response to your questions may relate to future results 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 provisions of the securities law. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the Company's business and prospects are contained in the Company's filings with the Securities and Exchange Commission.

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

Thank you, Rochelle. Good morning, everybody, 2009 marked the first time in our history that we did not grow the top and bottom-line. Yet, in light of this difficult operating environment, the Brown & Brown team continues to deliver for our clients and generated a 34.3% EBITDA margin. As we've said in the past, we have margin pressure in a negative internal growth environment. The insurance industry as a whole continues to post positive underwriting results for Q4 with standard carriers combined ratios in the 90s and with written premiums generally lower 4% to 8% Q4 over Q4. The risk bearers are seeing the impact of shrinking exposure units as we are.

Finally, you should be aware that our Q4 numbers reflect $4.2 million less in contingency revenue for FIU that was received in Q4 of '08. This was postponed into 2010 and subject to favorable loss experience, we are able to, or potentially able to collect that in '10. Now, I would like to turn it over to Cory for our financial report.

Thanks, Powell. After three quarters of slight improvements, the weak economy, the continued soft pricing, the soft M&A environment and, again, the lack of similar profit sharing contingencies that we got from fourth quarter last year, all caused the fourth quarter this year to be the worst quarter for the entire year. As most of you that routinely follow our Company know that as our internal growth rate goes, whether it grows or shrinks, so goes our earning. As long as we have negative internal growth, as Powell was mentioning, we will have shrinkage of our margins as some of that commission revenues evaporate. So with that said and our fourth quarter revenues did retreat more severally than any other quarter during the 2009 year. And so our total revenues for the quarter did decrease 7.7% and that represents $17.9 million of total loss revenues.

Commissions and fees, which is the main revenue line item, that decreased 7.2% and that's $16.6 million of that $17.9 million. And within that, that's where our contingent profit sharing continued commissions reduced by $4.4 million of which $4 million, as Powell mentioned, was from FIU. So taking the remaining total core commissions and fees, which excludes the profit sharing contingent commissions, decreased $12.1 million from the fourth quarter of last year and within that net growth number is that -- is $6.8 million of acquired revenues. So therefore, when you add those two back together, our total net loss of core commissions and fees on a same-store sales basis was $18.7 million and that reflects a negative 8.3% internal growth rate. That number really breaks out that $13 million of that total was from a broad based reduction in the three segments of our retail division.

And then secondly, $4.5 million of that came from our national programs division, of which that portion was really equally split between reductions at our FIU Proctor and public entity subsidiaries. So the specific rate growths, obviously, is in the press release and Powell and Jim will talk about each of the divisions more specifically in a minute. Moving to our investment income, we only earned -- we earned $700,000 less in the fourth quarter this year compared to the '08 and that's exclusively due to substantially lower investment yields in 2009, even though we do have much higher average daily balances in our cash accounts. We are currently making only 10 to 12 basis points on our overnight market accounts and really last month and early January, we were only making one basis points, as hard as that is to believe, but it's substantially down. Other income was $700,000 for this quarter compared to $1.3 million in the fourth quarter of '08.

Most of the prior year's fourth quarter gains and half of the 2009 fourth quarter gains resulted primarily from the sales of certain books of businesses in our normal course of operation. So moving down and looking at the expenses during the fourth quarter, our employee compensation and benefits increased 1.2 percentage points to 53.7% of total revenue, even though the actual net dollar cost dropped by $6.8 million from the same quarter. The employee compensation benefits relating to just the new standalone acquisitions since the beginning of the fourth quarter was $1.9 million of new costs. Therefore on a somewhat comparable same-store sales basis, because that also includes any fold-in acquisitions, we had an aggregate net decrease in our employee compensation and benefit costs of approximately $8.7 million.

So you can see even though our profit center leaders do a great job of managing their costs and reducing employee benefit costs by $8.7 million, having $18.7 million of revenue evaporate due to the rate and the exposure units shows that our operating profit margins and pretax margins do compress. Moving on down, our noncash stock-based compensation cost was $2.1 million in the fourth quarter, which is an increase of about $400,000 and that's just due to new performance stock grants issued during the year. Our other operating expenses increased 1.8 percentage points to 17% of the total revenues and that represents about $1 million of increased costs. The other operating expenses relating just to the standalone acquisitions is about half of that, $0.5 million, and therefore on the comparable same-store basis we had approximately $0.5 million of additional net costs.

Almost all of our costs and line items showed a decrease from the prior year fourth quarters, like travel and entertainment expenses, supplies, occupancy costs. However, those savings were offset by a $1.4 million increase in our legal expenses. Our legal expenses is higher due to the cost of aggressively defending legal proceedings against us, as well as aggressively pursuing legal actions against some third parties. Our amortization and depreciation charges are really just a factor of our various acquisition levels. Our interest expense is slightly higher due to acquisition earnout liabilities that we have. And then, finally for the quarter, moving to our effective tax rate, for the entire year of 2009 our effective tax rate was 39.9%. We'd expected to run an effective tax rate around 39.3%, which we did for the first nine months, but due to the substantial drop in revenue in the fourth quarter, the rate did move up and the impact of having to true up the previous nine months amounted to about $1 million and that did fall into the fourth quarter, which drove up the rate to the 42.4%.

The rate moved from our expected 39.3% to the 39.9% rate mainly due to higher state tax rates, like Michigan, which has an effective tax rate on a combined basis of roughly 41.3%. And that's where our Proctor subsidiary is and when we have higher -- when they become a higher percentage of our total pretax income, the overall rate does go up. So now just quickly moving just to the year-to-date numbers, I will just restate a little bit of what Powell said is that for the year we did have total revenues of $967.9 million and that's down only 1% from 2008 and that represents about $9.7 million. And of that amount $8.8 million loan was just from our profit sharing contingent commissions. So in spite of a year that had a lot of difficult challenges that we mentioned, I think it's very important that each of our leaders at our decentralized operations were still able to maintain an operating EBITDA margin of 34.3%. That was really only one point, one percentage point down from last year. So all in all, it was a good year relative to the difficult challenges that we did face. So with that, let me turn it back to Powell.

Thank you, Cory. From a retail perspective, Florida retail internal growth was down 10.4% versus 9.7%. GL and automobile rates are flat to down 15%. Work comp rates are down 6.8% on average for 2010. Since 2003, when reform was enacted, rates are down approximately 63% in Florida. Exposures and payrolls are typically flat to down 15%. The construction industry in Florida here, as you know, is still very slow. GL and auto rates are flat to down 15% and the exposure units, payrolls are down 5% to 40%. Citizens Property Insurance Company, effective January 1, increased their rates. Commercial residential rates are up on buildings over $10 million in value. They are typically with the same terms and conditions up 20%, but most of those insureds are changing their terms and conditions, meaning taking higher wind deductibles and AOP deductibles, so it usually levels out more about a 10% increase. On buildings under $10 million, it's typically a flat 10% increase.

Personal lines rates are also up, some more so than others in different areas of the state, but roughly 10%. What does that really mean? Well, in the -- some of that business that is currently with Citizens is moving towards the excess and surplus lines market and specifically we're starting to see more property in the Panhandle try to migrate out of Citizens into the E&S market and to a lesser degree in southwest Florida. We have not seen the pricing get close enough yet in -- on the east coast of Florida and more specifically southeast Florida. On a national retail basis, internal growth was negative 7.2 versus 3.3. In the southeast, excluding Florida, GL and auto rates are flat to down 10% and work comp rates are flat to down 5%, except in Louisiana, where rates are down 5% to 20%. Exposures are flat to down 10%. Construction, GL and auto rates are typically flat to down 15% and payrolls are down 5% to 15.

I will note that accounts over $100,000 in premium anywhere in the country continue to attract lots and lots of attention and regional carriers are very, very competitive in the southeast on all sizes of accounts. In the northeast, property, general liability and automobile rates are flat to down 10%. Work comp rates are down 5% to up 5%, and exposures are typically flat to down 10%. In the construction area in the northeast, rates are flat to down 10% and exposures are flat to down 20%. I will note that accounts in and around the New York City area seem to be holding up better than other accounts in the northeast United States. In the Midwest, property, general liability and auto rates are flat to down 15%. Work comp rates are flat to down 10%. One note, Texas and Michigan are more competitive with rates on average, down 15% to 25%, and exposures are typically down 10% to 40%. Construction, GL and automobile rates are down 5% to 10% and exposures are down 10% to 15%.

Lots of capacity in the Midwest and there are new regional carriers entering states, most notably as an example in Colorado, where they have two new regional carriers, they continue to drive pricing down in that state. In western retail, internal growth was 14.1% negative versus 11.5%. Property, GL and auto rates are flat to down 15%, with exposures down 5% to 30%. Work comp rates are either up 5% to down 10%, and exposures are down 10% to 25%. Construction continues to be slow. GL and automobile rates are down 5% to 15% and exposures are down 5% to 50%. There's intense rate pressure in the Pacific northwest, specifically the Seattle area in GL, auto and work comp. Rates are down 20% plus. A year ago, they were flattish. In Southern California automobile rates are down 15% to 20%.

We continue to see significant construction shrinkage in, I'm sorry, in Arizona and Seattle. And in the western states that we operate in, they seem to have a more difficult economic environment than the national average from an unemployment standpoint. Employee benefits. Small groups rates are increasing 5% to 15% and insureds are modifying plans to reduce the ultimate increases. On large groups, those are groups over 50 insured lives, rates are up 5% to 15% on good loss experience. If they have poor loss experience, it's substantially higher, and covered lives in groups are typically down 5% to 40%. That said, I will now turn it over to Jim for your report.

Thank you, Powell, and good morning, everyone. I would like to cover the non-retail divisions, wholesale brokerage services and programs, and also to touch on the M&A activity. Within the wholesale brokerage this was a positive surprise in the fourth quarter. The negative organic growth, the reduction of 3.1% for the fourth quarter, was the best quarter in this division since the third quarter of 2007. The negative organic challenge in 2009 was 6.2% and this weighs very favorably compared to the 14.6% challenge we had in 2008. So definitely an improvement in this division. Special recognition to our two leaders there, Tony Strianese and Mike Riordan. These individuals in the face of 9.5% less revenue, they took out actually more expenses than that and improved their core margin in 2009 in this division by 1.1%. I would like to share with you a couple of comments from the different operating units within wholesale brokerage. The price reductions, they continue to happen.

Under accounts -- the accounts under $50,000 in premium the reductions are smaller. They are generally in the 0 to 5% range. On accounts over $50,000 premium, we experienced really 10%, 15%, 20% reduction in pricing there and competition from the standard market. Exposure units continue to deteriorate 0, 5% to 8%. Interesting comments from a couple business units and that is that payrolls for the last couple of quarters are more stable than the revenue base. So perhaps the amount of hiring or terminations there is shrinking but not a lot of impact on the top-line for our customers at this time. Submission count is up, which is very positive, indicating a surge of market opportunity. The standard markets, as mentioned, are still very aggressive. We think that the binding authority component of this business, which represents about two-third revenues, is a growth opportunity in 2010. There's some hungry carriers that certainly would like to have additional business in this area and we're talking to a number about additional authorities from them to grow that business.

Turning now to the service unit, this business unit continues to produce industry-leading margins of 26.7% for the year. We were down slightly in the third -- in the fourth quarter. Fourth quarter down slightly due to claims count, but for the year, revenue was up 5.6% and a corresponding increase in pretax earnings by 4.4%. This month, we did close on the acquisition of Protocols. This is a business unit similar to NuQuest. They are a Medicare set aside provider to carriers. It's a growth opportunity with a high margin performer in this unit. Turning now to the professional programs. For the quarter, they were -- the revenues were down 5.4%. This is principally on price reductions in a couple of the business units for this quarter, but for the year, we are very pleased to report a 2% growth in professional programs. This division, you may recall, is comprised of small account, professional coverage for dentists and lawyers, insurance agents, physicians, and the price pressures on this business unit, again, under the $50,000 premium count, the price pressure is a little bit less, maybe at that 0, 5%, 8%, over 50,000, it's probably double that.

It's anywhere from 10, 8, to a plus percent challenge there, particularly on accounts with fewer or no losses. There is, surprisingly, slightly less exposure units with respect to numbers of law firms and units comprising the premium formula. On a very positive note, we were able to initiate new sales growth in this division in 2009 and believe that can spill over into 2010. Next is the special program unit. This is -- consists of some 16 business units. The -- we did have a negative organic growth for the quarter in this division of 11.4%. For the year, though, this unit was -- had an increase of 9% for the year, down for the quarter, but up for the year. This had a lot to do with some fluctuation of revenues at Proctor Financial that I will cover with you in a moment. Within this unit is our public entity unit, they were down just under 5% for the year with sustainable earnings. The factor here was more pricing than the business units, certainly governments are not reducing as quickly as the general business economy, but the price competition is quite severe.

The next unit of note, Florida and the coastal underwriters, our condominium unit in south Florida, we did have a tough quarter, primarily due to capacity concerns or issues and that is the ability to write total new exposure units in south Florida. And for the year 2009 we were down 2.4% within this unit. We are very pleased to report that Jeff Eisen and his leaders have been able to successfully negotiate new capacity for 2010, which will enable us to keep our existing customers and also actually grow this business unit for non-tri county exposures in Florida for 2010. A real plus for them and we are excited about that new capacity. We are able to achieve some price increases on condominiums in Florida, a sum to those being imposed by Citizens. American Specialty is our entertainment and sports facility up in Indiana. They were down 9.1% for the year.

Two factors, one certainly price competition in longtail casualty is very severe. The other, and perhaps even more significant, was the transition from one policy issuing Company to another. That transition is now complete. We -- going into 2010, the new carrier will offer our ability to issue new products there for this business unit and we feel like an opportunity to reverse the trend and provide some growth for American Specialty. Now back to Proctor Financial and some additional guidance as to certainly the fluctuation of revenues for this business unit. Proctor is an insurance service provider for regional banks for their mortgage portfolios. And describing that, mortgage portfolios you think about all the defaults, the things going on there. Actually, that has generated earnings revenue opportunity for us. However, the volatility of the regional banks is one that has caused fluctuations in revenues and growth and earnings within Proctor that we wanted to provide additional color to you.

Proctor does have the characteristics of having large accounts, therefore, revenue can be lumpy. Revenue tends to come on very slowly. As we write a new account we grow that account with respect to new exposures. Unfortunately when we lose one, as we did last year as a result of a takeover by the FDIC of a large account, the revenue disappears immediately. That certainly impacted the fourth quarter And with respect to the first and second quarter of 2010, we would like to provide some guidance on this business unit. In the first quarter we could anticipate revenues, as a result of this large account having been taken over, of a reduction of some $9 million to $10 million of revenue in the first quarter for Proctor. In the second quarter the number could be $6 million to $8 million. We feel this is a very conservative view of it. It's based upon our existing customer base. It doesn't include new business or exposure unit growth nor a change, a significant change in the mortgage environment.

So those factors certainly would help your model in looking at forward looking for 2010. Lastly, moving back to M&A and getting into something, frankly, on a very positive happenings there. We are seeing some promising new activity. I think they -- at least a stability of revenues from the standpoint that we can sit down and have a meaningful conversation with a prospect as to their expectations and our expectations of value. That conversations are going much better this year than last year. The early part of 2010 is encouraging from the three business units we have acquired. Last year the industry was down some 40% in M&A activity. We think '10 certainly has more promise to it. There's a tax rate change sitting out there at the end of 2010. This is prompting discussions by potential sellers to do I do it now or do I pay more next year with respect to taxes. The other item Cory mentioned, the cash kind of sitting on the sidelines.

The idle cash is something that is darn near idle, because you look at the earnings of that cash. So we are going to work very hard to put that money to work in a very prudent manner. And lastly, also in the room is Tom Riley. Tom and I are friends for some 20 years. Tom replaced me, followed me as CFO in 1989. After a couple of years he took over south Florida offices, grew that operation. He built his region plus others to some $200 million in acquisitions that he has touched and led, has been, as Powell mentioned, the most prolific buyer of agencies, and he lives in a jet, which is the story of many of us. So we've got a very, very experienced leader to step in and be involved in the M&A activity and I think we will have great success with those efforts. So with that, Powell, I'll turn it back over to you.

Thank you, Jim. I would like to conclude by mentioning several items, three particularly. One, we have broken out Proctor Financial because it's an important part of our business but it is countercyclical. The recent events in our economy has had a significant impact on that business. The rest of our Company is more of a mirror reflection of the broad, middle market economy. Two, Hyatt and Jim have developed a great group of operating leaders and those leaders continue to step up and take on more responsibility. As Jim alluded to, Tom Riley, who has been our most prolific acquirer of agencies in the past, will now head acquisitions for our team and focus more of his time in that area in the future. And finally, we have ten regional presidents and regional executive vice presidents who report to the CEO.

That -- this development, in terms of the regional president and the executive vice president, regional executive vice president structure has developed over the last ten years. All of those individuals have reported to Jim, Hyatt and/or myself during that period of time. Now, all ten will report to me, with some taking on more responsibility, as we alluded to with Tom Riley of acquisitions. So with that said, Rochelle, I'd like to turn it back to you to open it up to questions.

(Operator instructions) We will first hear from Mike Grasher with Piper Jaffray.

Thank you. Good morning, everyone. Powell, I wanted to circle back with you in terms of your analysis of the market and what you were describing to us. It seems pretty dire out there and maybe not -- nothing seems to be turning up. Is there anywhere or either by line or geography that maybe indicates some light at the end of the tunnel?

Mike, we -- I would tell you that it seems to be, continues to be very competitive in the economy out there and what we read and what we see is different. And so if you noticed in my comments, I talked about our business being a mirror reflection of the middle market economy. And so we continue, and Jim alluded to it as well, some of our clients we're seeing are not having payroll shrinkages, but we are still seeing shrinkages in their revenues and sales and so the areas that you don't see as much change would be property related businesses, however, it's possible to have an evaluation of that property and it be valued less than you had it insured for. So you are seeing some values on property accounts come down too. So I would tell you that it's pretty darn competitive everywhere. There are places in the country that a year ago we did not see the slowdown, and you have heard me say that before, in places like Seattle and Portland where it as slowed down a bit. But it continues to be competitive.

Okay. So maybe just less bad overall, but certainly nothing to get too excited about?

Yes, I think that it's -- I think that's a fair statement, but it was a down, '09 there was a downdraft as you can tell.

Yes. Yes. Cory, just a follow-up question. Can you talk about the variable expenses or the other operating expenses. They are up about $6 million in '09 versus '08. Are there areas here where you might expect to see some heightened expense awareness or management or how should we be thinking about that for 2010?

I think part of the decentralized system is that each one of our profit center leaders looks at each of their operations and modifies. So with that said, things that can be changed are already being changed and a lot of the savings that we do have is that if you take all the groups and put them in a line in terms of the highest margins to the lowest margin, probably some of the greater savings are coming from offices that may be below the average level. So there's no one area that will come up. It's just unique charges that happen in a particular quarter. Like on this particular quarter it happenerd to be a higher amount of legal expenses that just popped up because of a couple of cases. So I would expect us to be relatively consistent in terms of the percentage. Now, as it -- the percentage of total revenue is dependent upon, believe it or not, more so on where the revenues grow or shrink at, but from an absolute dollar standpoint, I don't think there really is any -- it won't be significant changes.

Mike, this is Jim. I think on the operating side, we -- with respect to the cost, 2008, 2009 was the first time that I saw where budgets never lost -- never left the desk of the leaders. And what that means is that you are always looking, what is my new revenue base? What are the expenses that disappear because the commission goes? And then what is the next phase I can do with respect to, let's say, rent. What about support staff? What about other costs there? And so that budget is a living document sitting on their desk to work with each and every quarter going forward. Our people have really done that very, very well. We talked last quarter about the reduction in lease costs that we -- a goal of taking 25% of that out over the forward 12, 18 months and in that we're finding success because the issues in the real estate market. So that micromanagement down at a small P&L level is bearing fruit.

Okay. Thanks very much for the color and taking my questions.

And next we'll move to Keith Walsh with Citi.

Hi, good morning, gentlemen. A couple of questions on revenues for Powell and then I have got a M&A question for Jim. Just looking at -- I guess, we are into your three year of negative organic and I thought we would have lapsed some of the negative by now and it seems to be actually getting worse. Maybe if you can just talk first on the impact we are seeing on rate versus exposure, first of all in '09 relative to '08, if one is having more of a pronounced impact than another. And then I have got a couple of follow-ups there.

Sure. Keith, we would tell you that rate is maybe 25%, maybe 30%, whereas exposure unit shrinkage, you may have heard me say, I would say it's two-thirds to three-quarters of the impact across the board.

And how has that been traditionally -- I'm sorry.

Yes, traditionally, if you think about it -- well, I haven't asked the question is there a similar period of time excluding the economy in investor meetings and I would bring you back to the late '90s when rates were going down somewhere between 4% and 7%. In the fourth quarter of '09, the average standard rate went down, standard Company rate went down 5.6%. And so in that period if the economy is flat to up slightly, we believe we grow organically, as we did in the late '90s. But then you put on top of that a downdraft, which we call the double whammy, is you have one, rates going down but the more important impact is the shrinking exposure units. We are continuing to write a lot of new business, but it's very difficult to fill in the whole of shrinking exposure units to then to grow your business on top of that. So I would say two-thirds to three-quarters exposure units, one-third to one-quarter rate.

And just to follow-up on the exposure units, what are the inflection points we should be looking for? Is it really payroll related? New construction? Like, what are the really key metrics for you guys.

Well, Keith, it's interesting. We have been looking over the last year for a leading economic indicator on which to peg our performance and we have not found one that truly reflects the performance of our business. Some of us have talked about the fact that it is a -- we have a lagging component in our business or maybe the middle market may have a lagging component from an economic standpoint to the overall market. I don't know, but we have not been able to find a leading economic indicator of any sort that has a direct correlation to our business yet.

Okay. And then the second piece of my question is you touched on the competitive position by regional competitors, maybe if you could talk a little bit about retention of your producers and your accounts by historical standards, maybe a little more color around the regional competitors that you mentioned earlier.

When I was talking about regionals, I wanted to make sure that was regional insurance companies.

Okay.

But as it relates to our retention of accounts and of producers, let's talk about accounts and producers. One, we have not seen a significant deterioration on retention of number of accounts if you exclude bankruptcies. That's a big if, but I'm saying if you exclude that, our retention level is more near historical norm. So that's retaining the number of accounts but accounts can shrink in size because their sales and payroll and things like that have shrunk. Number one.

Number two, as it relates to producers, we, as you know, basically allocate 1% of our revenues to recruiting and enhancing high-quality people that are not in the current budget around our system each year. And in doing so, we have continued to recruit high-quality people and try to enhance their abilities through Brown & Brown University and we have been very fortunate to retain the producers in our system. That does not mean that we haven't had some producers leave, which you have normally in any market cycle, but we would tell you that we have been very pleased in retaining the high quality producers in our system and recruiting new high-quality people, who we think will be also very high quality producers in the future But the regional component was regional insurance companies was what I was really referring to.

Okay. And then just last question for Jim just on M&A. If I look at the -- through the first two months, I guess, of the year or almost two months, about $10.5 million of acquired revs. I guess I would exstrapolate that out maybe a $60 million run rate for the year. Is that a fair run rate or do you guys think you can do better than that? Or is that a good trend that we should think about.

Well, that certainly -- if you take the last four or five year average that would be a very doable target. If you look at deployable cash, the opportunities there or so, we have never really put numbers out there in terms of forecasting acquisitions. They kind of happen when they do. They are also very lumpy with respect to the quarters that they come in, but the -- is there an improvement in the environment? And we think there is. And that has to do with the ability to establish value on our part and the seller. We are fortunate to be one of the players out there that has the resources to acquire at different size levels. And if you look at some that really want to have more chunky acquisitions, our model we can acquire really from $2 million, $3 million, $4 million and $5 million up, so that gives us, I think, an advantage to some others. And frankly, what is very, very profitable agencies and opportunities too. So this year, we hope to be very busy.

Thanks a lot, guys.

And Mark Hughes with SunTrust will have our next question.

Thank you very much. Any thoughts on the overall contingent outlook for Q1. I guess some of that FIU will show up in 2010. Any other comments?

Yes. The FIU, Mark, is typically -- we anticipate that at the end of the year. And as it relates to profit sharing, once again, it's a guess. Profit sharing is a function of the performance of the book at the local office level, not only from a loss ratio stand point, but from a premium stand point. So if the premium shrinks and is profitable, the calculation would typically be lower. Having said that, if the premium grows and the losses grow, then you could get lower too, or if it grows and it's more profitable, you can get more. So we really don't know from a standpoint of what the contingencies are going to look like, however, we said in markets or in cycles where the loss ratios on average go down, the insurance companies typically will pay out more in contingencies. That is not indicative necessarily of each individual office. And having said that, when loss ratios go up, carriers typically pay out less in contingencies. So I know I have been kind of broad on that statement, but we really don't know until they start coming in.

On the M&A front, I think it sounds like you are able to come to better agreement on terms of valuation. Is that a tax issue? Do you think people are -- they finally got to the point where they are lacking in clarity about when the soft market is going to end and so they are willing to come to the table?

Yes, I think it's more that the market is the market. So the -- if they believe that market was going to suddenly jump up and revenues and earnings would increase, the tendency to probably remain in place, wait for a better, brighter day, that doesn't appear to be happening in a time frame that many need. So they are coming back saying, look, we had $12 million in revenue. We now have $10 million, what might have happened, might have happened but let's talk about what we have today. Arrange an opportunity for us to grow this to a value that we can agree upon and move forward. So I think that's probably the most significant change that we've seen.

Thank you.

And next we'll move to Keith Alexander with JPMorgan.

Hi. Good morning.

Good morning.

I was wondering just first of all, was there anything unusual in the national retail (inaudible).

Keith, I can't hear you, actually. It's breaking up.

Hi. Is that better?

That's better.

Yes, hey, I was just wondering, was there anything unusual in national or what would point to the acceleration of the decline in national in the quarter? It just seems like it was a little bit faster than recent trend.

Yes, no, there's not anything in particular we are pointing to, Keith. I just think it's an overall deterioration in the market. I know that you said it's up from 7 -- yes, it's actually from 3.3 to 7.2 quarter over quarter, but I would attribute that personally to a combination of overall the economy pushing down somewhat and in some of the areas that were more stable a year ago, they started to slow down as well. That's what I would -- but there's not one thing that we point to.

Okay. And I'm going to ask a question that's kind of been asked before, just in a different way. So where are we in terms of the organic declines? Do you think that we are going to see continued acceleration, stabilization or maybe a gradual improvement from here?

Well, that's hard to say, Keith. I would tell you that the way I would probably answer that is if you believe what you read and hear, that the economy and the economic outlook is flattish and so how does that translate into our business, we don't know yet. And so, obviously, you could make an argument that successive years down when you hear exposure units down on top of down, how much further down can they go? And so we don't know, quite honestly. And so I think to the question earlier, from a standpoint of, we are trying to do everything we can to retain our clients and our clients are shrinking and when that stabilizes and/or the growth starts, we will start to see it pretty shortly thereafter. But we don't know, Keith, to answer to your question.

Okay. And then going back to the other operating expense, do you expect any of the legal expenses to carry over to 2010 or is that just a onetime item?

Well, I think that $1.4 million is more of a onetime item, because the case is over. But any particular quarter, they can jump up. From a year-to-year basis, I would expect it to be stable, if not even down a little bit.

Okay.

Certainly what we hope, especially on that particular line item.

And on the tax rate, is there any additional portion of that that might carry over to 2010?

Well, I think from an ongoing basis, I think you've got to model out a 39.8% to 39.9% effective tax rate on a go-forward basis.

Okay. And last question. Has your interest in repurchasing shares changed at all?

We, as you know Keith, haven't ever done that. We don't like to use the term never or always, but it's not been discussed with the board and we believe that our cash has a lot of opportunities this year to invest in high-quality agencies. But, like I said, it's something that we are not using the word never or always, but we really do believe that there's a lot of acquisition opportunities for 2010 that we would invest our money in.

All right. Great. Thank you, guys.

And next we'll move to Meyer Shields with Stifel Nicolaus.

Thanks, good morning, everyone. This might be a little bit of a tough question, but when you are pursuing acquisitions with potential companies, does the question of why other brokers' organic growth rates are improving while yours have yet to stablize. Does that come up? Is that an impediment to doing deals?

Meyer, this is Jim. No, it has not. I think the element in a case of a difference between the other public brokers and Bro are pretty obvious. I think they are really -- they are focused at opportunity, at culture, at value, at their people being able to stay on and go forward and do the things that they have done in the past to operate most like they have before. So that component is not there. The organic growth is one that has a lot to do with, obviously, with value for Bro shares that we want to get into our hands and we do that. So to that extent, they are keenly tuned into that component. But it's not one where they value that as that, gee, we're unhappy talking to you because of that particular component. It's never come up.

Okay. No, thank you. That was very thorough. Two small questions for Cory. One, when we look at FIU related contingents for Q4 2010, am I right in assuming that all else being equal, we'd have $4 million postponed from 2009 and let's say $4 million from 2010?

Meyer, this is Jim. You are right, Meyer. The rollover from '09 to 2010 was a good news/bad news. The good news was that we negotiated in November and December an increase in the participants on the reinsurance treaty for FIU. In doing that, though, part of that was extending the '09 year into 2010, which we couldn't close out the '09 year and we couldn't collect the contingent. But it does continue to build, to accrue very, very profitable years, which that has not disappeared, but we don't bring closure to that year until 2010. So we have -- it doesn't diminish the 2010 opportunity to your point.

Okay, that's very good. And historically, I guess, there's been some seasonality with other operating expenses being lower in the first quarter than in other quarters and we did not see that in 2009. Should we expect it in 2010?

I guess I'm not sure what costs you are thinking of, seasonal costs, because, I mean, I don't view us having too many expenses that are really seasonal related costs. But I think that if you look at the overall costs that we have for 2009 is -- it changes on a monthly basis and I think the current level is what you ought to expect for 2010.

And we should expect that every quarter in 2010.

As a general rule.

Okay.

Well, excluding contingents, which certainly influences first quarter.

Right, but that -- .

And it does affect the bonus amount so that would fluctuate that side of it.

Okay. Got it. Thank you so much.

And Brett Huff with Stephens will have our next question.

Good morning, guys.

Morning.

A couple of questions. Cory, I wondered, could you just -- want to make sure when you were giving us the various comp and OpEx math, which was sort of same store sales organic and which was added by the M&A. Could you go through that. I think you gave us the year or was that a 4Q number and regardless, I was writing quickly but couldn't get it all. Could you just highlight both those -- that math again for me for 4Q.

Yes, right. That is a -- those were fourth quarter numbers.

Okay.

That I was giving. And when I say that the way we do that is we really just taken the standalone acquisitions that are new and we are isolating the true costs there and then just saying, okay, that is X dollars and then separating that to the rest of the offices that were there in the same time last year.

Right.

What that does include is if we do have any fold-ins, those numbers are kind of embedded in that existing office. So there are some increased costs there from the fold-ins, but I'm saying they are really like same store. So you have to kind of know that little imprecision methodology there. But what I was basically -- are you talking about the terms of the compensation or the other expense line.

Could you do both for me?

Yes, kind of reviewing back on the compensation, we base said they were the net reduction of $6.8 million of raw dollars. Okau. If you take just the standalone acquisitions, they accounted for $1.9 million of compensation. So essentially, you have to add those two numbers together, because the net was a $6.8 million drop, but you are carving out the $1.9 million. So if you take just the offices that were there in the both years that do have a little bit of fold-ins in there, that -- those were actually reduced by a total of $8.7 million of costs that came out.

Okay.

Okay? So do you follow what those numbers are?

Yep. Yep, that's great.

And then when we went to the other operating expenses, just for the quarter again, there is basically an increase in total expenses of about $1 million. It went from roughly $35.359 million to $36.382 million, so that's right at about $1 million. And of that, those standalone acquisitions, they accounted for $0.5 million of that. So then that means there's another $0.5 million net increase on just kind of the same stores. And then -- but when you look at all the various line items, like I said, T&E and supplies, almost every line item was a decline, with the exception of legal and that's where legal actually had a bump up of about $1.4 million.

Okay.

And so that kind of overshadowed and that's how we ended up with $0.5 million and up.

Okay, great. On the guidance for Proctor, the 1Q and 2Q, that's a year-over-year number, the $9 million to $10 million hit and then the $6 million to $8 million hit, is that correct?

That's correct.

Okay. And can you talk a little bit more about Citizens? Is sounds like you are getting or you are hopeful that the higher prices will benefit you all down in Florida a little bit and it sounds like on the margin in the condo pricing that that's happening. Any more color on how quickly that could benefit you or anything?

Yes, well, let's talk about the Citizens for a moment. I think in the last call we talked about we write about $75 million of Citizens' business in premium.

Okau.

And so think about it roughly as 10% commission, roughly. So $7.5 million of revenue.

Okay.

And so what I think is going to happen is this, there's going to be an inflection point depending on where you are in the state at which business, as I alluded to, will pour out of Citizens into the E&S market. So, for example, right now the Panhandle seems to be that area where the inflection point is the closest. If you noticed, the inflection point is not that close in southeast Florida yet. So there would be a slight increase on accounts in southeast Florida if the terms and the conditions stays the same. That's a big if. And so as I alluded to, those accounts that were over $10 million in value, the rates that are coming out are typically up about 20%. But when they change the terms and conditions, they are up about 10%. So the inflection point in southeast Florida is still a ways away at which the E&S market, at least at their current appetite, would start to depopulate accounts from Citizens.

Okay. That's helpful. And then the last question was on the lease issue. Can you give us a quantification of the success in that so far, or is that more a back half 2010 thing as you can negotiate leases off over the year?

I think that to answer your question, it is -- every scenario is different in every office, so it's taking awhile for it to work itself through the system, so I can't tell you exactly when we are going to start to see the major impact in terms of lease improvement, but we can say that we are working on it and we are improving every quarter.

But, again, if you look at excluding acquisitions, we actually had a net drop of occupancy costs of roughly $200,000, $300,000 just through '09. So most of that, part of that just came in during part of the year. So you will see a little bit better improvement in 2010. So it's going in the right direction.

Okay. Thank you.

And we do have one question remaining. We will hear from Scott Heleniak with RBC Capital Markets.

Hi, thanks. You talked about acquisition multiples paid coming down a little bit. I wondering if you might be able to quantify that, how much specifically had come down and your acquisition strategy, is that predicated on multiples coming down lower from where they are now or sort of just kind of leveling out at this level.

I think last answer first and that is we think they level out. The last, if you go back two years, due to venture capital money, banks, others, the multiples had grown from 6, 6.5, to 7.5, 8 plus. They are back into that 6, 6.5, some there are premium at 7, but for the most part they are really back in that 6, 6.5 range. The multiple certainly is one component, but the other details about opportunity to grow it, about a workout forward numbers, are you really paying for what has been delivered becomes the major part of the play. So yes, they are down, but that's really not the predication to looking at the enthusiasm for 2010 as one of individuals saying this is the time to do this. I need to go ahead and get something done this year. I don't want to work another five or eight years and I don't want to pay so much money to Uncle Sam.

Okay. That's a good answer. Then the other question, the only one I had left was you guys talked at the beginning of the year about increasing the producer hiring, you talked about increasing the budget. I was just wondering if you could compare how active you actually were in hiring producers and kind of how you are weighing that now versus acquisitions, how you are looking at that.

I think, Scott, we look at it the same way we have looked at it in the past in terms of it is an important part of growing our business and providing future leadership in the future in terms of sales leadership and some of those individuals will actually run offices, if they have the talent and they are so inclined. And so we haven't looked at it any differently. As I said, we allocate roughly 1% of our revenues a year to help subsidize producers who are not already in budgets at local office levels and that is totally separate and distinct from our appetite in doing acquisitions. So we -- our position on both has not changed. We are actively looking to hire high quality people internally and do high quality acquisitions.

Okay.

And if you look at from a dollar standpoint, I mean, we -- newer producers are basically on salary until they can be trained and validated and we run on average around $40 million, $43 million of annualized salary costs and that actually went up a little over $1 million on a run rate this past year from -- compared to '08. So almost every three out of four quarters it has increased. So we continue to hire high quality people and train them.

Are you seeing any changes in the talent available out there, the talent pool, compared to past several quarters? Is that about the same?

I wouldn't say, Scott, it's different quarter over quarter, but I would say that in the last year or maybe even the last 18 months, that it has been substantially deeper, that pool, than it has been in the past. Meaning there's just a lot of people that we're seeing from industries that we probably would not have otherwise seen.

Okay. Thanks.

Okau.

And we do have another question. We will hear from Sarah DeWitt with Barclays Capital.

Hi, good morning. There seems to be a lot of moving pieces in the specialty programs business in terms of your expectation for improvement in FIU next year, but further declines in Proctor. So if I put all this together, what should this mean in terms of organic growth in this segment next year?

Let me take a stab at that. If you are rid of the impact of Proctor, the numbers that are so compelling they wanted to add that additional color, (inaudible) of that, this business unit's particular program area has been our better performers in 2008 and 2009 given the organic challenge we've had. So are they going to be flat or positive? Probably not, but we still believe that we can -- we have some opportunities there for improvement in the organic growth side within those various business units on factors that hit us in '09 with respect to a new trading partner and a case of some new products out there to help grow it. And FIU, certainly the capacity played to help, if you will, really replenish the revenue base back to their historic levels which is in '08 and '09 has been lower than otherwise.

Okay. Great. Thank you.

And that will conclude the question-and-answer session. At this time I will turn the call back over to Mr. Brown for any additional or closing remarks.

Thank you, Rochelle and thank you all, everybody, this morning and we'll talk to you next quarter. Thank you and have a great day.

And that will conclude today's conference. We thank you for your participation.