Brown & Brown Inc (BRO) 2010 Q1 法說會逐字稿

Good morning and welcome to the Brown & Brown, Inc. earning's 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 event 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 laws. Actual results or events in the future are subject to a number of risk and uncertainties and may different materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result a number of factors including those risk 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'll now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.

Thank you, Vicki, good morning, everybody. Q1 results were impacted by the economy, and we were encouraged by pockets of improvement, but shrinking exposure units continue to put pressure on our results. As you know the Healthcare Reform Bill was passed and as we see it, it now is the foundation upon which the rules and regulations can now truly be written. Basically, probably means more government involvement, which means probably a little more work and potentially more opportunities for intermediaries like Brown & Brown. Here today with me in the room are Jim Henderson, Cory Walker and Tom Riley. Now I'll turn it over to Cory for the numbers.

Thanks, Powell. Our net income for the first quarter 2010 was $44.1 million, which is down 8.1% from last year. Correspondingly, our net income per share for of the quarter was $0.31, which is down 8.8% from the $0.34 last year same quarter. From a revenue standpoint, commissions and fees for the quarter decreased 5% to $250.7 million from the $264 million we earned comparable quarter in '09. Included in our press release is our internal growth table that shows a total growth and the internal growth rates of our core commissions and fees, which excludes the profit sharing contigent commission.

I'll talk about profit sharing contigent commissions, we received $32.2 million in the 2010 first quarter. That's up about $2.3 million from the $29.9 million that we received last year in the first quarter. Of this $2.3 million net increase, we had $6.1 million actually came from an increase at Proctor Financial, who as you know, had a superior year in 2009. The entire programs division had a total increase, including the $6.1 million of $7.2 million. However, our retail division had a $4.8 million reduction in their profit sharing contingent commissions and our wholesale brokerage division was essentially flat relative to contingent commissions. Our best estimate of how much profit sharing contingent commissions we received for the rest of 2010 is between $11 million and $15 million, which is an educated guess, and it is also really dependent upon how much we get from our FIU program. We think that that would breakdown basically probably around $4 million to $5 million in the second quarter, possibly $6 million to $8 million in the third quarter, and then whatever we receive for FIU, which could be as much as $4 million in the fourth quarter.

Now, looking at the internal growth schedule, this is in the press release, we had a negative internal growth rate of 8.6%. But as we've talked about before, Proctor because they had such a big year in '09, if you exclude their down draft this year, which is about $8.3 million, the internal growth rate was 5.6% negative. And that is a sequential improvement over the negative 8.3% in the fourth quarter, and then if you extract the Proctor impact in the first quarter of '09, we had a total of a negative 2.2% but without Proctor's big hit in the first quarter it was negative 7.4%. So it was an improvement over both sequential and first quarter last year. So if you look at that schedule, we have our total core commissions in fees it was down 6.5% or $15.3 million. And within that net number, we have $4.9 million of acquired revenues. So that means that we did have a $20.2 million in less commissions and fees on a same store sales basis. Powell and Jim will talk about the activities in each of those business segments in a minute.

So moving on the other income items, our investment income increased marginally. On our other income we did have an aggregate gain of $1.3 million versus a prior year loss of about $700,000. Both the gain in the current year and the loss in the prior year were primarily results of sales of certain books of businesses.

Moving our attention now to the expense line items. Employee compensation and benefits in 2010 for the first quarter decreased 4.1%. The total decrease in the employee compensation benefits was about $5.2 million compared to first quarter of '09. Of this reduction, net reduction in cost there was about $1.5 million of new compensation benefits from the new stand alone acquisitions that we completed since April of last year. So therefore, the impact of these, excluding the impact of these stand alone acquisitions, we actually had about $6.6 million less commissions on account of semi same store sales basis. And that $6.6 million came from lower profit center bonuses and salaries of about $5 million, and we had about $1.1 million lower in group health insurance costs.

Our non-cash stock base compensation was up slightly over the prior year, and the quarterly cost of approximately $2 million should be a good estimate for the remaining quarters of 2010. The other operating expenses increased about $0.5 million or 1.3% from the 2009 quarter. However, the new stand alone acquisitions added about $300,000 of new costs for the quarter. And therefore, from an existing semi same store sale basis, our net cost actually went up by about $200,000. And this is really -- the net increase really relates to about $2.4 million in higher legal expenses in E&O insurance reserve balances but those costs were substantially offset by broad base reductions in our occupancy costs, supplies, T&E expenses and bad debt write offs. If you look at amortization depreciation in aggregate, it was really flat relative to last year that was primarily due to a light year of acquisitions in 2009. Our interest expense decreased about $25,000 and that was a slight decrease in the outstanding debt.

And now for our new income statement line item, change in estimated acquisition earn out payable, this is brought to you by -- the compliments of the accounting profession and FASB 141R and that's the GAAP guidance for accounting for acquisitions. Most of our acquisitions have a three-year earn out component, which this statement requires us on the date of acquisition to estimate the precise dollar amount of each of these earn outs three years from that day. That estimate gets recorded as part of the asset purchase price, goodwill or expiration and then the liability of that earn out payable is is recorded as a liability for that estimate. For the acquisitions that we did in 2009, we recorded an aggregate earn out payable of about $8.1 million. Looking at it today, we, our best guess, with two years left generally of most these acquisitions the liability would be closer to $7.4 million, hence the $696,000 adjustment that runs through the P&L statement. So essentially every quarter, we'll be doing a mark to market of that estimated earn out liability. And so it could fluctuate quarter to quarter. And just, just so you know, there's also an interest component on that $8.1 million from 2009 that flows through that line item also, so we've broke that out as a separate line item so you can include it or not include it, whatever you're choice would be on that.

Looking at our effective tax rate, it is 39.6%, which we expect to continue forward through the rest of this year. And it really, so to conclude our net income was $44.1 million and that reflects 8.1% decrease from the prior year. So with that financial overview, I'll turn it back to Powell.

Thanks Cory. Great report. In Florida retail we're down 6.8 versus 10.3 in Q4. Property rates in Florida are down typically 5% to 15%. GL rates and auto rates are -- are flat to down 15%, with exposures equal to that, down flat to 15%. Construction area in Florida continues to be slow. GL and auto rate are down flat to 15%. While payrolls are down up to 20% or more.

In the national retail space we're down 2.2%, versus 7.2% in Q4. In the southeastern United States, property rates are flattish. GL and auto rates are flat down to 10%, work comp rates are down 5% to 15% and exposures are flat to down 10%. Construction in the southeast is slow. Not as slow as Florida but GL and auto rates are down up to 10% and payrolls are down 5% to 15%.

In the Northeastern United States property GL and auto rates are flat to down 5%. Work comp rates are flat, exposures are flat to down 10%, construction, GL and auto rates are flat to down 10% and exposures are flat to down 10%. Midwest, property GL and auto rates are flat to down 15%. Work comp rates are flat, exposures are down 5% to 15%. Construction, GL and auto rates are flat to down 15%. And exposures are down 5% to 15%. Significant impact of regional carriers in the midwest as we've talked about in the past.

Western Retail was down 16.1% versus 14.1% in Q4. Property GL and auto rates are flat down to 15%. Exposures are flat to down 15%, except in the Las Vegas area where they're down more than that. Work comp rates are up 5% to down 10%. And the payrolls associated with that are down 10% to 15%, except, again in the Las Vegas where payrolls are down even more. GL and automobile rates are down 5% to 15% in the construction area, with exposures down 5% to 15%, except in Las Vegas, again, where construction is down considerably.

And employee benefits, small group rates, those are under 50 lives, insured lives, on average across the country are up 5% to 15%. And large group rates, depending on the experience of the group, could be up anywhere from 5% to 20%. However, that is tempered by the fact that insured lives on groups are down 5% to 15% -- I'm sorry, 5% to 30% depending on the area of the country. So now I'll turn it over to Jim, for an update on programs, services and wholesale.

Thank you, Powell, and good morning, everyone. I think earnings season seems to coincide with sinus season, so bear with me on my voice. With respect to services, we continued a steady organic growth in the first quarter. In addition we had an excellent acquisition that will add even better margins to this business unit. Great leadership and good performance. Congratulations.

Next on the wholesale brokerage, this -- we continue to see an encouraging trend on the organic challenge that you're faced with in wholesale brokerage unit. The triple wins of rates, of exposure units and business vacating to the standard market. The improvement in the trend if you look at our negative organic challenge the last three years, it's been 6.3% in 2007, 14% in 2008 and negative 6.3% in 2009. So congratulations to leaders there that's causing this trend to head the right direction. There are 38 business units at wholesale brokerage, about 13 of those had organic growth. 25, in fact, had organic challenge. We continue to see and this business unit on the small ticket items, the headwinds that we discussed, pricing shows steady -- an improving trend especially in the small account items. On larger accounts with favorable loss ratios, you're subject to competition and therefore probably anywhere from 5% to 10% rate reduction.

Commercial auto is showing in certain regions some positive signs of stabilizing. Not increasing, but stabilizing, the result of which is from the best our leaders can tell us, certain players in the market that heretofore were very competitive, setting new pricing standards that those seem to be backing off, and, in fact, greater stability to the commercial auto market. Particularly the non-standard market. Large casualty and professional liability continue to experience 5% to 10% rate reductions. On property remains very competitive with rate reductions, in addition, valuations are being re-exercised downward based upon new appraisals in market conditions. In the wholesale area, there are companies that are paying extra commission and rate concessions especially if they can look at rolling over or picking up a specific slice of business, particularly focus that they would like to add to their business units.

Turning now to the programs. In the professional program unit, we have a negative organic challenge of 8.4%. The story here is, I think we can best describe is a temporary glitch in our lawyer unit. We have a, we're moving to a new carrier in the lawyer unit, and in that, we have a licensing issue in the State of New York. We think we're moving to a solution, and returning the lawyer program to a contributor to growth as opposed to challenged. This particular component of professional programs accounted for about 80% of that negative organic growth in the first quarter. The other professional program units remain under price pressure with reductions again in that 5% to 10% in moderate reductions exposure units.

With respect to special programs, again, Cory mentioned Proctor. Proctor is the story in this division, accounting for about 85% of the negative organic challenge in this unit. The -- and again the story as you may recall is some non-recurring revenue first/second quarter last year versus this year. Within the special programs, large casualty continues under price pressure, especially with good results and some new players out there. This willing to certainly be very competitive on new business. In addition to special programs, the public entity business is experiencing perhaps greater price pressure this year, attributable to cities, counties and schools looking for ways to balance their budget and certainly finding ways that they can spend less on insurance premium if possible.

Next, I'd like to turn to Tom to talk to M&A. This is, this is a special pleasure for me. Tom is a very-- is a special friend of more than 20 years. He followed me through the CFO role. He was a leader with Arthur Anderson, came in CFO, became a producer, ran an office, he has sourced, negotiated, integrated and managed more than 150 acquisitions. His 20 years background in this discipline makes him uniquely qualified to lead the Brown & Brown M&A activities. With that I'll turn it over to Tom.

Thanks very much Jim. During the first quarter, we completed five transactions aggregating $11.8 million of revenue. 2009 was our low watermark in terms of the number of deals since 2007. Our largest deal closed January 1, '09, so after that we completed $16 million of acquisition revenue for the rest of the year. Various sources had the industry as a whole with 35% to 40% less transactions in '09, than were completed in 2008. But most of us were slow last year.

The number of opportunities and deal flows has increased. That is a fact. There could be a number of reasons which would include a change in the capital gains that is contemplated at the end of the year, also the improving economy and outlook for the future, which is the period over which the earn outs would be calculated. The acquisition environment has improved, and is supportive of transaction numbers and revenues we have enjoyed in prior years. As Jim said in his comments, we are sitting on record volumes of cash and stand ready for most any opportunity that is presented to us. So back to you, Powell.

Thank you, Tom and Jim, great reports. In conclusion I'd like to wrap up with a couple of overarching comments. Many of you may have seen CIAB just released their first quarter data on P&C rates, those rates show that they were down 5.3%, which is not as much down as Q4, which was down 5.6%. There continues to be a gulf between new business pricing and renewals. Some more pronounced than others. Accounts that are over $100,000 at premium, anywhere in the country attract a lot of attention and a lot of competition, so thus downward pressure on pricing, and finally, regional carriers continue to be very aggressive, particularly in non-cap prone areas. So with those comments, Vicki, I'd like to turn it back over to you, and we'll open it up to questions.

Thank you. (Operator Instructions). We'll take our first question from Adam Klauber with Macquarie.

Thanks a lot, that's Adam Klauber with Macquarie, good morning everyone.Two questions. Could you talk about the core business of Proctor? Are they able to - - How is the pipeline for new clients and are the, amount of wounds track going up or down?

Good morning Adam, how are you? The pipeline, I mean, they've been a new business generator really for the last several years, and of course, they're in the, kind of the mortgage service business, and you've got customers there that are certainly going through a lot of instability as to who owns them and merger and acquisition activity going on, so we have, where we lost business there had a I lot to do with some, let's say M&A event. That being said, it's a great team. We have billed out some new technology there that we feel gives us long, long-term ability to grow that business unit to be even more competitive with respect to pricing and service and products. So, we see stability returning there because of one reason being some software capability and also sales capability there. So I'm not sure if that really is the heart and soul of your question, but absent the non-recurring revenue last year we really look to greater stability of their revenue stream.

Adam I think it's also important to realize when we bought them, 4 or 5 years ago, they had roughly $18 million of revenue, and we've grown it to where last year they had core revenues of $52 million plus substantial contingency, so it's been a great acquisition, and I think they'll continue to grow.

Great. Thanks. Also one more question on the acquisition atmosphere and pipeline. Over the last maybe 6, 9 months several of your competitors have raised some funds to increase their acquisition activity, have you seen more pressure on prices? More aggressive actions out there within the acquisition market?

Hey, Adam, no. Actually we haven't. It seems like the pricing is back to where it was a couple years ago, so I have not seen in any of the deals we've been involved with any pricing pressure from some of the people that you're speaking of.

Great.

I think the, I mean, get to specific with respect to Marsh, where they've announced several deals. It's really interesting, even though the indication is middle market, I think their definition on middle market is still different from ours. And what we're seeing there is that if it really fits their profile, it may not fit our profile. So I think that is probably okay news for us, because we continue to do what we're doing in a different market segment.

Great. Thank you very much.

Our next question ed to will come from Keith Walsh with Citi.

Hi, good morning gentlemen. First question would be first Cory, and just thinking about the over $6 million of contingents against attributable to Procter, barring any increase in organic for the rest of the business, is there any scenario you can envision contingent commissions increasing year over year in 1Q 11, versus 1Q '10. And then I've got a couple follow-ups.

I'll tell you there's too much time, I mean, between now and next quarter a lot of things occur. Clearly the contingent commission 6.1 will be a high watermark for Procter, so that in itself brings it down. But relative to the retail group, you know there's still a lot to be played out. We were down 4.8 from the first quarter of 2009.

The only bit I can add, business con continue against are largely dependent upon underwriting performance, and so absent of storms, we certainly have the, the aspect of growth and continued high level of con continue against there. If there is storms, it does impact those contingents, so that's probably the biggest factor that would play into their change.

Okay. And then, for Tom, just following up more on M&A. Looking at you guys, probably your acquired revenues in the quarter probably the lowest number you've probably ever had in your history from looking at $5 million and cash on the balance sheet is the highest probably you've had had in your history, $228 million, so maybe you can talk specifically about deal multiples and why we haven't seen more of an acceleration in transactions it seems like the run rate's getting a little better. Talk about deal multiples where they are now and where they were a year ago and where they were two years ago if you could.

Well, we've, we've obviously tried to keep the deal multiples where they were. We he do what we have to do sometimes to get the deals completed, but we still you know try to keep the deals between you know 6 and 6.25 in terms of operating profit. It isn't because we weren't trying last year. We certainly were, the number of transactions that came to us was the lowest like we said since 2000 and so it wasn't that we missed a whole bunch of times. There certainly was a couple transactions last year that we would have liked to have done that we did not, but it would not have materially affected the number that you saw. So the numbers have increased and I think you'll see some numbers in the second quarter that hopefully, no deal's done until it's done that is more along the lines of what we've done in the past, so but, the deal multiples have not, have not, we tried not to ever get up on the high end of that, and so but I think it's back years that we're comfortable with.

Keith, this is Powell I'd like to interject if I may Tom. Historical norms have been 6 to 7, and I would say it's more like 6 to 6.5 now.

Yes.

And last year what we saw, which was pronounced, was seller's expectations were driver off high water marks typically 2007 valuations of their agencies, and so if you look at our negative internal growth in the last three years, and you see how it's impacted our business, many independent insurance agencies, which are well run, have had similar if not more significant of a negative down draft and so in, logically you might think, or we might think that if you have a down draft and you're going to have a corresponding down draft in value, and yet, the seller's expectation last year, there was a schism between what they expected which was up here high watermark at '07 versus what willing and able buyers ourselves included but not exclusive life not all willing able to pay. That's goes back to Tom's earlier, 30% to 40% fewer acquisitions down last year and I think I'd add one final comment. If you think in the early 2000s, there were, there was a lot of, of bank activity, and that has tailed off and tailed off probably 3 or 4 years ago. There's still banks involved, but not to the extent they were earlier. Then you add private equity firms that got involved and that started to slow down, and so all the time there's a new particular entrant or person being involved in a space but we kind of just keep on doing what we're doing, plotting away, and most importantly, on acquisitions it's about cultural fit. So Tom and our team are out talking to people all the time, but just because they become available doesn't mean that there's a cultural fit, and so we're trying to invest very wisely for the long-term.

Thanks. Oh, sorry and then last question for you Powell. You've led the Company through, you know two very, couple tough years the last few years as far as pressure on the business that's out of your control on the call and in your comment teary in the release you sounded cautious yet some optimism in certain parts of the business, am I reading that wrong or what has changed this quarter versus say last or, if anything?

No. I think that, Keith, I would tell you that we feel good about our business. The results just haven't materialized because of economic impacts, and so I would tell you that I think that your assessment is not incorrect. I think that there are areas of the country that have been impacted less negatively than others. I'll give you an example. For example, San Antonio, Texas I was there a week and a half ago. Their unemployment rate is 7%. Their economy there is based primarily on healthcare and defense. So the economy in the San Antonio, Texas area is different than the economy is in Florida or Southern California, and so there are areas around that are like that. Florida's economy continues to be bumpy, but it is less bad, that might be the way I would describe it. Doesn't mean it's improving. That means it's not going down as quickly. So we know that in Florida's case, that Florida will come back, just like the rest of the economy. It just may take a little longer. So I think this is a long winded answer to say I think your assessment is fair.

Great. Thanks a lot guys

Moving on we'll move at Piper Jaffray's Joe DeMarino.

Thank you good morning. Could you explain maybe how much of a lag there might be between an improvement in payrolls or the jobs numbers and then you're exposure basis?

Sure. Joe, there is, there's no exact answer on that, and let me be specific why? When you meet with a client or we meet with a client, they are going to tell us what their expectations are for their exposure units going forward. So if you're a widget manufacturer and you did $12 million of widget sales last year, and this year they did $8 million, and they already know that they have two very large contracts in the pipeline that are probably going to get them to at least $10 million, if they're conservative, they may say, let's just say with the $8 million and it will be picked up at audit. So let's play that scenario out two or three steps further. If they renew their business on April 1st, with $8 million of sales, and they actually do do $10 million of sales in April 1st to March 31st, then next year within roughly 60 days, excuse me, of the expiration date of the policy, the carrier will audit the policy. So there would be an additional premium on the $2 million more of sales. Now you can interchange sales with payrolls or payrolls with number of automobiles, or whatever you want to do on insurable exposure units, but that's a long winded answer of saying, the potential drag would be up 14 months. But every client is different on the way he or she views her business and renews their business. There are certain carriers that do quarterly audits. You can have self audits or there are certain clients that will actually modify their exposure basis mid-term upward or downward but upward is what you're specifically talking about, so they don't have a big audit at the end of the year.

Is the improvement in the audit or lack of improvement in the audit in the way that it effects a carrier, is it a one for one impact on, on the commission that you guys get?

Well, yes. Yes.

Okay. Okay. That's very helpful and then just, I have one other question then, I have a feeling the answer is exposures but maybe, if you could handicap or kind of guess what percentage of the top line issues you're spacing are related to exposures versus the continued self pricing, that would be helpful but it seemed like it's monthly exposures.

Sure we said Joe we believe somewhere between 2/3s and three quarters of the negative down draft is exposure basis related, whereas the one quarter to 2, 1/3 would be pricing pressure.

And is that similar with last quarter?

Yes. I would say that that's, that, that has been far and away the most significant impact is shrinking exposure units.

Okay.

We've said that and that's been universal, yes, last quarter, this quarter but we've been saying that for like the last year.

Sure. I'm just wondering if it's getting slightly better. It seems like it is, though. Okay. --

I'll say one thing, Joe, you would be interested. I have been asked and we are asked as a group, is this time similar to any other time in a market cycle excluding the economy? And we would draw your attention to the end of the '90s, '98 and '99 specifically, and in that period, if you may remember, that was the end of a 13-year soft market, and rates were going down, we believe, somewhere between 4% and 7% on average. Now the he economy was going up, and we as an organization were growing 1.6% and 2.1% organically at that time with that kind of rate pressure, and so said that we believe in order to grow organically, we need a, a positive economic outlook, we could still operate in an environment like we are now and grow organically. So I think the key is exposure to units versus rates. Now if rates go down precipitously and exposure units, we're in the double dip as I said in the annual report letter as I said publicly. If you a single dip, if the dip's not too bad then we think we grow organically again.

Got it. Okay that's very helpful. Thanks a lot.

Thank you.

Moving on, we'll hear from Mark Hughes, SunTrust.

Thank you very much. If you look at payrolls sequentially among your client base if you look 4Q to 1Q, any comment there year over year? Obviously still down. Sequentially has it started to stabilize?

Good morning Mark. I would tell you that that's, that's hard to say, because everywhere is different. I'll give you an example, though, of the kind of things, this is a Florida specific. I had breakfast yesterday with a close friend who runs a large general contractor in Florida, and their revenues have gone from the $160 million to maybe the $50 million range in two years and they think it will probably go back up this year to the $70 million or $80 million range so their payrolls are obviously a huge component of that, so they've had a down draft on their labor force and then an up, potential up draft as their work occurs, that's one example. I just use it because it's top of mind, but if you go to Portland, Oregon or you go to Syracuse, New York or Sarasota, Florida, every single one will have different scenarios like that in the construction industry, as a general statement, you hear a lot of if they were specialized in certain classes of business, they are under the most pressure many of those may go out of business. Those trade contractors and artisans that have made to this far will stabilize, these are people speculating, and then they will grow and benefit as the economy improves. The construction area probably has, this is from construction friends, has a two-year lag behind the broad middle market economy. And if you look at other than construction it's all across the board back to my widget manufacturer example.

Right.

So I'm sorry. I can't give you one easy yes, no, or specific but it's really client specific.

So would it be fair to say you haven't seen enough to make you think it has begun to stabilize, you don't have enough information to draw that conclusion?

Yes, I would make this statement, Mark. I don't believe a month or two anywhere in the country creates a trend. You can have a positive feeling in an area which is not supported by numbers yet or economic data, but I think there are certain places that feel better about the economic output or prospect in the future than others. But I don't think we have the data to support that yet.

Well, we'll go with positive feelings for start at least. Okay. Cory, any 2Q items to keep in mind as we think about the year over year comp, anything last year that was an unusual benefit or a headwind?

No, the biggest item is one we've said before and similar to this quarter is the Procter. Last year, Procter was up $10 million, they ended up being down 8.3 this quarter, and the same way with, the second quarter, we said that they're down could be as much as $8 million in the second quarter compared to last year. So that's still there. We still think maybe they've a little bit better than that. But it's, we still got three quarters to go on that one. But that's really the only unusual item that we're wear of right now.

And that's at $8 million head wind in 2Q from Procter.

That's right.

Okay. Thank you very much.

Keith Alexander with JPMorgan.

Hi, good morning.

Good morning.

Hi Keith.

So I was looking at the acquisition related revenues, and while the numbers that come through the income statement tell one story, it seems like there's a much more positive story being told through the inter quarter press releases, with a more significant increase in announced acquisition related revenues, I'm just wondering, is that, how much of that is sustainable do you believe going forward through the rest of the year?

Tom, you want to answer that?

I'm not sure I understand. You're saying how much more revenue do you think would impact --

Sustainable.

Sustainable? Well.

Yes. Yes.

I feel like I said, that previously. Our anticipation is that the deal flow is going to increase over what we've, we've seen in the last year and a half, and so I think we're, we've completed about $12 million in the first quarter and our anticipation is that things are going to increase and hopefully back to the numbers we've enjoyed in the past so that they'll be able to get back to the, the numbers that we did in the prior years. I think we'll have some numbers in the next few months that will be more like what we've seen in the past.

But on the acquisition Keith, it is, we end up giving a press release on every major acquisition that we do, and there's occasionally a small book of business or something that somebody wants to do a press release on, one of our (inaudible) leaders, averaged less than a million dollars we normally don't put the revenue amount in there, but everything else you have the revenue amounts generally so it's easy to take these acquisitions and unless it's a specialty line where like the a public entity where you have a lot of revenue in the second or third quarter, most of it is pretty much equally over the year. So if you've got, you know a $4 million acquisition, you can kind of schedule it out to be a million dollars a quarter, so as you know this quarter we only had $4.9 which was reflective of 20 some odd million dollars of acquisitions we did last year, so you should be able to follow that pretty, pretty easily in terms of numbers.

Okay. Thanks. And for, just like to touch on organic growth for a moment. In national retailers and deceleration the decline, do you think that this is sustainable or should we expect re-acceleration in 2Q?

Don't, don't know the answer to that, Keith. Obviously we watch it very closely, and some of that is being dictated by how accounts renew as I referred to earlier, in one of the earlier questions and the expectations of our clients. But we don't really know. Obviously it's a lot about one, doing what's in the best interest of our clients. Two, doing everything we can to retain you're existing client base. And three, write as much new business as we possibly can which we're endeavor to do all the time. But I can't exactly answer your question.

Keith, I think you know wall street seems to be well ahead of Main Street with respect to recovery. There's signals out there that Main Street is stabilizing and I think we have now I think the fourth quarter of positive forward signals, with respect to economic change and those would seem like they would spell good news for us as well. Coming offer both a, one of the most significant rate reduction environment the last 3 or 4 years. That head wind, on top of the economic change, has been a challenge. We, all signals indicate that's improving, but the thing that we can't really provide to you nor anyone to you say is that, this bounce, is this a V, is it a I U, is it a one year, 2-year, 3-year type of recovery, return to norm. It seems to be heading that way. But nobody can put a time frame on it.

Okay. And then I guess I understand that, but switching to Western Retail, it seems that was a little bit worse this quarter, can you touch on what might have changed? If it was just a comp year over year, or did something change sequentially.

I don't think anything changed sequentially, Keith. It's just kind of tough going in the west and as you may know we recently had a senior leadership change there in the west, we've asked Roy Bridges to go, whose been a very successful senior leader with Brown & Brown for the last 20 years to go help improve that. Also interestingly enough, If you look at the Bureau of Labor statistics website and they rank the top, all the states in order of unemployment numbers, unfortunately in the bottom 5, two of them are in west, California is number 48 and Nevada is number 50. Followed right there by Florida at number 47. So that being said the west has had a tough, tough run at it, and Roy is going to be there to help everybody there try to continue to work through this, but the economy and particularly south, southwestern United States has been just brutal. But, but like I said, we look for that to improve under Roy's leadership.

One last question, as long as we're talking about management changes, I saw that Linda Downs is also promoted and was that to, to turnaround another part of the business?

Actually what we've done in, as you may remember, in the first quarter, I mean, in the fourth quarter call, I talked about the structure of our business and the leadership, specifically with senior leaders stepping up to take on additional responsibilities and at that point in time I referred to Tom Riley taking on acquisitions, which was Tom's first conference call with us, when he was in here as you remember. Now, Linda, who has been with our team since 1980, has taken on additional responsibilities with retail offices, not only in the Midwestern United States but kind of up the eastern seaboard in several states and so she has taken on several opportunities as we've moved offices from certain senior leaders to our senior leaders to best, not only address growth opportunities, improvement in offices, but in terms of with acquisitions and as people are growing, and, and doing thing to the best the benefit of the Company, so yes, she's taken on additional responsibilities, primarily those additional responsibilities have been retail. She already had some programs in a wholesale operation, and some of that was as a result of re-configuration with Roy going into the west.

Okay. Great.

All very positive, by the way.

Thank you very much guys.

Thanks, Keith.

John Fox of Fenimore Asset Management has our next question.

Yes. Thank you I have a number of questions. First for Cory. Cory, my recollection of Procter in the second quarter was around $6 million compare, and you a few minutes said $8 million, has anything changed there. Or am I just incorrect?

John this is Powell we said on the Q4 call, $6 million to $8 million.

Okay.

You specifically said $8 million. We gave it a $6 million to $8 million number, so that's the little disconnect there.

I was giving you the benefit of the down.

Yes.

Okay. Second question is, I think it was Jim's comments on professional line with the temporary glitch there in lawyers. Are you kind of signalling that you expect the internal growth rate to be positive there the rest of the year?

Well, I don't know about it turning positive, I think that's probably would be even more optimistic there. I think the element being down 8.4%, was definitely a glitch. I think we can improve upon that. We are experiencing continued price pressure on larger professional liability accounts, which may cause us to not get into that positive territory, but we can certainly improve where we're at first quarter, John.

Okay. Thank you. And then for Powell, you started the call with two comments. I wonder if you could elaborate. You probably have on the first one but talked about pockets of improvement if you can just elaborate what you're seeing there. And two, you're talking about the healthcare bill potentially being a positive for intermediaries if you can expand on that thank you.

Sure. Sure John. In terms of pocket of potential improvement I kind of eluded to the area San Antonio, Texas I don't think it's state specific, I think it's area specific, and I also said earlier, to one of the prior questions that a month or two don't make a trend, and so I think sometimes in some of these areas we have people on our team that have said they feel like it's getting better, and yet we don't have the data, either economic data or the actual results that show that.

Right.

So I don't want to get you and your expectations too far ahead on that one, John. And I know your's won't but for the entire group, I think it's important, I'm saying that because we like to be very honest about what we're seeing of what it is we're hearing, but until we see it in our numbers that doesn't help you, and it doesn't help us. I just mention that because this is the first time in a while that we've felt that and that's a good thing, but until we see it in our numbers it doesn't, it doesn't help us that much. Number one.

Number two, you're comment and question about healthcare reform, and how that might be positive for intermediaries. Let me back up and make a couple observations about our healthcare business, and we've talked about this in investor conferences and on the call before. One, we did about $158 million of employee benefits revenue last year. Of that, 2/3s is healthcare. The vast majority of that healthcare is large group. That means over 50 insured lives. That's the so-called Brown & Brown profile. Now as it relates to healthcare changes, there's all kinds of speculation about how this is all going to work and the way I describe it internally to our team is what you would read in the paper, John, is that they have passed a Chevrolet, that means that you got a Chevrolet, your taxes are going up just like the rest of ours, but we're all getting a Chevrolet on healthcare. I would contend that we didn't get a Chevrolet, we got the chassis of a car with four wheels on it.

Right.

And yet, and so the key is if you look in your left hand and you had a book and in that book there were no words, that book is where they're going to right write the rules and regulations on how to put together the chassis of the car, so how do you put the doors on? How do you put the engine in? How do you put the hood on? How do you put the trunk together. So ultimately we may have a Chevrolet, I'm not saying we don't. I'm just saying we have a chassis. Okay.

So if you bear, so my appoint is if you bear with that comment for a moment, there can be changes in the it distribution model, that means the carriers could change the way they pay intermediaries. And that meet mean that we would be compensated differently. I don't know what that means. That means it could be a commission, it could be a fee. It could be some variation thereof that would be disclose today the client going forward. We don't know, that will be driven somewhat by carriers. Number two, there are going to be potentials with all kinds of change and some might say chaos that creates, we believe, great opportunity, and there may be products and services, but specifically products that are not yet being sold that will be developed that we will sell in the future to our clients. And so you would say, like what? And so remember, I'm just totally speculating when I say this, but if you continue with the car example, if the healthcare program that is initially offered to the insured or the, or the group is a you go, let's call it a Yugo, but the group wants to Yugo to a Chevy or they want to buy the Chevy up to a Cadillac, then we might, and this doesn't exist yet three that I'm aware of John, I'm just giving you an example, there may be something that's developed that's going to be called a healthcare wrap around policy, and all of a sudden, not unlike some of the products that have been developed in the P&C environment, this would be something that would make the Yugo a Chevy or the Chevy a Cadillac.

Right.

I hate to be vague shall and because I know you like us to be very specific, but it goes back to the analogy that the book has no words in it yet. We have a chassis in front of us, but the rules and regulations are going to be further written in the future and what we do know is that your taxes and my taxes and everybody else's taxes on the call are going up. So we're going to start paying for it, but we don't know exactly how we're going to make this car with a chassis into a functioning car yet, as the rules and regs are developed. What we think, though, the key is this. In the middle market there are very few if any people that will be able to drive the information and content to as many customers and perspective customers as we have, we will, and have been doing, and so the point is there are other large national brokers, many international fee driven brokers that are going to be able to do it with they are mega accounts but I'm saying our ability to drive information to middle market clients will enable us, we believe to be very successful and do what's in the best interest for not only our existing clients but for our future clients.

Okay. Thank you. One last for Cory, you mentioned on the operating expenses higher legal, which I think you mentioned maybe in the fourth quarter also, is that going to continue, do you see that changing or?

Well, in some of these legal costs are not always, we're defending it, sometimes we're spending the money to protect our rights.

Right. I implying anything, Cory.

Yes. So, so we, all we want legal costs going down, and I know our team is working to get that way, but a lot times that's out of our control based on the, on the situation. So as of right now, until it changes, I would expect you know, a, maybe a slightly lower level, but I wouldn't, wouldn't plan on it until you see.

Okay. Thank you.

Moving on we'll here from Meyer Shields with Stifel Nicolaus. Meyer, your line is open. Please release your mute function at this time.

Okay. Is this helping?

Sure is.

Okay. I'm sorry. Am I coming through?

We can hear you, Meyer.

Okay. Let me start off, cory at the end of the fourth quarter, my understanding was that there was $4 million of fourth quarter '09 FIU contingents that were differed until, or expected to be differed until the fourth quarter of this year, did I get that wrong?

No that, that is, it's partly right. They had $4 million of contingents that we thought we'd get, but they, they pushed it back for numerous reasons. There is a, that's not assured, we will probably get it if there are no hurricanes, but if there is a hurricane, then all bets are off. And there is a possibility that there could be a little bit, say maybe $750,000 or so possibly even in the second quarter, but that's not defined yet either. So that's really kind of all we know about it right now.

Okay. So I think my understanding was wrong because I thought there would be $4 million of last year and $4 million of this year's.

No.

Okay. I'm sorry.

You know, again, this year, last year hit $4 million, but then it gets lumped into the new lost components, loss ratios for this year, which is going to be heavily impacted by the current hurricane season, and so if there's not a hurricane, we'd think we'd get at least $4 million and maybe a little bit more. But like I said, we've got to play it out through the rest of the year.

Can you I, can you I make a comment on that real fast? Meyer, you're understanding was not a totally incorrect. What we said was, number one, it was being pushed over into '10. There was a possibility that could be recognized earlier in the year, meaning earlier in the year in Q1, Q2, which hasn't occurred as of yet. It could push through summer and in the event that we did not experience a hurricane, that there could be a, a duplicative effect in terms of there could be up to $4 million from last year and several million from this year. I think that the number that we said might be where the top side could be $6 million or $7 million, but once, again, it's all driven on the experience of the wind blows, all bets are off. Conversely, if the wind doesn't blow, then it's up to the calculation. Fair?

Yes. Okay, that clears it up.

Yes. I just wanted to make sure.

No, I really appreciate it. Is there any connection at all between your contingent rates and your core commission rates or are those contracts basically unchanged?

Well, let's back up. You have five companies that have GSCs, okay. Guaranteed supplemental commissions. Guaranteed supplemental commissions are driven off past performance whether it be the last year or last three years and then you have traditional profit sharing on basically the rest of the business, and those profit sharing programs have typically a profit profitability component, which is a very big part of it, a growth component, and a persistency component, meaning on the existing counts that are written. So I think that answers your question, but if it doesn't, tell me.

Well, I guess it does. I'm just, I'm trying to see, and I think you're answering this, but there's no change in terms of maybe pushing a higher percentage of the potential revenues to contingents as both the core commissions or vice versa.

No. No, that's the no the case. Okay. (Inaudible - multiple speakers).

I can't think of any reason they might want to. Last question, is the organic growth rate on the businesses you've acquired materially different from the organic business of the Brown & Brown businesses?

Let's make sure we talk about. This is something we talk a lot about internally. The way we define organic growth is number one, you have to be in the system for 12 months or more. So once we acquired them 12 months later, the clock starts ticking. And if we were to acquire a book of business or somebody comes over and brings accounts with them in a transaction, which doesn't happen that often, we don't count that in internal growth. So as it relates to the question specifically, do we see a material difference in internal growth? No, we don't.

And during that (Inaudible - multiple speakers).

Go ahead.

Sorry

Go ahead.

I was going to say downing during the first 12 months, those companies are producing some revenue, and I'm just wondering whether when we model, we should assume that the economic pressures that are facing the legacy Brown & Brown store fronts are also facing those acquired companies?

That's a fair, that's a fair assumption.

That's correct.

I think that's absolutely correct, but I do think the important thing, Meyer, to think about is this. Remember, just because they're not counted in internal growth, doesn't mean that they're, their earn out is not running. So as I like to say and Tom, and Jim and Cory, the clock's ticking. So their, their incentive is consistent with ours. We want them to grow their top line and their bottom line during that earn out, and beyond.

So.

There's not a disconnect there. It's actually a mutually beneficial goal.

All right.

I think you just hit the most significant reason for the slow down in acquisitions because the, what was happening there, those that we did acquire, the potential to hit the top end of that range was taken out of play because of reduced exposures and pricing. And that led others to say, wait, gee, I think we need to sit on the side line until we get a better feel about the fact we can hit that top end price range. We did see that improving.

Oh, that's great and that's very thorough. Thank you very much all.

We'll take our next question from Scott Heleniak with RBC Capital Markets.

Good morning. I just have two questions the other questions have been answered. First question. Private equity is starting to do other deals in other industries, I was wondering if you see sign that private equity might be coming back or starting to look around at other properties and do you expect that to change over the next couple of quarters or are they gone for a while do you think?

Well, I think the, certainly private equity, maybe addressing first of all, that wholesale brokerage acquisitions. I think they've been probably more effected by the headwinds than any other deals out there. If you look at the USI, if you look at HOB. If you look at Alliant ant and others, they seem to be relatively quiet in their acquisitions. Maybe doing some, but not at the levels they were before.

Yes.

So what happens their next generation in terms of ownership out there. But we really see no significant new money out there getting in this business that would say, here's a model that was very successful over the five or 10-year period we wanting to out there and replicate it, take new money, go out there and buy agencies and figure out a next step whether or not it's public ownership or spinning over to new buyers, so that being said, that's not the new players in the market is not a factor that seems to be, that's impacting our M and A activity.

Okay. The only other question I had was any plans to shift some of the, the money that you have in sort of lower yielding money market accounts, any plans to shift that, anytime soon. It's normally I wouldn't ask that, but the cash balance is getting pretty significant so any kind of change, any kind of rate you would get would make a difference, I'm wondering how you're looking at that now.

Well the answer is, we're not really we're still keeping it short-term and we have bought some instruments of banks in getting a little bit more yield, but the yields are still less than 50, 60, BIPS.

Painful reminder by the way.

Okay. Well, that's a little bit of a change I guess compared to past few quarters. Okay. Thanks .

Thank you.

Brett Huff with Stephens has our next question.

Good morning, guys.

Good morning.

Morning.

A lost my questions have been answered I did want to drill in on one Florida topic or two Florida topics. Powell, you've been talking about pockets of improvement and I was wanting to see if you were talk about the pockets of Florida that we've talked about in the recent past. Specifically you guys have talked about FIU capacity in the last quarter or wanted to make sure there was no changes to and that capacity was becoming available? Number two, any other detail you can give us on sort of non-economic pricing relative to citizens, those two items in particular in Florida?

All right. FIU no change in capacity, but as it relates to always the interesting dynamic in Florida, citizens and FIU have been the predominant player in southeast Florida for triple A construction, condominium as you're aware, and periodically on older buildings or different buildings, we're starting to see the E&S market every once in a while get in there and write one or be very close. So it's means the gap is shrinking there, and we don't know what ultimately that will do, because if the wind blows, that's going to change as well. But we do, we do see that. No impact on, on capacity, but definitely a closing of the gap with the E&S market. It's, it relates to citizens specifically, as you remember on the last call, we talked about up 10% in terms of rates. I will tell you the, the non-economic more political comment would be if you read the local papers now recently, it is becoming more of a hot potato, and there's lots of discussion when in essence several of you, and I think you specifically, and I have talked about this have asked, well why doesn't somebody write an article you know, an opinion and OP ED column or something like that, and the answer is, they're starting to come fast and fewer just if you remember us, meaning we have a couple contentious political campaigns that are going on this year . Particularly our governor is run for US Senate and things like this are starting to come up and be discussed not only publicly in open forums, but in the newspapers. So that's kind of the, the stuff we don't talk as much as about usually on these calls, but it is starting to begin and it's kind of interesting because the general sentiment is if there was a big storm, there's not enough money in the kitty, and why not address this now and do the financially prudent thing. It doesn't mean it's going to happen, Brett, I'm just saying, that we're starting to see it all the time in the paper

Okay.

The only item I might add is there's been now a third of the, of these take out companies that's writing again homeowners. That's nothing to do with an FIU with you if you look at homeowners taking business out of citizens. There's now a third of those that is in financial trouble, and so the, the concept it where you put a little bit of the capital and you can take business out of citizens doesn't seem to be running quite as positive as the, certainly the state would alike. The story, that is positive to us, we have a better chance to provide, and open market solution to the homeowners as opposed to citizens.

Thanks Jim, yeah that's good.

Great. Thanks you, I appreciate it.

Yes.

Our last question today will come from Dean Evans from KBW.

Yes, thanks, guys, most of my questions have been answered at this point. I just sort of a quick one. If we look at the Florida retail segment, with your, their organic decline getting better in the quarter both versus all the quarters last year and particularly the first quarter last year we list in to your commentary which sounds like pricing there is pretty much down in the 5% to 15% range, that's sort of the different set that makes up. How did Florida get a little bit better in the quarter on the organic side?

I think it depends on the offices that you're talking about. But there's, there's, there's a stabilization in certain clients that renewed in Q1 that's I little bit of a speculation on my part, but I know that specifically in certain instances. Number two, you write a lot of new business, and it's, it's sequentially not as negative as it has been because as you've heard me say before and Jim, and myself particularly and Cory, Dean, in the past, Florida has been kind of tough sledding, and so we would tell you that it's not as tough. It's still tough, it's just not as tough, but it's still down. So it's going to get better, we just don't know exactly when.

So is it sort of realistic I guess to think of the first quarter so far as maybe a, kind of a base run rate for the rest of the year and yes, it could be a little worse, a little better, but it's --

I think that's too, remember I made the comment earlier in the call that, a month or two or, or in this case three doesn't make a trend? I would be cautious on that, I just don't know. We don't know. We, we are definitely looking very carefully at it and we are talking all the time. I'm in offices with Jim and Tom and Cory, in the offices around the country talking about how do we retain ( our existing clients and writing more new business, but I just, I don't think I would say that yet, Dean.

Okay. Thank you. That's really all I had.

Yes.

And there are no further questions at the time. I'll turn things back over for any additional or closing remarks?

Well thank you, Vicki. It's great to talk to everybody and we look forward to talking to you at the end of the next quarter. So have a nice day.

And that does conclude today's teleconference, thank you all for joining.