Brown & Brown Inc (BRO) 2011 Q2 法說會逐字稿

Good morning and welcome to the Brown & Brown Inc earnings conference call. Today's conference is being recorded.

Please note that certain information discussed during this call including answers given in response to your question 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 laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made, as a result of a number of factors including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the Company's Business and prospects are contained in the Company's filings with the Securities and Exchange Commission. With that said, I would now like to turn the conference over to Mr. Powell Brown, our President and Chief Executive Officer.

Thank you Laura, good morning everyone. We are calling in this morning from the Advocator Group in the Boston area, and I'd like to thank Mike Crowe and his team for doing a great job. We are going to have a board meeting here the next 2 days and are really excited about it. Markets in certain areas and certain lines of coverage are seeking rate increases. Most markets are not willing to lose a renewal. New business pricing continues to be aggressive, there is a pricing gap that continues between new and renewal pricing. We're pleased to announce that we have completed $47 million of annualized revenue year-to-date, and now I'd like to turn it over to Cory for our financial report.

Thanks Powell. Our net income for the second quarter 2011 of $37 million was down 10.2% from last year's second-quarter net income of $41.2 million. And our earnings per share for the second quarter of 2011 of $0.26 is $0.03 lower than the $0.29 in the second quarter of 2010.

The difference in the quarterly earnings per share results can be summarized in 3 areas. One, the change in the estimated acquisition earn-out payable which accounted for nearly $0.01 of that difference. Reduced profit sharing contingency income, which accounted for about $0.018. And then thirdly, reduced other income, which accounted for $0.088 which in aggregate all of that is almost $0.04. From a revenue standpoint, commissions and fees for the quarter increased 2% or $4.9 million to $246 million from the $241.1 million we earned last year's second quarter.

Included in our press release is our table that summarizes the total growth rate and the internal growth rates from our core commissions and fees, which of course is excludes profit sharing contingent commissions and revenues from books of businesses or other operations that were sold. In the second quarter 2011, we received only $2.3 million of profit sharing contingencies. That's $4.2 million less than the $6.4 million that we received last in the second quarter. The decrease is primarily due to the fact that last year, we earned $3 million in profit sharing contingencies from one of our workers' compensation carriers that wanted to reduce their exposures and therefore, we were asked to move the business and thus we did not receive any profit sharing contingencies from the carrier in 2011.

Additionally, in the second quarter of 2010 we received $750,000 of profit sharing contingent commissions from the FIU program, which was not received this year. At the end of the first quarter this year, we had estimated that we might receive between $3 million and $4 million in the second quarter. It turned out that the $1 million difference relates primarily to our wholesale brokerage division, that now looks like it might come into the third quarter instead. Therefore, we now are estimating that we may receive an additional $6 million to $7 million in the third quarter. And then for the fourth quarter, whatever we receive from FIU is what we will get. Which, if there is no hurricanes, if there is a hurricane that hits Florida in 2011, that number will be 0, but if we're fortunate enough not to have any hurricanes, we could possibly receive as much as $1 million in the fourth quarter on contingencies.

Now, if you look at the internal gross schedule, we did have a negative internal growth rate of negative 4.8%. If you exclude the negative impact this quarter of Proctor Financial, which we discussed in our first-quarter conference call, our negative internal growth rate was negative 4%. Our total core commissions and fees for the quarter increased 4.3% or $10.1 million of total new commissions and fees. However, within that net number was $21.3 million of acquired revenues. That means that we had $11.3 million less commissions and fee revenues on the same-store sales basis and hence, the 4.8% negative internal growth rate. As the internal growth rate schedule indicates the vast majority of the negative growth relates to our National Retail division and our Proctor Financial operation. Powell will discuss each of these divisions in a minute.

Moving on to our other income, our investment income was just up slightly over the second quarter 2010. However, our other income was $1.8 million less than last year's second quarter. And that was primarily due to the fact that last year, we recognized a gain that resulted from a lawsuit that we won against former producers for violating their employment agreements.

Looking at our pre-tax profit margin for the second quarter of 2011, it was 24.9%, and that compared to the 2010 second-quarter profit margin of 27.9%. That's a 3 percentage point decline.

If you exclude the impact of the changes in the acquisition earn-out liability, which was $2.1 million, the reduction in the other income which was $1.8 million, and the net reduction in the profit sharing contingent income of $4.2 million, the 2011 second-quarter pre-tax margin was only 40 basis points lower than the comparable 2010 quarter. And that difference is more than accounted for by some delayed revenues from Proctor Financial, which Powell will talk about a little bit later. In fact, the operating profit margins in most of our divisions showed an improvement when you exclude the Proctor numbers.

Employee benefits and compensation as a percentage of total revenues for the second quarter of 2011 was 51%. For the second quarter of 2010, employee compensation benefits as a percentage of total revenue was 49.8%. However, when you exclude the $4.2 million of additional profit sharing contingencies in 2010, and the $1.8 million additional other income, employee compensation and benefits in the second quarter of last year would have only been 51.1%, which is only 10 basis points different than the current quarter. The total dollar increase on the net basis in employee compensation benefits was approximately $4.5 million between the 2 quarters. However, $7.3 million of this net total was attributable to [jet] the standalone new acquisitions since last year. Therefore, excluding the impact of these standalone acquisitions, we actually had $2.8 million in less compensation benefits on a kind of semi same-store sales basis. And that is primarily related to reductions in salaries and bonuses.

Our non-cash stock-based compensation cost was $2.7 million in the second quarter 2011, which is consistent with our previous guidance on the increased cost, which includes our new stock incentive plan that was implemented in the first quarter of 2011. In the current quarter, other operating expenses increased as a percentage of total revenues by 40 basis points to 14.2% of total revenue. The total dollar increase in other operating expenses was $1.4 million. However, $2.6 million of this aggregate total was attributable to just the standalone acquisitions since last year. Therefore, on a comparable again semi same-store sales basis, those offices had an aggregate reduction of other operating expenses of approximately $1.2 million. These decreases were broad-based small reductions and many expense line items such as occupancy cost, supplies, and telephone cost.

Amortization and depreciation expense increased in aggregate over the 2010 second quarter as a result of our acquisitions this year. Interest expense is consistent with the expected quarterly expense of approximately $3.6 million. Our change in estimated acquisition earn-out payables was a debit of $1.6 million this quarter, versus a credit of $533,000 in the second quarter 2010. Thus it has a net-delta loss difference between the 2 quarters of $2.1 million which is almost $0.01. The debit that occurred in 2011 quarter occurred as a result of several acquisitions performing better than what we originally predicted at the date of each of the respective acquisitions. Our effective tax rate for 2011 is currently expected to run approximately 39.7% range. Which is just slightly higher than last year's effective tax rate. So with that quarterly overview, I will turn it back to Powell.

Thank you Cory. Quarterly Retail was down 1.1% versus 2.5% last year, property rates are down 5% to up 10%, liability rates are flat to down 5%, exposure units are generally flat to down slightly, auto rates and work comp exposures are flattish. The most competitive pricing areas in Florida are from Jacksonville out into the Panhandle to Panama City or Pensacola. There are certain national markets that are willing to use their property capacity and they are very active in new business being written in Florida and there are certain regional markets that are also very, very active in new business.

Florida Retailer as a group had a net decline of $451,000 for the quarter. However, last year in the second quarter, there was a $518,000 accounting adjustment to reduce our SAB 101 reserve for future policy cancellations. That did not have a corresponding adjustment in the second quarter this year. So thus, when you aggregate all the individual offices, some were up and some were down, but the aggregate, there was a net positive growth of $67,000. National Retail, negative 8.1% versus negative 3.3% in the Southeast, excluding Florida, property rates are down 5% to up 5%, GL rates are typically flat to down 5%. Auto rates are flat, work comp rates are flat to down 10%, and exposure units typically are flat to up slightly on certain accounts.

The marketplace, markets are looking for rate on renewals and a few of those carriers are willing to walk away if they cannot get a flat renewal. Most markets continue to be aggressive on new business, and regional carriers are the most competitive. In the Northeast, property GL and auto rates are flat, we are seeing downward pressure on auto rates in north Jersey a bit, work comp rates are flat up 5%, and basically exposure units in the northeast are flat to down slightly. Construction flat to possibly up slightly in areas, but the markets are saying they need slight increases. We are seeing low-single-digit increases stick on some accounts. But, once again, no market wants to lose a renewal.

In the midwest, property rates are flat to up slightly, and GL rates are flat to down slightly. Auto rates are flat, work comp rates are up several percent, and exposure units are typically flattish. In the construction area, GL rates are flat to down 10%, and we are seeing bigger -- the payrolls on bigger contractors, or some of ours, down substantially in the midwest. In Texas, coastal property rates via ENS markets are up 5% to 15%, yet certain standard markets want rate increases and others are gutting the pricing. Smaller standard market property is basically flat. GL rates are down 5% to 10%, work comp rates are down 10%, and certain national carriers are tightening up on their work composition in Texas while the former state fund remains very competitive.

That said, there are a handful of offices that experienced a unique set of circumstances that contributed to the vast majority of the downdraft in Q2, and I'd like to elaborate on several of those for your benefit. One office saw former owner, a number of years retired come back into the business and take several accounts. The result was a reduction in over $1 million of revenue, and there's current litigation ongoing in this matter. Another office that writes employee benefits in a particular state for school boards has seen a dramatic impact on their business, down approximately $1 million plus due to 1, the reduction in teachers, and 2, increased competition in their state employee benefits plan. Another office had a large life-case last year in Q2 without a corresponding case this year. One office that focuses on large contractors in the Midwest renewed all of their accounts but due to the dramatic shrinkage in exposure units in their accounts, their revenues were down substantially for the quarter. And finally, there was a timing of $700,000 of revenue that came into Q1 last year that was received in Q1 this year. So we didn't have a corresponding revenue stream in Q2 this year.

Couple these offices I just described with a higher than normal lost business for a handful of other offices, and you get our National Retail results. The remaining offices not discussed in National Retail performed well with a slight degree decrease in revenues overall. And Western Retail, we were down 3.7% versus down 3%. Last year, property rates are flat to down 10%, GL rates are flat to down 5%, auto rates are flat, work comp rates are down 5% to up 5% except on accounts with bad loss ratios. We will talk about those in a moment.

Exposure units are generally flat, some maybe down slightly. On a market standpoint, we are seeing carriers on accounts under $50,000 in premium trying to get rate. And some of it is sticking. Larger accounts are still very competitive. Anything over $100,000 in premium attracts a lot of attention.

Back to work comp, it's all about underwriting now. We are seeing more declines on new business submissions due to bad loss ratios than before. If the account has a debit mod, we are going to say you are going to have to start paying more. Credits are going away from the carriers. If you have a credit mod, there is still favorable terms that can be achieved, i.e., flat or down is still available. The major comp players in California are starting to get rate, i.e., some tightening And the state fund we are seeing on loss challenged accounts.

In the employee benefits arena, small group under 50 lives we are seeing rates up 5% to 15%, and large group over 50 lives, we are seeing up 5% to 10%. Certain carriers are breaking out compensation on larger groups as we previously discussed. Some are asking us to get our clients assigned disclosure statements and like I said, we talked about that last quarter.

In the Wholesale division, we are up 1% versus up 1% last quarter. The brokerage property -- cap property is up 5% to 15% and RMS 11 continues to impact the marketplace specifically in Houston, but in other areas as well. General liability rates are leveling off a bit, exposures are typically flat to up slightly. And professional liability rates; EPLI and D&O rates are down 5% to 7%. Typically small and middle market revenues on accounts are up slightly, we are starting to see some increase in claims due to wage-an-hour losses. We are seeing lots of technology and medical company start-ups. On our E&O business we are seeing revenues down slightly on renewal accounts and anything in a financial institution area, rates are up. From a binding authority standpoint, property rates are flat to down slightly.

London, interestingly enough, is trying to increase rates but unsuccessfully up 5% to 15%. That's the desired rate increase. Yet the domestic markets are still flattish as I said earlier on rates. However, RMS 11 is still creating challenges for binding markets. Some of those markets are saying, quote, just wait until we get this figured out, end quote. Thus, it's a somewhat fluid state changing daily or weekly. GL rates are flat to down slightly. Construction GL is flat, down -- flat to down 5% to 10%, professional liability is generally flat. Exposures are flat to down 5%.

In the programs arena, professional programs down 5.4% versus down 3.1%, dental rates are flat to down slightly, lawyers are down 5% to 10% and rate depending on the type and number of attorneys. CalSurance continues to see rate pressure on the book with exposures down 5% to 10%. In special programs were down 12% versus down 3.1%. Proctor is seeing rates are down so in Q1, we estimated that Proctor's revenues would be down $500,000 in revenue in Q2 and down $2.8 million in Q3. Their revenues were actually down $2.4 million in Q2 due to a timing issue, and we believe them to be down approximately $1 million to $1.5 million in Q3. But we still think they're going to meet or exceed original budget of $37 million in core revenue for the year.

FIU rates were flattish, x-wind business continues to be priced very competitively. And the state has not yet addressed the A-rates on properties over $10 million in TIV. We talked a little bit about citizens in the past. We thought those were going to be addressed after the session, which that has not been addressed. Finally, one of our other special programs, Acumen Re had a $700,000 revenue move from Q2 of this year into Q3. It's just a timing issue. From a services standpoint, we were down 80 basis points versus down 30 basis points in Q1.

From an acquisition standpoint, we are very pleased, we have closed $47 million year-to-date in annualized revenues as I said earlier. In the second quarter we closed $26.5 million in fixed transactions. Acquisition opportunities continue to be good. We are very pleased with our activity. As we have discussed in the past, organizations sell on their own time frame. But we continue to look for good firms that fit culturally with Brown & Brown.

In conclusion our results in Q2 were unusual primarily due to the reduction in other income and over $4 million less in profit sharing contingencies. However, we are pleased with the improvement in Florida Retail and continued positive internal growth in Wholesale. As Cory pointed out, we have 3 items that impacted our quarterly earnings. $0.04 over compared period last year for the second quarter. Carrier results in Q1 continue to deteriorate on a combined basis from [$1.011 to $1.033] and interestingly premium-to-surplus fell from [$0.77 to $0.75] March of '10 to March of '11. This is a new record level based on quarterly data back to 1986. With that, I would like to turn it back over to you Laura, to open it up for questions.

(Operator Instructions)

Keith Walsh, Citigroup.

It was very helpful, the discussion about some of the one-off items there in each of the offices. Can you talk a little bit about excluding Proctor within your book?

When I think about the market now, it seems prices are still soft but maybe decelerating, the decline is decelerating. Exposures seem to be a little bit better. Is there something going on with new business or retention? If you could just talk to that a little bit.

Yes. We tried to give you a little color around it in the National Retail scenario. You are correct in saying relative to several offices. In our Business right now, we are seeing rates, depending on where you are around the country, rate pressure upward, some areas of the country as I said up here in the Northeast we are seeing it stick a little bit more. I'm talking excluding coastal property number 1.

And we continue to see rates move around. Because nobody wants to lose a renewal. I alluded to in the Southeast outside of Atlanta and some of those areas, that carriers are willing to walk away on business, if it goes below a flat renewal.

We continue to write a lot of new business, and in most of our offices, we do not see a change in historical retention ratios. However, as I alluded to in one example in National Retail where we write a lot of business with large contractors. That office was dramatically impacted downward -- they renewed all their business but the exposure units were down substantially.

So, it's very difficult to make a broad statement, Keith. But to try to make that no, we continue to write a lot of new business and our historical retention ratios at most offices are the same.

Okay, and just another on revenue. It seemed the trend heading before this quarter, four consecutive quarters of just improving organic. I think the consensus out there was probably you guys were going to be flat to up in the second half of the year and this quarter kind of throws a monkey wrench into that it seems like. You did a nice job explaining some of the things but is that now off the table for the second half of the year? Is this a new trend we're looking at or should we just go back to what we have been seeing previously?

Let's go back to what we talked about in Q1, and what we said was that obviously we were pleased with the incremental improvement in our internal growth rate. Yet -- and I don't remember my exact terms, we thought we would probably see more of historical performance between now and the end of the year. That was not broadly defined.

But knowing that there were some people on this call that thought because we were negative 1.1% that we were going to go positive in Q2 and Cory and I -- I thought tried to articulate that we didn't think that because we haven't seen improvement in middle market as much as some people may have thought. I don't know if those people are on the phone or if somebody thought that on the call today. But that's what my recollection was, Keith, relative to that.

So the second half of the year we are still looking at a negative scenario?

When we said in the first quarter that we thought that we would be operating between now and the end of the year, that was 90 days ago, in a similar operating environment. We are sticking by that. So if from a historical performance scenario, Cory do you want to allude --

Yes, Keith I do think that the second half of the year will reflect something closer to what we saw in the first quarter. As opposed to a slight aberration with a handful of our offices this quarter. Does that answer it?

It does. And then last question just on contingents, if you could give just remind us what percent of your contingents are driven by profitability of PNC companies. And then it seems like the outlook for 2012 has got to be reduced on the contingents at this point if you could talk to that.

Yes. I would say generally, off the top of my head, all of our profit sharing is based on profitability. That is always a function of it, Keith. There might be other criteria like persistency, or new business or something like that. But the core foundation of profit sharing commissions really is profit sharing.

And so the fact that the loss ratios are going up, I think your assessment is correct that profit sharing in 2012 should be lower. Because the loss ratios are going up.

Okay, thanks a lot guys.

Mark Hughes, SunTrust.

The pricing gap between the new and renewal business that you describe that there still is a gap there? How did that compare to say Q1 or Q4? And then through the last cycle, how does that normally trend when the markets are to firm up? Do those close entirely, or what would you expect going forward?

Well, I would say that it is similar to Q1 and probably similar to Q4. I think I said the last time on the call, if you take into account that you submit or you get a renewal account and the account is -- the market is looking for a 4% rate increase and you negotiated down to a 1% or 2% rate increase. If you took the same account, which you wouldn't, but if you took the same account and it was a different operation, meaning all the same exposure units, and you submitted to the exact same carrier, I've said before that that could be priced 10% to 15% less than expiring.

And so, Mark, to your comment, depending on when a market changes, I normally think of property sort of leading the way. And can there still be a change in the new and renewal business pricing in a firming market? And the answer is yes, but the gap closes.

In a perfect world, static state you would think they would be the same. But the answer is the market is inefficient. And that inefficiency is not bad but that inefficiency creates the opportunity for us to write a lot of new business and do good things for our existing customers. So, have we seen that gap close? No, not yet.

Okay. And then Cory, the expectation for the change in the earn-out liability, should we normally assume that's going to be flat? Is there something about the trend in these recent acquisitions that would make us think that would be a positive number similar to this quarter?

No, our goal is when we make the acquisition, we have to predict what that earn-out will be 3 years from the date of the original acquisition. So, you've heard my diatribes before about how much noise this 141 R creates.

The fact of the matter, the only thing that really does matter, is how good of a predictor we are of the date of acquisition. So, in this case, our objective is always to be 100% accurate but you will never be 100% accurate. But we always would hope that half would be up and half would be down and net to zero. In this particular quarter, there were situations where we had acquisitions that did perform better than we anticipated.

And there were an acquisition where it was an early termination. Because we wanted to combine the offices that moved their earn-out closer to their maximum. And that's what created it.

In the future, I would hope it would be lower, but I tell you it's such that it's a very unpredictable number, and it doesn't mean anything other than create noise. So all we can do is highlight it for you and that's why we have it as a special line item. But the positive is when it is a debit, it does mean that the earn-outs are doing better than what was originally predicted. But that's just a point estimate, 3 years before it actually happens. I would hope in the future it would be less, but I can't assure that.

Thank you.

Mike Grasher, Piper Jaffray.

Just wanted to follow-up on the exposures issue. I know you mentioned the large contractor account where they renewed everything but the exposure units fell. Is there any area or any line of business I guess where you're actually seeing exposure units accelerating across the board? Maybe accelerating is too strong but up modestly.

I think I wouldn't use the term accelerating. Are there areas of the country and classes of business, and I think it's a real specific to the office and what they are soliciting. So for example, if you went to our Atlanta office and you asked them about the contractors that they have worked on recently, and/or their existing business, the contracting business has been down so low there, that they are seeing slight increases on their accounts. Does that mean that they are back close to where they were? Not even close.

And so, there are stories Mike, like that across the country, but there's no -- when we go into offices, I ask the entire team, all of our teammates in the office how many accounts do you see that have 25% exposure increases? And very few hands will ever go up and when they do, they are unusual types of accounts.

I'll give you an example; I was in an office recently where 1 was a manufacturer of a medical product -- an invasive medical product. That was the scenario. Their exposure units were up 25%.

And then the next one was a technology company. And then you start asking does anybody have 15% or 10% or 5%, and most of the accounts are flattish as a very broad statement. So that's how we go into it on our renewal books and we talk to people in our offices about it. But we are not seeing anybody expanding dramatically in terms of their exposure units.

And those are just on the renewal accounts you are speaking to there. How about just new business where they are establishing new accounts?

The new business, you would like to think you may know a historical perspective on their exposure units, and we may not know all of that up front. We get that in the process, and if we get it for the under-writer up front, some are growing and some aren't going. But as a general rule, I would say more are flat to potentially up or down slightly.

Okay. And then second question would be around workers' comp reform. There's been numerous states that have enacted some sort of reform be it positive or negative for under-writers. But how does that impact your business and your approach to the market?

Sure. Work comp reform creates an opportunity for us. So you've heard us talk about in the past that in Florida -- we will just use that as an example -- in Florida there was meaningful tort reform it 2003 for workers' compensation and as a result, rates went down an average, compounded average of 60% plus since 2003. On January 1 of this year Mike, as we have talked about before, rates went up I think an average of 7.8%. So, that is an opportunity for us not only to do a good job for our existing clients but to work on new business and bring those solutions to our prospects.

Couple that, go to the other end of the United rates, go to Washington state. Washington state is 1 of 4 monopolistic states left. In the state of Washington we talked about there was the possibility of meaningful reform and opening it up to the private market this year. That was defeated, surprised us and it surprised a lot of other people, it was defeated by a -- an effort led by several interest groups in the state of Washington. I just heard yesterday that the rates in Washington, I believe are going up across the board 30% plus this year. Now, would that have happened in a private market? I tend to doubt it. And so if in fact that market becomes privatized, then that in turn creates a great opportunity for us because we will go to our existing clients and new prospects and offer work comp solutions.

So then you look at some place like California, which is always sort of at the forefront of most of your minds relative to comp issues. And what we are basically saying is -- I would say carefully, but I would say that there are markets that are getting religion. And they are saying if you have bad loss experience, you're going to not get the credits that you once got. If you have good loss experience, you can still get flat to slightly down renewals.

And so, that's a long-winded answer of saying, Mike, that we think that reform generally is an opportunity for us for our existing clients and new business.

Okay. I appreciate the detail on that. And then I guess the final question I had just if you can give an update to the degree around the litigation with your former employees. Is that having any impact at all on your Florida business? Or with the --

No, no, and no. But as you know, we don't typically talk about ongoing litigation. However, however, we currently have an agreement in principle with the individuals that you have discussed. But several of the substantive terms have not been performed. Thus, we are not at liberty to discuss at this time in detail.

Fair enough, thanks very much.

Matthew Heimermann, JPMorgan.

Couple questions, first, just with respect to -- I know growth has been on the top of the mind for everybody I guess as we've gone through the Q&A role today. I think originally you discussed kind of 2011 being a transition year for growth. And certainly, the headwinds that you kind of started the year with haven't really eased all that much.

I guess if we were looking to 2012, what factors need to change to actually get you into the positive growth column? Is it a function of rates changing, just having a little bit more of a more positive economic growth behind us, just as you kind of survey the landscape of factors you feel are most important to getting there.

Most important factors by far Matt, are exposure units. And we have said before that the current rate environment, particularly in areas where you still hear us saying there are rate decreases or flattening, that's not -- we don't need the market to firm up in rates to grow organically. We just need to have a little bit better economic operating environment for the middle market customers across the country. So remember, we are a middle market agency broker firm that basically is paid by commissions.

And so, we are still not seeing economic expansion in the middle market. That is the biggest single thing that impacts our business.

And just with respect to that, from the psyche, of your clients right now, is that more -- does that just come back to uncertainty with some of the issues we've talked about in the past in terms of healthcare legislation and what the actual implementation looks like. Is that just a function to maybe payrolls or employee counts not coming back in the middle market maybe as significantly -- not that they are significant anywhere, but not getting maybe the relief you might be getting at the large end of the market? Are those the factors that still kind of we should think about in terms of maybe trying to gauge where we are on that front?

Yes. I think that number one, in the middle market clients of ours, there was not a dramatic shift to optimism. There continues to be what I call a cautious view moving forward, and you've heard us talk about the bunker mentality. I don't think that owner of a business has come out of the bunker yet. And so, that said, you will hear in our offices if you were to ask individual offices, that you are seeing on some accounts expansion of business without adding new individuals or employees.

And so, we have thought all along what we've read in national papers and hear on the news up until about 8 weeks ago, maybe it was 10 weeks ago, that the economy was doing better and everybody was feeling good, and all that other stuff and the answer was we were sort of scratching our heads and saying we are not saying that with our middle market customers and our new business prospects. I think it's not as though they went from bunker mentality to joy and optimism to back to the bunker, it was more they'd been in the bunker the entire time, although it was just not as difficult, but it's still a difficult operating environment. But getting better. That's how I think that they view it.

Okay. That's fair. And then just one of the things I've struggled with just looking at the brokers, vis-a-vis some of the insurance under-writers is that for the last several quarters a number of the insurance under-writers talked about premium molded adjustments upward quite significantly in the work comp area and that doesn't seem to be a trend that you all have kind of confirmed in your own commentary. So, is there any color you could just add there?

I guess I'm curious if work comp -- the reason I'm asking is just why the difference but also of work comp rates start to go up a little bit, how material -- I guess I'm trying to gauge how material that is relative to payroll still not looking like they have expanded either.

Right. First off I would say I think you're focused on the right thing, which is payroll as opposed to rate. In the carriers and/or the brokers segment number one. Number two, I only worked 3 years as an insurance carrier in the beginning of my career, so my comments might be slightly off, but my suggestion or commentary would be the following.

If you ask in a normal year an insurance carrier what percent of additional premiums or what impact of additional premiums on workers compensation, what that impact has been to their total premium writings in the quarter, I would believe the answer will be somewhere between 2% to 4% positive. So 2% to 4% of the total premium written would be as a result of payroll audits. In this economic environment, my understanding in talking with people that we know at these firms, is it has been kind of the reverse. The reverse is basically down 2% to 4%.

What they may be saying and I don't know, you might inquire about those carriers in question, is they may be saying that it's getting closer to flat or very slightly up. And I don't know that, and see it's funny because when you hear carriers say that they are getting rate on their commercial book of let's just say 2%, that's on their renewal book. But if they could tell you what their new business pricing is, their new business pricing is still down substantially in terms of if they know the comparative on expiring, which most of the times they don't talk about that. Some do, but not all of them.

So I think there's a 2% to 4% swing positive or negative as a result of premium audits on workers' compensation and I think my impression is that it's going back more towards flat as opposed to positive than it has been in the past.

Is it fair to say that in a normal -- when we've been in normal years in the past when carriers have seen those audit premium adjustments. Those aren't things that necessarily -- are those things that would have -- I guess I would be curious from a commission standpoint, from your standpoint, is that stuff that you just capture up front, and it doesn't really flow through to you? I'm just trying to understand.

No no, we capture it and it flows through to us, what I would tell you is you get the good with the good and you get the bad with the bad. And so what I mean by that is in an expanding economy, you get clients growing and then typically they are going to have net more premium audit positives, those would be called additional premiums versus return premiums. That is actually put into -- that is put into our numbers in the growth of our business.

On the flip side. When you have a shrinking economy as we have been going through, for the last several years, you get not only the downdraft on your renewals of accounts, but you get return premiums on top. I call that the double whammy. Which is baked into the negative downdraft.

We've I said before, that remember a lag on a work comp policy positively or negatively could be up to 14 months and you say well why? Well, if we renew your business, Matthew Heimermann Inc, you're a manufacturer, today. Okay. And you have renewed it and you have $10 million of sales and so we go 12 months down the road and actually you knew that you actually had another contract in the pipeline, which was going to get you to $14 million, but you just have had this bunker mentality, you've been very cautious about updating your payrolls or your sales figures with us.

So basically at the end of the exposure period or the policy period next year, the carrier will have 60 days to come in and do a premium audit. In doing a premium audit, they will determine that Matthew Heimermann Inc did $14 million in sales and they will send an additional premium so you would pay the additional premium to us, we will get our commission, they will get their premium.

Conversely, in a shrinking environment, if you had said your sales were $20 million and when in actuality the market was going down on your manufacture of product and now it's $14 million, they are going to have a return premium of that $6 million and we've got to give that commission back to the carrier on that.

Okay. That's right. That was my presumption. I guess then the take-away is that some of the comments we are hearing on positive adjustments are 2% to 4% just are not representative of what you're seeing in the business overall. Probably the take-away.

I think that is fair. I don't know how those statements were made, but I find it unusual to say broadly speaking that somebody's comp book, which by the way, comp books in average, have been -- they are heating up on the temperature. I call it running a slight temperature at about 114% combined ratio. And expected to go towards 120% year-end based on everything we can gather. So, if the book is growing, even if it's growing and the temperature is going up, profitability may be in question.

Yes. And then sorry to take so long on this, one question for Cory is just -- and I've asked this in the past, I just wanted to know any update thinking with respect to some of the maturities? The maturities this year and then just the capital structure in total from a maturity standpoint, given that it still seems to be a relatively favorable environment to be an issuer?

Matt, are you talking about our debt?

On the debt side, yes.

Well we've already got -- we have $100 million that is coming due in September, and that's already been replaced with another debt from our Prudential partners. And their rates are going to go from 5.3% on the $100 million that is retiring down to 4.5%. And so, there's no other really change in our capital structure.

We've got a lot of cash, and so don't really foresee any significant change right now. Looking to just to make acquisitions.

I guess I was thinking more in the standpoint that I think your other maturity is 2016 and kind of whether it made sense to even though you may not necessarily have a need burning a hole in your pocket, whether or not just with the environment we are in, whether it make sense, because you certainly have the capacity I think from a financial leverage perspective. To maybe put another maturity out there.

At this time, we are not talking about it just because we've got so much of ready cash, and are not considering that until a bigger deal comes along.

Okay. Fair enough. Thanks.

Brett Huff, Stephens Inc.

A question and I want to make sure I'm hearing you right. It sounds like rates -- there's a little bit of a -- there's some room for hope on rates, which seems a little bit different than the past couple quarters. If that's the case, even if it's small, and given that it sounds like exposure units haven't changed much in the last couple quarters and it sounds like they won't in the next couple of quarters. Why would the second half organic growth still kind of look like the first quarter if rates are getting a little bit better, or is that a wrong interpretation?

I don't know if I think that is a wrong interpretation. I think that basically that as we have said, if you consolidate my comments on the market, you have a lot of flat and down slightly I think in exposure units. There's some that are up slightly, but we would say that I think that the expectation for internal growth going forward is as I said earlier, more similar to the historical range. And as Cory alluded to earlier, we would like to think that it would be closer to what you might have seen earlier in the year than what you have seen this quarter. But that's kind of our best estimate right now.

Okay. And then you guys looked at Proctor in 2012, it sounds like you've been -- even though there some shifting between quarters, it sounds like your estimate -- you're still feeling pretty good about the $37 million or so in contribution there. Is there anything that is happening in Proctor that should change -- should cause the meaningful fluctuation as we go into 2012 or are the sort of rocky seas with Proctor behind us once we get done with this year?

Don't think so Brett, but that's an interesting space, and we like that business, but there's a couple 800 pound guerillas that operate in that space that you always got to contend with from a competitive standpoint. But we are not aware of anything right now that we would need to give additional color on.

Okay. And the last question on comp, the comp number I thought was -- it came in better than we expected and I'm sure part of it was because of the revenue was lighter than we thought. But any thoughts there on containing cost as -- are we seeing more competition for talent, has anything changed meaningfully there that we should think about in terms of escalating comp costs going forward?

No, I don't think so. Remember, we want to get the best people on the team and we are looking to add teammates in terms of revenue producing teammates through both M&A transactions and hiring them from other industries and teaching them the insurance business. So, no, but we are very focused on high-quality people on the team, getting them, keeping them, retaining them, training them.

Okay and then last question. It seems like you guys are -- I feel very strongly that you guys are running leaner than you have maybe ever in the past. When rate and/or exposure units goes up, how should we think about your margin versus historical margins?

We believe that we can go and approach back our historical operating results, and may be able to exceed those. But once again, what we are trying to do is grow our business. And obviously we did not grow our business internally this quarter. And so it's something that we are focused on. And we think that we have the discipline to drive the results in a normal operating environment.

Great, that's what I needed, appreciate your time.

Doug Mewhirter, RBC Capital Markets.

Hi, all my questions have been answered, thank you.

Meyer Shields, Stifel Nicolaus.

I want to talk about what's actually driving the relative out performance in Wholesale? Because I haven't heard a lot of the sort of quasi-specialty business moving back to the ES market and I'm wondering what's actually distinguishing that --

Yes, I think there are two things. One, as you know coastal property rates are up, and as I said 5% to 15%. So that helps. And two, depending on the market, be it brokerage or binding, the uncertainty/confusion that is surrounding RMS 11 is creating some opportunities for us. What I mean by that is there may be scenarios where in an open market, if you want to call it that, and binding authority, there would be lots of binding authority markets that would be quoting our renewals, whereas if RMS 11 if the Company is saying just wait until we figure it out, they may not -- the competition may not be able to quote a renewal on it.

Number one, conversely if we have a market that is opened, it is not confused, and we are write more potentially new business or taking it from a market that is sort of in a state that is trying to figure it out, there is still just a lot of competitive forces at play, which we think are very positive for us. And are really pleased with all the teammates in the Wholesale division and everything they are doing. But it a combination of rate pressure on the brokerage property, RMS 11 in a very broadly defined term, and I know you don't want to hear that and we don't either, but it is kind of amazing how one, I'm going to call it one Monte Carlo simulation model can drive so much confusion. Or create so much opportunity.

Right. Call the next question if there's any companies that were for life who's will be on the models.

Right. But like I say if a rating agency places a lot of value in the model then somebody is forced into using it.

Right. That's absolutely true. Cory, is there any rule of thumb connecting the out-performance of newly acquired agents in a quarter and the adjustment to the earn-out?

It's not a quarter-by-quarter phenomenon. It's over the whole period of time. So we have not made any specific tie-ins, because out of all the acquisitions we do, some are doing better than our original projections, and some are doing a little bit worse. So they kind of generally, we hope average out.

This particular quarter, it just went the other way. They did better. But I don't think it's necessarily something that is as predictable. We try to make as good-faith effort as possible to try to predict a point in time, 3 years down the road on the earn-out, and just naturally it's going to change.

So, generally we feel like we get the best acquisitions if we focus on the people. So generally, they do pretty well. But I'm not sure exactly how to answer your question.

I think you are. There's just not enough relationship on an individual quarterly basis.

Yes, the unfortunate thing is that that particular line item is nothing but noise, because the only thing it's measuring is how good a predictor we are at the time we make the acquisition. And you know my feelings on that one.

Yes, understood. Last question if I can. When we look at other income for the first 3 quarters of 2010 it was above $1 million. And it's come down. I understand that that is related to litigation in many cases. Should we expect the first and second quarters to be a good run rate for the next Q?

Well, not necessarily. I think it will probably be slightly up in the second half. As a general rule, you can kind of look at between $400,000 to $600,000 as kind of the normal baseline, which is additional rent income that we might have and other operating income that is normal. Anything outside that $400,000 to $600,000 is something that is a one-time occurrence. Either a gain or loss of a sale of fixed assets for a book of business, or litigation settlement.

But as a general role, I think you'll see the number be higher in the second half than it is right now for just this year. But again, it's not quite susceptible to accurate prediction as our normal operations.

Great, thanks so much.

Adam Cooper with William Blair.

Sorry if you said this before, but what was the organic this quarter of the benefits versus second quarter last year?

You're talking about our Services division?

Yes.

And that was -- we were negative 0.8 versus negative 0.3. In the first quarter.

Okay and could you give some color, what's going on with benefit commissions as far as the healthcare legislation, is that having an impact?

Sure. The answer is it is Adam, I would categorize it as very regional in nature. So you might have something going on in South Florida that might not be going on exactly in Texas versus in Phoenix, versus in Southern California. Might all be a little different on how the carriers are addressing it. But, a couple things that we are seeing.

Carriers on small group that paid on a commission basis in certain areas of the country are sometimes moving towards per-head per-month. So if you have a per-head per-month charge, the only way your revenue goes up in the future is to add more heads as opposed to if the rate goes up, you get a little bit more of the rate. That would be number one.

Number two, in some scenarios, where there are dominant market positions, meaning of a carrier, ABC carrier writes a dominant, they pay a certain commission to place the business, obviously with them, the traditional commissions. And if there is another market that comes in that is more competitive, it's conceivable that the commission level that they would pay us might be lower. That is a conceivable scenario.

So, obviously trying to do what is in the best interest of our customer, we have to do that because if we don't, obviously somebody else will. And that's how we lose a business.

But the final thing that we are seeing is and I alluded to it briefly today, we talked about it in Q1, certain carriers on large group, and large group is typically defined as over 100, but in certain states it is over 50, are asking us to have fine compensation disclosure agreements with our customers. That does not mean that they are not going to collect the money and then give us our commission levels, they are just breaking it out. And we don't have a problem with that. Because we are talking with our customers about our compensation and if they have additional questions, we want to provide as much transparency as they want into the way we are compensated, from whom we're compensated, how we're compensated, what we do for our compensation. But it really is a regional thing, barring certain national healthcare that are asking for disclosure statements signed across the country.

That's a long-winded answer of saying is there pressure on commissions -- benefits commissions? Yes. Is there uncertainty around healthcare reform? Yes. Does that create an opportunity for us? Yes. We are selling a ton of new business to new prospects, which are becoming new customers for employee benefits. And finally, we believe that there will be no meaningful healthcare reform modifications prior to 2013 because of the presidential election.

Now Adam, I wanted to clarify something because when you started this conversation about the internal growth rate, what I was giving you is the internal growth rate of our Service division. Everything that Powell was just talking about, the employee benefits in healthcare, those are all embedded in our Retail division. Okay? And so the Service division is primarily the TPA services, our Social Security satisfied groups, as well as our Social Security disability advocacy groups.

Medicare satisfied company --

So those internal growth rate they gave you in the front first part didn't have anything to do with the employee benefit healthcare side of it.

Okay. Okay, and one final question. Could you give us an update on Citizens with the new legislation are homeowners rates coming up or is it a little too early to actually see the impact of that?

Remember, when we talked about it last time, the issue where the rates will go up are around the sinkhole legislation, Adam. And I haven't seen it yet, but I know that it's going to be occurring, if it's not already occurring.

But, the bigger issue that we talked about and I've been asked about before is the A-rating of the larger properties and what we said on Q1 was we thought that the governor was going to call the legislature back in for a special session, and basically address that head-on and increase rates another 10%. On commercial residential properties. So think condos, apartments, certain assisted living facilities. That has not occurred.

And so that's surprising to us because in facilities like FIU which we write on QBE paper, their big competition has been historically citizens and to a lesser extent the ex-insurer surplus line market which is continuing to be what we alluded to I think in Q1. As the rates for Citizens go up, the competition that Citizens was presenting will probably be supplanted by the ENS market.

Okay, thank you remarks.

John Fox, Fenimore Asset Management.

Morning everyone I have two questions. First, I am a little unclear on the impact that Proctor had this quarter. So if you could just go through that on the internal side.

Okay. Proctor this quarter was down $2.4 million in revenue this quarter. And we had said to everybody that we thought they were going to be down about $500,000, and then be down about $2.8 million in Q3. That's what we said in Q1. Going forward, they were down $2.4 million and we are saying in Q3 we think they are going to be down somewhere between $1 million and $1.5 million.

Okay that is in special programs?

That is in special programs.

Okay. Terrific. And I think for Cory, do you have an estimate, Cory, for cash payments you will make this year for earn-outs?

Year-to-date, we made cash payments roughly of about $86 million. Okay? So the second half of the year it will be up, will it be equivalent to the $86 million. It's going to be somewhere $130 million probably $140 million, right now. But we got $86 million year-to-date.

Okay, I'm sorry, that is for earn-outs or for acquisition?

That is for total acquisition cost.

Right, I was looking for just the earn-out piece, which was $358,000 in the first quarter.

Well, I don't know if we --

It's in the financing section of the cash flow statement. I will just call you back if that's okay.

Yes.

The total amount acquisitions and earn-outs is $86 million?

That's correct.

Okay, thank you.

Dan Farrell, Stern AG.

You mentioned the M&A environment, you still feel that the pipeline is looking good. But could you talk about the competitive environment in terms of closing deals, and any -- where pricing of deals are right now?

Sure. We think that pricing of deals remains in the historical range that we have talked about before. And relative to -- that is typically 6 to 7 times an operating profit definition. Everybody can define it a little differently. We define it EBIT-A. That is our definition because there is very little D. But as it relates to the pipeline and sourcing of deals, what we've said is we meet with lots of people and talk to them about Brown & Brown and talk to them about their business and try to figure out if there is a cultural fit. And for every 10 firms that we meet with, there is a group of them, maybe 5 let's say, 5 or 6, that up front you could probably determine there maybe is just not a fit. And that's okay because you want to learn that up front.

But of those that we determined that there is a fit, let's make this easy, for the math purposes, if we have 4 that we were going to give term sheets to, typically we get 2 of those plus or minus slightly. So let's say we have 50% quoted or offered to close ratio. And so we feel like acquisitions as we've talked about the past kind of go in waves. And you can plant seeds today and that's going to bear fruit 6 years from now. Or it could be 90 days from now.

Just using the current location as an example, I can tell you that we at Brown & Brown, met Mike Crowe and his team 4 years ago. And we met and thought very highly of them, but it was just not an opportunity at the time to do a transaction. So we did a transaction here last fall in September as you know, so what happened, well they continue to grow their business, we stayed in touch, and over a 3-year period continued to foster a deeper and better relationship. Mike and his team continue to grow and prosper. And then we figured out a way to make it obviously mutually beneficial. And they joined our team in September.

So, every deal is a little different, Dan. But I think the important thing is we want to be out talking to people all the time, which we are. And we are focused on doing this for a long term.

As you know, there is really -- we call it four types of buyers in the space. You have people like us and some of the other publicly traded firms that have a history, and have done it for a long period of time, have a defined culture, and it's a long-term play. A long-term investment in operating environment. Two, you have banks. And we've said that we believe banks in aggregate are net sellers of insurance assets. We obviously closed on one this last quarter.

The only thing -- it seems to us that Wells and BB&T are the only 2 banks that are committed long-term to the insurance space. That assumes that they don't change their mind on their view on insurance. For whatever reason and then they might sell it. Or if there was a regulatory environment change, such that they couldn't own it in the future. That might change it.

The third would be private equity and private equity as we all know is typically short-term in nature and I would say 3 to 7 years. And we all know that you can't define and develop a very significant culture in that short period of time. And so, that's going to attract a different type of seller as well.

And then finally, it would be kind of I call it the cross town rival. Which is the smaller local or regional agency, that has probably been competing head-to-head with that firm, and then do they ultimately come together. And that's a possibility.

But ultimately, one of the good things about Brown & Brown, we believe in our acquisition strategy and this is pretty commonly known about Brown & Brown, there are three things we say with certainty. Number one, we pay with cash. Hard to argue with greenbacks. Number two, we do what we say and say what we do, i.e., when we give a term sheet and we do due diligence, we don't start negotiating from there. We stick to the original terms and conditions. And three, we can close quickly because we have everything done in-house.

Having said that, that's an observation of ours, it's not a criticism of anybody else's, but I think that's pretty widely known about us out there. And it's something that we are proud of because we view ourselves as operators that do a lot of -- we happen to do a lot of acquisitions as opposed to the alternative.

Thank you, that was helpful.

There are no further questions in the queue at this time. I would now like to turn the conference back over to Mr. Brown and Mr. Walker for any additional or closing remarks.

Okay. Thank you Laura and we appreciate everybody's time and have a wonderful day. We will talk to next quarter.

Ladies and gentlemen this does conclude today's conference. We thank you for your participation.