Brown & Brown Inc (BRO) 2012 Q1 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 questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events including financial performance. Such statements are intended to fall within the safe harbor provisions of the securities law.

Actual results or events in the future are subject to a number of risk and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statement 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 will now turn the call over to Hyatt Brown.

Thank you very much, Nicole, and welcome, everyone, to our first-quarter earnings call. I will now turn it over to Cory for the financials.

Thanks, Hyatt. Our net income for the first quarter of 2012 was $49.4 million and that was up 6.8% over last year's first quarter. Correspondingly, our net income per share for the quarter was $0.34. That is a 6.3% increase over the $0.32 that we earned in the first quarter of 2011.

From the revenue standpoint, commissions and fees for the quarter increased 13.4% to $296.5 million. That is up from the $261.5 million we earned the last year's first quarter. Included in our press release is our normal table that summarizes our total growth rates and internal growth rates from our core commissions and fees, which excludes the profit sharing contingent commissions and now exclude the guaranteed supplemental commissions, GSCs, as we will discuss in a minute.

We received $24.2 million of profit sharing contingent commissions, which represents a net decrease of approximately $4.7 million from the $28.9 million we received last year in the first quarter. Of this $4.7 million net decrease, roughly half of it was attributable to lower profit sharing contingent commissions in the retail division, and the other half approximately from the program division that was really relating primarily to Proctor Financial and our public entity operation with lower profit sharing.

Our best estimates of how much profit sharing contingent commissions we will receive for the remaining part of 2012, and this is based on just what we received this quarter plus our discussion with the various carriers, is that we think we may receive between $14 million and $17 million through the fourth quarters. We think that for the second quarter we will receive somewhere between $2 million and $3 million, in the third quarter we should be around $10 million to $11 million, and the fourth quarter we could get somewhere between $2 million and $3 million.

Now, additionally, we did accrue $2.6 million of guaranteed supplemental commissions, GSCs, in the first quarter of 2012. And that is $712,000 less than the $3.3 million that we accrued in the first quarter of 2011. Now this reduction is due to the fact that of the five carriers that pay us GSCs in lieu of the profit sharing contingent commissions two of them have reverted back to their profit sharing contingent commission contracts beginning this year in 2012.

The cash from the GSC contracts that we accrued during the year is still received at approximately the same time period that we received the profit sharing contingent commission, which for these commissions would be in the first half of 2013. Therefore, there is no substantial change in the timing of the actual cash flows from the two programs.

As you know, Brown & Brown would much rather have the standard profit sharing contingent commission arrangements since we believe that it more appropriately aligns the interest of the clients, the insurance carrier, and us as the insurance agent in enhancing the safety and loss control systems. Since we believe the remaining carriers will eventually move back to the profit sharing contingent commission arrangements over the next few years, we will begin to treat the GSCs similar to the profit sharing contingent commissions with the respect of excluding them from our internal growth rate calculation and just including them in the reconciliation below. So you will see with complete transparency the actual numbers of both the contingents and the GSCs each quarter.

Now looking at the internal growth schedule, we had a positive internal growth rate of 0.9%. For the first quarter of 2012 our core commissions and fees increased 19.3% and that is $43.6 million of net additional core commissions and fees. However, within that net number we had $41.5 million of acquired revenues.

That means that we had $2.1 million more commissions and fee revenues on a same-store sales basis; that we had a positive internal growth in three of our four divisions -- the wholesale brokerage division, the national programs, and the services division. Our national program division had the best, quote, negative internal growth rate they have had in many, many quarters and that was only a negative $1 million or negative 0.7%. Hyatt will talk about the activities in each of these segments in a minute.

Looking at our investment income, it decreased slightly by $100,000 mainly just due to again the low rate environment. The other income increased by $5.3 million and that was mainly due to aggregate gains of about $3.1 million from the sales of certain books of businesses. And then we also did have a $2.2 million settlement from an enforcement of our non-piracy agreements.

Our pretax margins for the first quarter of 2012 was 27.4% and that is compared to our last year's first-quarter pretax margin of 29.2%. That is a 1.8 percentage point differential. 1.2 of that percentage point came from employee compensation and benefits to where the compensation and benefits line item, as a percentage of total revenues, was 49.5%. And that was an increase from the 48.3% cost factor from last year.

The total dollar increase on a net basis in the employee compensation benefits was approximately $23 million and that was an 18.2% increase. But of that $23 million, $20.4 million was attributable to just new stand-alone acquisitions since last year. Therefore, excluding the impact of these stand-alone acquisitions, we had $2.6 million of additional compensation kind of on a semi-same-store sales basis because the fold-ins are still included in that number.

Now kind of breaking down where that $2.6 million was -- we had essentially about $2.9 million of additional cost. The largest portion of that was $1.3 million and that was due to a special one-time program that we will pay our retail commission to producers, an extra 5% of their book production that they had for the year of 2011, if they can grow that book production during 2012 by at least 5%. So if they grow it by more than 5% then they will get 5% commission paid at a one-time basis in the first quarter of 2013, based on their 2011 book. So for the first quarter that amounted to an additional compensation expense of $1.3 million.

Additionally, we had $600,000 of new salaries for new producers that we have brought into the system. We also had about $0.5 million of an increased cost on our group health insurance costs and another $500,000 in just related additional payroll taxes. So the four of these additional compensation and benefit costs added about 100 basis points to our ratio of total compensation expense as a percentage of total revenues.

Now another item that added an additional 30 basis points to our ratio of compensation benefits to total revenues was our November 2011 acquisition of ICG. Now ICG is a property tax payment tracking and processing company that we acquired in order to assist Proctor financially in handling the larger banks and mortgage servicers relating to lender-placed insurance marketplace. The accounting treatment required by the SEC generates kind of a unique GAAP, which is Generally Accepted Accounting Principle, results on this operation.

For the first quarter ICG had recorded revenues of $811,000, but the compensation benefit cost of $1.3 million and $500,000 of other expenses for a net operating loss of $1.7 million. Now the costs of this operation are accounted for just as a normal accounting basis and it's as payroll is paid everything is expensed as incurred. However, the revenue recognition is much different than the actual cash that we receive on this operation.

And to explain that is just when one of ICG's customers wants us to track and process the property tax payments of one of their loans, we will generally charge an all-upfront fee of somewhere between $80 and $100. But let's just say for this example that it's $84 and we get that all-upfront $84 to track this loan for the entire life of its loan.

Now we currently think the average life of all the loans in ICG's portfolio is roughly seven years. So even though the vast majority of the cost that ICG has is in the providing of the initial tax payment research and the computer set-up cost of this particular tracking for this tax payment, the ongoing annual charge to manage that account on an ongoing basis is generally only about $2 or $3 per year on an ongoing basis.

But, because of the SEC rules with revenue recognition on this line of business, we have to recognize that $84 over the entire life of the loan on a straight line basis. So basically we only get revenues at $1 per month in that example, so it's $84 divided by seven years divided by 12 months. So for this month on this example we basically only got $3 of revenues but the full cost.

So it's going to take a couple of years under this very conservative GAAP revenue recognition policy to kind of build the normalized profit margin in this particular case, but in the meantime this one operation accounts for about 30 basis points of that increased compensation and benefit as a percentage of total revenue line. So if you exclude those two items that we just talked about for 2012, the employee compensation and benefit as a percentage of total revenue was a really about 48.1% in 2012 and that is compared to the 48.3% first quarter of last year.

So with that let me keep going on to our non-cash stock-based compensation and that cost went up on a net basis about $1 million. That is really just due to the new stock grants, stock incentive plans, grants that we gave during -- at the first part of 2012, of which the majority of them went to the Arrowhead employees and management team.

In the current quarter, our other operating expenses increased as a percentage of total revenue by 50 basis points to 14.3% of total revenues from 13.8% in the first quarter last year. Now other operating expenses from a dollar standpoint increased $7.3 million and that is a 20.2% increase over 2011 quarter.

However, if you take the new stand-alone acquisitions, they amounted to $8.1 million of all those new costs during the quarter. So, therefore, if you just take the kind of a semi-same-store sales basis approach, those existing offices really had a net decrease of their expenses by about $800,000. Now there were some items that were up and down, but the biggest single change was, again, we get a continuing cost savings in our rent occupancy cost office space. And that by itself was just an $800,000 reduction in the current quarter.

So if you exclude the operations from these stand-alone acquisitions, our other operating expenses as a percentage of total revenues decreased to 13.5% from the prior year factor of 13.8%.

Our amortization and depreciation in aggregate was up $2.6 million from last year and that is obviously just due to the newer acquisitions. Our interest expense was up $500,000 over prior year and that is primarily as a result of borrowing the additional $200 million that we borrowed on the Arrowhead acquisition. Then, of course, our line item, that change in acquisition earnout payable first quarter this year, was a credit of $388,000 versus a credit last year of $99,000.

Our effective tax rate for 2012 is currently expected to run at approximately 40.3% and that is primarily due to the higher state income tax rate because of the large California exposure from our new Arrowhead acquisition. So really just to conclude, it was a very, very good quarter. We are very happy with the positive internal growth and our net income of $49.4 million was a nice increase of 6.8%.

So with that I will turn it over to Hyatt.

Very good, Cory. Thank you, good report. Getting into what is happening in terms of pricing, etc., first of all, a general statement relative to personal lines across the US.

Homeowners, which have been unprofitable for several years, are moving up 2% to 5%. Now in some places they are a little more, in some places a little less. If you are getting in the coastal areas, it's more but if you sort of average it across the US 2% to 5%. Auto, personal auto, however, is flat to down and in some places down as much as 10%. So that is kind of what we see on personal lines across the US and personal lines is somewhere around $70 million -- $65 million to $70 million of our total revenues.

Looking at Florida, first of all. Let's split Florida into three layers. First of all, South and then I-4, which would be Daytona to St. Petersburg, and then the northern tier which would be Jacksonville west.

First of all, in the South the economy is starting to move up. Foreign capital coming into Dade, Broward things are coming along, except for an outlier and that is Naples. Naples is still questionable, flat to down in terms of the economy.

Property rates are up 2% to 5%-plus. Condos are up 10%. There are lots of gaming -- there is a lot of gaming going on in the condos relative to appraisal value. So if the price, the rate goes up 10% then if you can get the value, the appraised value of the condo down 5% then it's only a 5% increase. Well, lots of pushback from the risk bearers, etc., including citizens.

GL and auto is flat. Umbrellas are flat to up 2% and then workers' compensation. Now a general statement, workers' compensation across the entire states, all of the states in which we are doing business, is going up anyplace from 2% to 3% to 4% to 5% to 6% to 7% except for Nevada where it's going down zero to minus 5%. One of the reasons there is because apparently the law is very favorable to employers.

The other state where it may be flat workers' comp would be Oregon. Not exactly sure whether that is more of the economy or whether it's more of what is going on in terms of pricing. But workers' compensation across the United States it's under the most pressure and it is also moving up 2% to 4%, 5%, 6%, 7%.

Now the question then is what about payrolls. Payrolls vary and we are going to talk about that a little bit as we get into more of the other parts of the United States. Payrolls in South Florida are up slightly except for contractors.

Now, again, underwriting across the United States is starting to play a part. That means that underwriters are looking at loss ratios and if it's a bad loss ratio then the numbers that I have been talking about they are way too low. And so we have actually seen in the case of some workers' comp accounts where existing companies simply wouldn't renew -- haven't seen that in six or seven years. Now able to get other carriers on, but sometimes at a [consentual] rate which is substantially higher.

Employee benefits, now employee benefits in the southern part of Florida is up 5% to 7% but we are starting to see some accounts coming in at flat. If you move into the I-5 corridor, workers' comp again is up 5% to 7% -- 2%, 3%, 4%, 5%, 6%, 7%. Property up 2% to 4% or more. Condos up 10% or more. GL and auto is flat to a negative 2%.

Now in the property markets, and this is true throughout Florida and it's also true throughout all the cat areas that I am familiar from Texas all the way around Florida and all the way up to probably Virginia, etc., there is always an outlier property market. So just at the moment you think there is a 10% rate increase or a 5% or a 12% rate increase, someone will come in at flat sort of out of the loop. However, that is getting to be less and less and less. Again, underwriting is sort of taking over.

The economy in Central Florida is flat to slightly up except Orange County and Orange County is up nicely. RMS 11, I am sure you all have heard about that, and that is having a substantial impact in Central Florida because RMS 11 is focused on individual risks and then what is the PML on those individual risks. In some cases the PML has doubled over what last year was considered to be the PML. So that is having an impact also on capacity and pricing, particularly for some of the both admitted and non-admitted companies.

Employee benefits, in South Florida up 5% to 7%, Central Florida up 2% to 3%, and a large risk bearer has told us that probably starting July 1 there are going to be accounts that will be renewed at credits, meaning down. Haven't seen them in, gosh, I don't know when.

If you go to the northern tier of Florida, employee benefits, now this varies. Larger accounts, which are loss rated and have good or bad loss ratios, will vary but talking about those that are any place from 25 to maybe 250 employees, those in the northern tier would be flat to sometimes down 4% or 5%. Looking also at the northern tier, property -- habitational, condominiums, etc., etc. -- is up 5% to 10%.

The citizens in Florida is pretty much up 10% except for those condos that are $10 million or more in a tower. And so that is -- those are up more. In the northern tier of Florida, unlike elsewhere, admitted markets are still writing risks. Occasionally in Central Florida an admitted market will write a property risk but it's pretty scarce.

Auto and GL in the northern tier is up -- well, actually GL is up 2% to 3% but auto is really flat to down. Workers' comp I have talked about that. Now there is some higher months coming on also and umbrellas are flat.

So generally speaking, D&O is flat. EPLI is up -- employment practices, etc. -- is up 2% to 5%. When you get out into the West, particularly California, it's 10% to 15%. The surprise in Florida is the employee benefits which seems to be trending to the positive side, meaning that instead of large rate increases they are much smaller and there are a few at zero and a few at credit. So that is kind of interest.

In Georgia and South Carolina, again, we are [confirming] payroll is stabilizing. GL and auto flat. Property 2% to 3% except coastal. Coastal 5% to 15%. Inland condos up 5%, much tougher underwriting, and talked about personal lines.

Generally, exposures are flattish to up a little bit and the economy seems to be getting a little better. Generally speaking, when I am talking about the economy I am talking about general business excluding contractors. There are certain classes of contractors who are starting to do some business, the refurbishment contractors, etc., but other than that really not much.

Employee benefits in the Georgia/South Carolina it's up plus 6% to plus 8% and still having reductions in coverage. Virginia/Delaware, again workers' comp as we have talked about. Property is up 3% to 5% non-coastal. Get into the coastal areas and it's a different ball game -- 10% to 15%.

GL is up a little bit, 2%. Autos are flat. Autos are kind of flat really to down throughout the US. The economy is getting a little better.

Marine is flat to down 5%. Employee benefit flat, flattish, maybe down just a little bit. Wonder why all that is happening?

In New Jersey, New York, Pennsylvania, again employee benefits there is up 3% to 5% if it's over 50. If it's under 50 seems to be kind of flat -- it's under 50 employees. Property in those areas is up 3% to 5%. Everything is kind of tightening in terms of underwriting.

Payrolls seem to be moving up. The Northeast seems to be -- the economy seems to be doing better and that is very positive. There is one little difference in workers' comp. In Pennsylvania the state really has decreased the rate, but the credits are going away. And so rates going down but the loss-cost modifiers are changing so that the price to the consumer is actually going up.

Now condos in New Jersey and some areas of Pennsylvania, these are smaller and middle-sized condos now, many were on a three-year rate guarantee. And so those are coming off and those condos are going up in the neighborhood of 15%. Again, the payrolls are starting to move up just a little bit, reflective of the economy.

If you go into the Northeast, which is Connecticut and Massachusetts, again the economy is getting a little better. Property 2% to 3%. It seems that anyplace along the East Coast and all the way down and over to Texas there is this constant push-push on property, except right on the coast which is more than the 2% to 3%.

Once you get interior, once you get into Middle America, then the property is flat to in some places down. In other words, the push seems to be more all along the East Coast because of the catastrophe exposure and the fact that modeling now seems to suggest that there is a greater potential for loss inland, farther inland than was considered in the past.

Looking into the Midwest, which would be Michigan, Indiana, Illinois. Again, workers' comp; all areas it's moving up and so the payroll in these areas is kind of flattish. Now in some of the areas the economy is not doing as well either. GL and auto is flat. Med/mal is flat to a negative 5% and, of course, property in those areas is going down flat to minus 5%. Underwriting getting tighter.

Looking into Texas and Louisiana, the oil patch. Now the oil patch economy is there, it's doing well. Property -- and this is in I am thinking now of the Houston area.

Property in Houston -- part of Houston is considered to be Tier 1, which is coastal, and part is Tier 2. And so the windstorm pool in Texas is only available in Tier 1 and Tier 2 it's not available. The situation is that in Houston actually property has gone up 10% to 20% in the city, whether it's in Tier 1 or Tier 2.

Also, payrolls are going up. Payrolls are 5%, 10%, some cases 15%, and of course, it's kind of interesting again but workers' comp rates are flat but credits are disappearing. So even though the rates either are flat or down the credits are disappearing, which means that the price is going up.

GL and auto it's varied. In some cases it's flat and in some cases it may be up as much as 10%. So employee benefits is 3% to 5% up. We are not seeing flat there at the moment.

Looking into the West -- California, Nevada, Arizona, Oregon, Washington, Colorado -- I mentioned that workers' comp is up in all those states. California is probably maybe the one that is being under the most stress, except of course I mentioned Nevada. It was down probably as much as a negative 5%. Of course, there is no workers' comp in Washington.

EPLI in Southern California and really middle California is up 5% to 15%. Umbrellas are down 5%. Exposure seem to be stable. Property is flat there to down.

The economy is getting a little better in most areas in the West, except Nevada and maybe Oregon. If you look at Arizona, the property there is -- GL, property, auto, everything is flat to down. It's still very, very competitive and the property rates are $0.02 and $0.03. And $0.04 is kind of unusual in Arizona, the Phoenix area.

Arrowhead, as you know, is one of our most recent large acquisitions and they are doing very well. Last year they grew 5% to 6% to 7% organically and this year they are continuing on that same rate. Of course that is not included in our organic growth schedule because they haven't been with us a year.

Some of their programs are growing a little more than others, workers' comp being one. They are looking also at several areas. One thing is some new programs and expansion of existing programs, potentially quake in California. We are also looking at the fact that their platform, their IT platform, may be something that we want to adopt in our wholesale area. They are pretty doggone good in that area, so we are very pleased with what is going on there.

Looking at wholesale. Now wholesale is reflective of what is going on in retail, but really when we think of wholesale we think of property. Well, no. We think of transactional and we think of binding authority, so let's talk about binding authority first because it's a little easier.

Binding authority is primarily smaller property and casualty accounts. These would be $500 and $1,000 of premium to maybe $10,000 to $15,000 in premium. Those property rates and prices are going up pretty much 5% to 15%. One of the reasons is this is gray or not eligible for standard companies or standard companies are moving out of this area particularly if it's gray and therefore this 5% to 15% is sticking. Casualty, however it's pretty flattish to maybe up a little bit and professional liability again is plus 5% to plus 15% that's moving up (inaudible).

And now let's get in to the transactional and of course that's where there is some variations. And anything that is coastal, which has cat exposure and that's you know (Texas all the way around Florida to New Jersey), property is moving up 5% to 20%.Now there is some changes in coverage's and sometimes that affects actual total premium paid by the insured.

However, on very large accounts, big schedules of apartments, etc., etc., large, large condominiums that are not necessarily good construction, those can be up as much as 10% to 40%. It depends on the model. RMS having a big impact there.

Casualty, of course, in the transactional is pretty flat, not much there. Exposure units are slightly up, and so if you look at non-cat property in transactional that is flat, maybe a little, little up. Really not much at all.

But there is a lot of pressure in wholesale. I would say the pricing pressure in wholesale is greater than the pricing pressure is in the admitted market.

Looking at programs, FIU, those are our condominiums on the sand in South Florida and elsewhere, and it's pretty much kind of a 10% increase. That is kind of the way it is.

In the case of Proctor, a comment on that. I think as people know, Fannie Mae is now coming forward with some recommended changes that they want to have instituted for anybody, any bank or servicing company that is handling Fannie accounts. And there are several things. Of course, we were very much involved in discussions with Fannie and right on the cutting edge of what their requirements appear to be.

They are talking about policy forms which is coverage. The coverages they are talking about, pretty much are in line with what we are doing today in Proctor. Rates probably down some, but well within our comfort zone.

There is several kinds of things that are being discussed relative to how the coverage is placed -- the three letters to the borrowers and then all of that sort of thing. They are talking about maybe seeing if the private insurer would want to continue the coverage even though it's a foreclosure or it's not occupied.

Then they are talking about requiring admitted paper versus surplus lines. Now in some cases we find surplus lines' pricing is lower than admitted and so not exactly sure how all that will work. But the companies that we had that are currently writing both admitted and non-admitted some are going to make filings or are in the process of making filings in order to comply with what Fannie is going to require. And those companies would be Markel, Lexington. Lloyd's is looking at a fronting arrangement, so there will be changes.

And I think about half of our business has some Fannie exposure and there will be some changes, and we think that that will all end up being for the best interest of the consumers, and so we are all for that.

Looking into public entity, and I am thinking now more of public entity in Florida than I am in the Midwest and the Northeast or in the far West, like out in Washington. And those renewals, property renewals I am thinking about now, which come up July 1 -- well, June 30, July 1 and October 1, there is going to be some fairly chunky increases on those. Still not quite -- we are still not quite -- we are not really sure exactly what they are going to be, but somewhere in the neighborhood of maybe 15% to 20%, maybe a little more on property. And USIS payrolls, those are starting to move up a little bit, like 2%. That is the first time we have seen that in about four years. So things are coming along not bad.

If I was going to give you a broad general synopsis, I would say that for the first time there is constant and consistent pressure in many areas of the US to increase property rates and some other rates like EPLI, some in D&O, but also consistently Workers' Comp going up consistently. So that is different; that is different.

Now, on the good news side, Powell will be coming back to the office on Wednesday -- that's tomorrow -- and we are very pleased about that; been talking to him on a daily basis for the last 60, 90 days. And a couple, three weeks ago he started talking to Cory and getting information and then looked into our e-mail system. And then he's been talking to the senior leaders, so he will be back and we expect him to be at the retreat, the annual board retreat which starts Monday, and at the annual shareholders meeting Wednesday.

And we would expect that the Board would reinstate him as the CEO. Then he will move forward just as before. I am kind of pleased about that because I can go back to being Non-Executive Chairman. So that is good news.

Having said all that, Nicole will now open up the phone to any questions.

(Operator Instructions) Adam Klauber, William Blair.

Thanks. Good morning, Hyatt. Great to see the wholesale businesses turning around. Of the growth, how much of that is driven by higher rates versus more submissions with the standards carriers being pulled back?

It would be kind of an educated guess. I would say about two-thirds is higher rates or maybe 75% higher rates and 25% movement. We think there is going to be more movement because underwriting is continuing to get front and center.

Okay, thank you. Also in retail, obviously, we are seeing good movement and you talked about a lot of the different factors helping that segment out. How about net new business trends, are those improving also?

Yes, they are, Adam. One thing -- I have been to this pictures show before, about five times, and there is something different about this time. What it is is this -- the risk bearers have a lot more capital and, therefore, dry powder this time than in the past.

Number two, there are fewer risk bearers, and I am talking about standard risk bearers now, and, therefore, there is a lot more pressure to get the returns on capital up, which is pushing them. And so, whereas in the past when you have a market change, all of the sudden it's 20% and 30% or more, which is just -- it's awful.

This time it's not happening that way. And is it going to continue? Is this the 2, the 3, the 4? It seems like it is. And if it does then this is really a much better thing for the industry, because people are able to accept small rate increases because lots of things are going up. Particularly when we show them how five, six, seven years ago they paid X and last year they paid, like, 55% of X and now you are paying 60% of X that is very acceptable.

We are, in both wholesale and retail, but really more in retail because that is where the rubber really meets the road, we are being very, very careful about making sure that our customers and clients remember five years ago when it was maybe almost twice as much as the price was last year. So all of that is kind of positive.

Great, thank you very much.

Keith Walsh, Citi.

Keith, are you there? Hello?

Hearing no response from Mr. Walsh, we will move to Mark Hughes with SunTrust.

Thank you, good morning. The margin outlook when you take all those factors you discussed, Cory, and given the fact that contingents look like they will be steady to probably up in Q3, what do you think the year-over-year margins are going to look like next couple of quarters? Any initial thoughts?

Well, my gut reaction is the margins in general will improve. The two things that we tried to highlight on this call does skew the absolute numbers a little bit and that is -- the ICG operation has unusual item. Since we bought it in November basically it will be three-quarters of that.

Then like I said that special program that we developed this year for retail commission producers is going to add some extra compensation expense for this year, because this year is -- it's going to be a challenging year for them. We wanted to incentivize them for this year to really grow the business. Remember third quarter we talked about the fact that -- Powell had mentioned that we were planning to give up margins on a temporary basis to have growth. And that was kind of the program we were thinking of.

So when you extract, when you take those two things into consideration, I believe that margins will continue to improve for the rest of the year with those two exceptions.

Right. Is the $1.3 million, is that on the run rate to assume that everyone hits their 5% target?

No, I tell you, that is actually a little bit lower than kind of the average. We probably have about, say, $220 million to $230 million of business that is tied to a commission retail producer. And so theoretically you could have, if everybody exceeded that 5% growth, you could have $10 million to $12 million worth of total cost. So if you take half of that we are probably run rate of more like $6 million maybe, give or take.

So that is probably what I would plan on at this stage.

Okay, final question. Share buybacks, any updated thoughts there?

You are probably focusing that on me and the answer is no.

We have got a share buyback program. We have not bought any shares yet, because as we had mentioned before we primarily would buy back shares only at opportunistic prices.

Thank you.

Ray Iardella, Macquarie.

Thanks and good morning. Just could you guys maybe talk about -- I know you guys talked about property rates being up pretty nice, particularly on the coastal side. But how much of your business, I guess, in the first quarter how much revenue to you get from proper maybe versus casualty relative to the rest of the year?

Well, that is a good question and it doesn't vary by quarter particularly. Property in the past has been about, if I remember correctly, about 20% of our total and so it's probably moving up a little now. Florida, of course, the property rates are higher than they are elsewhere so I would use maybe 20% to 22% or 23% would be about what our property premiums are now.

Okay. And I would think second quarter might be a big quarter in terms of property exposure. Is that the right way to think about it or am I reading too much into that?

No, I don't think that the property, the amount of property insurance in terms of total insured values is going to change other than the new business variety. But there is that constant and consistent push on pricing. And so the question is 2% or 3% or 4% going to go into 4% or 5% or 6% and I don't know the answer to that.

Okay, that is helpful. Then I guess a lot of insurance carriers have been reporting perhaps some decline in retention. Is that something that your clients are talking about and pushing for, given some of the rate pressure you are talking about?

First of all, an insurance carrier feels that if they are in the 80% to 85% renewal retention percentage that they are about in the right place. Of course, in terms of us we want at least 95% and hopefully more. So it's kind of hard to talk about that retention thing.

Now one of the things that will occur, particularly in the coastal areas, and assuming that banks will allow this, there may be a buying down of the wind coverage. Someone had $500 million of property values and the cover other than wind was $500 million, maybe they would buy $100 million in wind as opposed to last year having, let's say, a total of $500 million. So it's very difficult to make those kinds of assessments.

Okay. Then one follow-up and I will re-queue. In terms of M&A, I guess how many transactions did you guys close in the first quarter? Did the Arrowhead transaction kind of slowdown that a little bit or is it just sort of lumpy as you get through the year?

It is kind of lumpy. And we had five transactions we closed; total of how much was that, Cory?

Right at $113 million into aggregate annualized revenues. $108 million of that, obviously, is the Arrowhead. (multiple speakers)

What I was going to say is is that we are seeing some additional interest and, again, inventory is about what it has been in the past, maybe a little better. But we are seeing some additional discussions. It might have something to do with the fact that people are looking at what is the tax rate going to be next year and maybe I will do something this year.

Now how much of that is out there, I don't know, but it just seems like there might be some of that thinking starting to accumulate.

Okay, thanks for the color.

Sarah Dewitt, Barclays Capital.

Good morning. On last quarter's call you thought the first half 2012 organic growth would be choppy. So what has changed since then and to what extent do you think the positive organic growth is sustainable?

Well, we have a tendency to be pretty conservative and we would much rather overperform and underpromise. And so we weren't really too sure that the underwriting regimen was going to continue to be front and center. It seems to be that the risk bearers are saying, no, this is what it's going to be.

The other thing that has been interesting is the impact of RMS 11. RMS 11 is impacting all coastal areas, so we were surprised that risk bearers are following that as assiduously as they seem to be, that is most of them. In some cases, on some risks, RMS 11 would suggest a PML double what the risk bearers had in their files for last year.

So all of that kind of we are thinking maybe a little better in terms of pricing. That is about as good an answer as I can give you.

Sarah, from our perspective when we were on the call, really the only thing that we really had to go on at the time is basically our detailed budgets by office. At that time, the first quarter was the more difficult quarter to get over and our budget basically had us at a negative internal growth.

Then, as Hyatt had mentioned, the pricing -- we were pretty surprised at how the pricing did hold up during the quarter. And that is what really kind of helped us. The economy we thought was going to be flatter, which it did, and so, therefore, we didn't have the down swoop that we have had historically. Therefore, the pricing and new business was able to grow it.

Basically from a budget standpoint the first quarter was the hurdle and, as Hyatt said, there is this gradual build that is at least going ahead. Nothing to where it's a huge wave, but at least it's a slow build. We think that each quarter will be incrementally, hopefully be a little bit better.

Great, that is great. Then if the organic growth stays at these levels, where do you see the margin heading longer term? I know historically you had that 40% goal. Is that something that is achievable again?

Absolutely, it's achievable. So we think that the cost structure and the leverage is still there with the exception of those two highlights that I have tried to explain in terms of the employee benefit and compensation on the short-term basis here.

Great. Thanks for the answers.

Brett Huff, Stephens.

Good morning, Hyatt. Good morning, Cory. One question; Hyatt, thanks for going through the detail as usual on the by geo and business line in detail, but if we could step back. What I recall is that you all would say that about 25% to 30% of the organic growth headwind you were facing was rate and the rest was exposure units.

A) is that still true? And B), similar to the last question, where did the improvement come -- rate or exposure units or both? Can you give us some color on that?

It came both and it varies with geographic area. I believe that if you looked at Florida it's probably half and half. Elsewhere, it's probably maybe a little more -- and I am thinking of the Northeast now -- a little more of the economy. The economy is better up there than it is elsewhere; at least that is what our people are telling us.

So they are moving in tandem generally, except for contractors. The contracting business -- now some particular kinds of contractors are doing okay, but most of them, particularly homebuilding, it's just not there. So going forward, once we get beyond the doggone election, I think people are going to feel a lot better about the economy.

But, generally speaking, there is a little more uptick there and payrolls seem to be flat and up a little bit. There is this constant push to get a little more rate. As businesses are feeling better about the fact that they can see a little growth in sales then the pricing is a little more acceptable.

But there is a lot of pushback. I don't want to give you a feeling that it's not tough out there.

Sure. The second question, Cory, you had mentioned last quarter that you thought about 60% to 70% incremental margins as you guys start growing again. Given the two sort of the highlights that you talked about, the comp structure at least for this year, which sounds like it's limited to this year, then the ICG sort of longer rev rec accounting, is that 60% to 70% number still something you feel is the right way to think about it?

Well, as long as you -- you need to probably back off 5% on that one commission and the ICG will be back on a normal flat level by the fourth quarter. (multiple speakers) I would back it off a little bit. I would back it off a little bit, but the basic structure is still there.

So it's mostly a this year thing, not a next year thing?

Absolutely.

Okay, that is what I needed. Thanks for your help, guys.

Meyer Shields, Stifel Nicolaus.

Thanks. Good morning, everyone. One quick modeling question, I guess either Hyatt or Cory. When we talked about the supplementals gravitating towards profit-based contingents, do we have any idea what the revenue numbers were in the last three quarters of 2011 so that we can forecast that split?

Yes, let me just give you the numbers for the first-quarter amounts. If you look at -- if we had left out GSCs in the first quarter of 2011, we reported a negative 2.3%, negative mid-term growth. Without GSCs it would have been negative 2.4%.

If you go back to the first quarter of 2010, we reported a negative 8.6% but without the GSCs it would have been lower at 8.2%. So the numbers that you saw for the first quarter on the GSCs, the GSC are accrued on an actual basis so those numbers that I gave you are relatively consistent for each quarter. And so it's not a huge differential so you can kind of figure it out.

I did not do it yet for the third, fourth -- second, third and fourth quarter but it's a relatively minor change. The first quarter would be representative of it.

Okay, that is helpful. We can work with that. Second, in the internal growth table you show divestitures or I guess the amount of business from offices or books of business that were sold over the past 12 months. And that has been going up over the past couple of quarters. I was wondering if you could talk about whether there is anything unusual going on there.

No, we had -- we typically don't like to sell a book of business, but if a producer leaves and it makes economic sense we will. And so in this particular quarter and in the second half of last year, we did have a couple of larger book sales that generates it and it kind of goes up and down. It is higher than it normally has; it normally is probably in the $1 million mark. But that is just the nature of what has happened in the last couple of quarters.

When you talk about a producer leaving is that producer the one buying the book of business?

Typically, yes, or whatever new agency he is going with.

All right. Okay, perfect. Thanks very much.

Matthew Heimermann, JPMorgan.

Good morning, everybody. Couple questions. One is just wanted to make sure there is no one-time kind of first-quarter kind of expenses associated with Arrowhead as we look at the G&A?

No, there is not. Arrowhead is pretty much a stand-alone organization. There was no office combinations so most everything that changed was really just -- is part of the original purchase price allocation.

Okay, and then if you guys (multiple speakers) sorry.

Also, one thing I would -- just to -- we actually didn't effectuate that acquisition till the ninth of January.

Right. So technically there is nine days of revenues of January that are not included in our number obviously.

Then I was also just curious, if you expand their platform to your wholesale division broadly, are there any incremental technology costs that would be associated with it? Or is it as simple as kind of turnkey just start putting your own information through it?

There will be incremental cost and there is no huge game plan on the table that will have any huge cost on it, but it will just be a gradual change as it makes sense for various offices and wholesale programs.

And then with the ICG and what Fannie Mae is proposing in terms of changes to the forced place lender's business broadly, I guess how do you think that positions you strategically versus some of the other brokers that participate in this business? What do you think some of the changes Fannie Mae has put forth might mean for some of the other competition in the market?

Well, we really don't know about the other competition. We really only know about us. From our standpoint, we are looking at it as just another change and about half of our business has some exposure to that and half dozens. So probably the largest single change would be having admitted paper versus non-admitted paper.

I was thinking more on the technology service side. It seems like that element and what Fannie Mae is asking people to do is going up. And so I just was curious whether or not you thought you were kind of ahead of the curve and putting that service technology in place in your business (multiple speakers)

I don't know that we are ahead of the curve or behind the curve; I think we are about in the middle of the curve as far as we can tell. The requirements that they are talking about we already do for the most part and the tweaks that they are talking about they don't seem to be a great deal of difficulty.

But one of the items that ICG did make sense for us is that that is now a true partner. In certain competitive situations previously there have been other companies that have provided that service. Because some of our competitors may have written more business with certain ones, we are explicitly excluded from having them give us a quote to do it as an outside service.

So with a partner inside it does give us the ability to provide that service and be able to control it. So from that standpoint it is a positive.

And then just with respect to programs overall, I think the last half of 2011 it was really the special programs that were kind of driving improved growth. I am just curious -- excuse me, it was special while professional was still lagging a little bit and you had some constructive comments, it sounded like, from a pricing standpoint in parts of the professional lines market, some of which might flow through to that.

But can you just talk about maybe on the old reporting wages kind of what the mix of growth looked like between professional and special?

They both grew, and from an ongoing standpoint I mean there is overall less offices that had negative growth than there were before, but in both sides they did have slight positive growth.

Now from a standpoint of overall, we had talked to about Proctor. Proctor, starting with the fourth quarter of last year, we now where comparing them to apples to apples. They have written a lot of new business and so from an incremental growth standpoint Proctor was, for the next really four quarters, was going to add a positive growth. And for this quarter alone they actually grew in excess of $800,000 of that total.

So that will continue as they kind of work through the whole Fannie Mae issue. But it's a good group of people, a good business, and they do it the right way.

Perfect, thanks much.

Ray Iardella.

Thanks for taking a follow-up. One quick numbers question, then one, I guess, broader question. First in the numbers one, on continuing commissions did Arrowhead receive any continuing commissions in the quarter? I think in the past you guys had talked about Arrowhead moving towards more of a fixed sort of commission structure going forward.

Well, I am not sure about that last statement, but Arrowhead did have some very minor -- it was $300,000. We do expect them to have contingent commissions, continue to be accrued during the year or earned during the year, but any contingencies that they may qualify for would primarily come in the third quarter. And that is part of that number.

They historically have had somewhere in the $4 million to $4.5 million per year come in. So could that come in in the third quarter? That was part of the number we gave you and we will just have to wait to see if it comes true.

Okay. Then the last question I have, as far as -- you had talked about some incremental compensation costs for some new hires. Is that something you guys plan on continuing to look for new producers throughout 2012? I mean is there any particular target you guys have or is it just finding good producers and trying to hire them when you can?

Well, actually, we really started about two years ago expanding our recruitment program array. It's not just for the retail. It's the wholesale and it's in programs that is across our whole system. There are great opportunities out there from people who have been working three, four, five, six years in another business and that business is not doing well or is not there.

And so we have been interviewing lots and lots of people. When they meet our profile then we try and bring them on board. So we probably will continue to increase the number of people that we are bringing on. I know one of the things that Powell has been pushing very aggressively is recruitment. In order to grow and to replace people who are going to be retiring and that sort of thing, we have to have new folks coming in. And so there is lots of opportunities for us and we are very pleased with our new people that are coming on. They are doing very well for us.

Ray, let me just add on to that. As you know even during -- like Hyatt said, the last couple of years, but even before that where we have had negative internal growth. That was, as I had mentioned a couple of times on the conference call, that was the one line item which never did decrease year over year because we continue, as Hyatt says, we are always looking for good, high-quality people.

We pretty much hire our producers and train them ourselves, and so when I had mentioned that there is $600,000 again this quarter in excess it was just to highlight the increase on that. But we do expect that to continue.

Okay, thanks for answering the follow-up and best of luck, Hyatt.

Thank you.

At this time we have no further questions. I would like to turn the call back over to our speakers for any additional or closing remarks.

That sounds good, Nicole. Thank you all. We will look forward to having another quarter. We are in adjournment. Thank you very much.

Thank you. With that we will conclude today's call. Thank you all for your participation. You may now disconnect.