Brown & Brown Inc (BRO) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Brown & Brown Incorporated 2013 first-quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including those relating to the Company's anticipated financial results for the first quarter of 2013. 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 than those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including the Company's determination as it finalizes its financial results for the first quarter of 2013; that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday; other factors that the Company may not have currently identified or quantified; and those risks and uncertainties 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. We disclaim intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Celia. Good morning, everyone. We are very pleased with our 10.2% organic growth in Q1. This shows the contributions of all of our divisions and that our consolidated margins expanded. And it shows, we believe, a positive trend for the future. Now I would like to turn it over to Cory for our financial report.

Thanks, Powell. We did have a very, very good quarter, and our net income for the first quarter of 2013 was $60.1 million, and that is up 21.6% over last year. Correspondingly, our net income per share was $0.41, and that is 20.6% over the $0.34 we earned at last year.

Now if you draw a line through the change in estimated acquisition earn-out payables, which was an expense of $1.5 million versus $388,000 last year, we really made $0.42, and that is compared to the $0.34, which is really a 23.5% increase, so very nice.

From a revenue standpoint, commissions and fees for the quarter increased 12.6% to $333 million, and that is up from the $296.5 million we earned last year. And of course, as always, in our press release we have a table that summarizes our total growth rates and the internal growth rates from our core commissions and fees, and that excludes our profit-sharing contingent commissions, as well as our guaranteed supplemental commissions, the GSCs.

For the quarter, we received $25 million of profit-sharing contingent commissions, and that is approximately $818,000 more than we earned last year in the first quarter. If you look at the breakdown of that $818,000, our retail division increased their profit-sharing contingent commission by $3.7 million and the wholesale brokerage division increased theirs by $500,000. Those are both as a result of basically better loss ratios from our insurance carriers. And on top of that, the impact from the Superstorm Sandy really was not as big of an impact as we had feared.

Now those increases then were offset by $3.8 million in less profit-sharing contingent commissions in our national programs division, and that is primarily due to our Proctor Financial operations.

Looking at how much profit-sharing contingent commissions we're going to receive for the rest of the year, based on kind of what we've seen so far and what we've talked to our carriers about, we think we will receive about $17 million to $20 million more of contingent commissions through the next three quarters.

Now, on an estimate of kind of where that is going to fall out, we think that we might receive between $5 million to $6 million in the second quarter, $10 million to $11 million in the third quarter, and then maybe another $2 million to $3 million in the fourth quarter.

Now, additionally, we did accrue in the first quarter of this year $2.2 million of GSCs, and that is about $370,000 less than the $2.6 million that we accrued the first quarter of 2012. And of course this reduction is in line with the fact that several carriers that used to pay us GSCs have switched their contracts back to profit-sharing contingent commissions. And so that accrual basis of about $2.2 million should probably carry forward for the next three quarters.

Now looking at the internal growth schedule, we did have a very nice positive internal growth rate of 10.2%. For the first quarter of 2013, our total core commissions and fees increased 14.5% to $38.8 million of net additional core commissions and fees. However, within that net number was $11.5 million of acquired revenues, and that means that we had $27.3 million more commissions and fees on the same-store sale basis. And the most important aspect of that is that all four of our divisions had positive internal growth, and Powell will get into the activities of each of those business segments in a minute.

Looking at our investment income, it was relatively flat relative to 2012. Our other income decreased by $4.8 million, and that was due to the fact we had -- in last year's first quarter we had $3.1 million of gains on certain sales of books of businesses. And we also had last year $2.2 million of settlements from the enforcement of our non-piracy agreements, both of those which did not reoccur this quarter.

Jumping down and looking at our pretax margin for the first quarter of 2013, it was 29.7%, and that is compared to last year's first quarter pretax margin of 27.4%. Our employee compensation and benefits as a percent of total revenue was 47.6%, and that is a decrease from the 49.5% cost factor in the first quarter of 2012.

The total dollar increase on a net basis in employee compensation and benefits was approximately $9.9 million -- that is about a 6.6% increase -- of which about $2.2 million of that was attributable to just new standalone acquisitions. Therefore, when you exclude the impact of those standalone acquisitions, we had about $7.7 million of additional compensation, and it's kind of a semi-same-store sales basis, because that does include some of the fold-in acquisitions. Of this increase, $800,000 was due to new salaries or salaries because of new producers, $4.7 million was due to increased compensation to our commission producers as well as our staff compensation. There was a $900,000 increase due to the increased profit center bonuses and other bonuses, and that includes the effects from the $1.3 million that we accrued last year that was related to the 5% bonus program for our retail commission producers.

And then we also had an additional $700,000 of additional payroll taxes because of the increased compensation.

Our non-cash stock-based compensation went up slightly, by approximately $103,000, and that was due to a few new grants in the month of January this year.

In the current quarter, our other operating expenses decreased as a percentage of total revenues by 50 basis points to 13.8%, and that is down from a 14.3% ratio in the first quarter of last year. Other operating expenses increased dollar-wise $2.9 million or 6.8%. If you exclude the standalone acquisitions, that added about $588,000 of new cost. And therefore, on existing same-store offices, we had a net increase of expenses of about $2.4 million. This net increase related primarily to $1.2 million of additional insurance inspection and service fee expenses as a result of net new businesses that we wrote this year -- this quarter. $900,000 of it was additional costs for data processing and software licensing fees. There was $800,000 on just foreign currency exchanges from our London operation.

Now, we did have other miscellaneous expenses that increased kind of across-the-board, but those were effectively offset by a $1.4 million decline in our legal expenses, as well as our claims and settlement reserve accounts.

Now, since I've gone through the other operating expenses, if you look at the income statement, last year, we had total revenues of $302 million. We had employee compensation and benefit costs of $149.6 million. We had non-cash stock grant composition of $3.7 million, and other operating expenses of $43.4 million. When you deduct those from total operating profit -- I mean from the total revenues, that gave us an EBITDA of about $105.7 million. And so our EBITDA margin in the first quarter of last year was 35%.

That same comparable analysis in the first quarter of 2013, we ended up with an EBITDA margin of 37.4%.

As we've talked in previous quarters, you can reconcile with the schedules that we give you, the reconciliation from the $302 million of total revenues last year to the $335 million this year, of which if you look at the internal growth schedule, we had acquisitions revenues of $11.5 million. If you look at our standalone acquisitions, the average EBITDA impact of those acquisitions were about 33.9% margins.

Our contingencies, which went up a net of about $448,000, that came in roughly at about an 83.5% EBITDA impact. Our investment in other income went down about $4.7 million, and that is at 100% EBITDA. And then if you look at our organic growth of $27.2 million, that came in at somewhere at 50% or maybe a little bit more, and our sold business was $1.991 million. And those all reconcile -- or those are reconciling differences to take the revenues to the current-quarter $335 million.

When you determine the impact of the EBITDA on each one of those changes, you're left with about $7.4 million of increased EBITDA, which is basically showing that our EBITDA margin increased. I mention that because when you get the Q which will be filed in a few weeks, you will be able to do that same analysis as we've talked about in each of the business segments. And I want to highlight specifically the retail division.

Last year in the first quarter, our EBITDA margin for the retail division was 34.8%. When you go through that same revenue reconciliation, our EBITDA margin for the first quarter of 2013 went up to 35.9%. So our retail division's margins increased by 1.1% on simply an 80 basis points increase of operating profit.

So I think that is an important concept to keep in mind when you look at our internal growth there.

Now, continuing on to our amortization and depreciation line item in aggregate, it was up a little over $1 million, and that was basically due to new acquisitions. Our interest expense decreased by $103,000, and that is because we have -- our average debt outstanding was down about $550,000 from last year this time.

We kind of mentioned that our change in acquisition earn-out payable was a debit this quarter of $1.5 million versus a credit last year in the first quarter of $388,000; so the swing there is there almost $1.9 million of [gap] expense charge.

Our effective tax rate for 2013 is currently expected to run about 39.6%, and I think that is a good number to use in the future three quarters.

So really to conclude, we ended up with our net income of $60.1 million, which was a nice increase of 21.6%, and it is the most net income that we've ever earned in any one quarter. So we consider it a very good quarter and look forward to a good rest of the year. So with that overview, I will turn it back to Powell.

Thanks, Cory. Great report. In our retail division, we were up 80 basis points versus 5.6 in Q4. In South Florida, property carriers are looking for 10% rate increases, but they are not getting it, typically. On good accounts, they are getting 2% to 5%, maybe 7%. On accounts that have loss problems, it is more than that.

GL rates and automobile rates in South Florida are flat to up 5%. And exposure units, both payrolls and sales, in South Florida on average are flat to up 5%. In Central to North Florida, property rates can be down to 2% to up 4% or 5%. And in particular, RMS 11 continues to have an impact on properties on the spine -- down the spine of the state of Florida, meaning more rate pressure. GL rates are zero to 5%, Auto is up 2% to 6%. We are not seeing net new autos put onto schedules. We are seeing new exchanged for old vehicles. Payrolls for workers' compensation our flat to up 5%.

Carriers are obviously pushing much harder for profitability today. Some are reunderwriting their books. There is lots of underwriting questions, and specifically in the toughest work comp classes, we are seeing more consent to rate.

In the southeastern United States excluding Florida, we are seeing property rates up 3% to 8%. GL is flat. Auto and work comp are zero to up 5%. Exposure units are flat to up 2% to 3% to 4% to 5%. We are seeing a lot more pressure on habitational accounts; that's both the property rate and GL, specifically thinking about two-story frame, garden-style apartments.

Work comp carriers are removing discretionary credits. We are seeing pressure on wind deductibles in coastal areas. And the coastal Carolinas are seeing more pressure on property rates in the standard market.

Texas and Oklahoma, the property and liability rates are generally up 5% to 10%. Automobile is flat to up slightly. Work comp is up -- it's flat to up 10%. Exposure units are flat to up 5%. On some payroll and workers compensation, it might be up to 10%.

Interestingly enough, there is some current legislation in Oklahoma that if it passes through their legislature, it could change their work comp system. It would create an opt-out system similar to that in Texas. Texas is the only state in the country that has that option, which is an opt-out system, and we happen to write a lot of that business in Texas as well.

In the Northeast, property rates upstate, upstate New York, are up zero to 5%. And New Jersey, around New York City and Long Island, the property rates are up 5% to 10%, and we'll come back to that -- more on that in a moment. GL rates, nonconstruction, are flat. Auto is down slightly to up slightly. We are seeing again new exchanged for old. And work comp rates are 5% to 10% up and exposure units are typically flat.

Carriers want a 5% to 10% -- I'm sorry -- a 5% to 8% rate increase, but they are getting much lower than that. Carriers and capacity are tightening on wind in Long Island, New Jersey and New York City. Coastal areas in New Jersey, those within several miles of the coast, meaning five to eight miles, are seeing 2% wind deductibles, which is a change from flat deductibles. So maybe a $25,000 deductible now goes to a 2% wind deductible, or something like that.

Flood, lots of changes in the flood space. The deductibles that were, as an example, maybe $25,000 are doubling to $50,000. Some carriers in the standard market are just plain deciding that they are not going to renew the property. So they are non-renewing the property and it is moving from the standard market into the E&S market.

Construction GL rates in New York City continue to go up 10% plus. In the Midwest, property rates are flat to up 5%. GL, down slightly to up 5%. Auto is flat to down, and work comp is up 5% to 7%. Exposure units are flattish. They can be up in some instances.

Carriers in the Midwest are typically looking for about a 10% rate, but they are not getting it. Healthcare exposures are down in the healthcare space. Manufacturing exposures are up. Regional carriers, as I've talked about a number of times, continue to be the most aggressive in the Midwest.

On the West Coast, property, zero to 5% up. GL is zero to 5%. Auto is flat. Work comp is continuing to be a challenge. It is hardening up not only in California, but in Oregon and in Arizona. The exposure units for workers' compensation and GL typically are flat, as well.

In Oregon, we were seeing quake limits that are getting lower, meaning they are reducing the quake limits offered, and the rates are doubling. And our employee benefits businesses, small group rates are up 7% to 15% and large group rates are up 10% to 12%. Exposure units, meaning number of insured lives or individuals, is typically flat to up slightly.

In our wholesale business, we were up 8.8% versus 8.3%. In the binding authority, I would call it a mixed bag, meaning rates are up slightly in some accounts and down on others. For example, good property in Florida is down slightly. Older construction, cat-exposed property, is up 7% to 10%. Casualty rates are class-driven. So vanilla risks are flat to down. Conversely, habitational, which we talked about earlier, liquor liability, bars and nightclubs, rates are going up.

We are seeing -- in the construction segment and binding authority, we are seeing some new projects come online. So that is encouraging.

On the brokerage component -- these are property rates now -- in coastal Texas, we are seeing rates flat to up 5%, but inland, they are looking for more rate with higher deductibles on non-named wind and hail.

In Florida, rates E&S are zero to 3%; flood deductibles are going to specific wording. In the Carolinas, it is the softest, and that always is because of the involvement of the standard market there.

In Long Island and New Jersey and New York City, in the wholesales space, we are calling it a brave new world. Lots of people are stepping back from frame habitational business. Increases in price of maybe 10% plus, with changes in terms and conditions. Flood limits are being cut, potentially not offered by some carriers, and much higher prices on flood. In liability, GL rates are flat to up 5%; exposures are up to 5% to 10%. Umbrellas are flat to up 10%.

Products liability accounts and construction rates could be down as much as 5% to 15%, meaning negative 5% to negative 15%. As I said earlier, nightclubs and liquor liabilities tightening.

Professional liability area, real estate E&O is up 5% to 10%. Retentions are up on that business, and miscellaneous E&O, rates are flat to down slightly. Lawyers' liability is flat to down. D&O and EPLI on private companies, up 5% to 10%. That increase is driven primarily because there is a poor loss experience on employment practices claims. And in the states of Florida, Texas and California, those combined policies are up more like 15% to 20% because of the experience.

Public company D&O on financial institutions, primaries are down 5%. Excess is typically flat. And on non-FI business, the rates are flat.

In national programs, national programs performed very nicely in Q1. Arrowhead's operations were included in organic growth, along with automobile aftermarket. As many of you saw the announcement that we picked up a program from Everest effective 4/1, which will contribute roughly $7 million of revenue in the next 12 months starting next month, May.

Now, someone will ask what was the contribution of the automobile aftermarket. And I would say that it is $7.2 million. And the same person that asked that question would say, well, in actuality, are you down $600,000 in national programs, and I would say it is a matter of respective. We have a program, of which we moved from another carrier to Everest, which is the Wheels program. And in that transition, there was a period of time in the first quarter where we could not write wheels in certain states with that other carrier. So we were actually down $2 million of revenue in that program.

And so, once again, as you saw, on 4-1, we picked up the program with Everest, which is the risk bearer on the Wheels program, which we are very excited about that partnership. And so in actuality, all of the other programs performed quite well. But the thing that makes those numbers not exactly look right at face value is we had a $2 million dip -- $2.1 million to be exact -- because of the change from one carrier to Everest in Q1. And we anticipate that picking back up now that we have our partnership with Everest.

From a services standpoint, we are up 62.8% versus 11%. Colonial Claims had a very, very busy quarter, and we thank everybody on the Colonial Claims team. They were up quarter over quarter about $16.2 million in terms of revenues. The impact, someone would ask, in Q2 will be nominal. The 2012 Q2, we did $625,000. In 2013, our budget is $600,000. So is there a possibility that some claims could be finalized? Sure, but the vast majority of the claims have been finalized, and we're down into wrap-up mode.

From an acquisition standpoint, the first quarter was slow from an acquisition standpoint, as we said, and we believe it is a bit of a hangover from the end of 2012 and the tax changes that were implemented. We continue to look at a large number of transactions, but we are ever vigilant about our cultural fit. So we are talking to people all the time, and as many of you have heard me say, some days -- it is a little bit like fishing. Some days the fish are biting and some days the fish are not biting. But we are always fishing.

In conclusion, I'd like to make a couple comments kind of around the horn. Here in Florida, Citizens is seemingly acting more rationally. There are rumors of rate increases on A-rated buildings; those are buildings over $10 million in TIV on 6-1 or 7-1. Around the country, the gap between new business and renewal business is 15% to 20%. It is something that we've talked about and it continues to be a widening gap. There are carriers that would like to drive rate on their renewal book, but continue to be very, very aggressive on their new business book.

Those that are seemingly the most aggressive around the horn would regionals. As you've heard me talk about, in the Midwest, there are a lot of very fine A-rated regional companies that we do business with that continue to be very aggressive. And some of those operate in other areas of the country and some are based in other areas of the country. But I would tell you those regionals can be very aggressive.

As I said earlier, acquisitions were slow in Q1 across the industry, not only just at Brown & Brown; but as I like to say when asked about our inventory, it's good. And I would end by saying we are seeing some or one in particular large carrier that are selectively picking off and writing cat property accounts around the country. But they have to be very specific.

So that's kind of a potpourri of comments. Now Celia, I'd like to turn it back to you to open it up for questions.

(Operator Instructions) Michael Nannizzi, Goldman Sachs.

Thank you very much. Powell, just one question on growth. I think you mentioned there is kind of tough comps in the first quarter in terms of retail organic. Just trying to get an idea of -- what kind of led to that? Was there anything as opposed to 1Q 2012 and 1Q 2013, whether it is lumpiness or anything like that, that caused the comps to be different? And then -- we'll start there. Thanks.

Perfect. All right, Michael. Good morning. I would tell you just by background, last year, 2012, our organic growth in retail was 1.6%. And so we believe starting in Q3, the trend is moving up. So we operate in a band kind of in all of our businesses, but we are specifically talking about retail.

In the first quarter of this year, there were several nonrecurring revenue items that were -- I'm specifically talking about life insurance. We are not a huge life insurance writer, although we do write some chunky life insurance business on occasion around the horn. And we have several offices, three or four, that specialize in it. But I'm saying as a general statement across the system, we don't write a ton of it.

And so we identified at least $1.1 million worth of nonrecurring life revenue in Q1 this year versus last year.

I'd also say that the EBITDA margin, as Cory talked about, is up 1.1%, which we are very pleased about.

Michael, what you may have heard me say in the past is that we believe the retail business is a low- to mid-single-digit organic growth engine with a normal operating economy. And so we've always said that we are a proxy for the middle market economy, which is the distinction over the overall economy. And so as we continue to see that improve, we think that will improve our prospects for internal growth in retail.

I would also tell you that we believe that our budget -- well, our budget, plainly -- not we believe -- our budget shows that our internal growth for retail should improve each quarter throughout the year.

Great. Thank you for that. I guess on the margin side, I'm just trying to understand. With organic, you mentioned the point that margins were higher, even though -- actually margin improvement and basis points was better than top-line organic growth. Just trying to understand what are the levers that you are able to pull in order to accomplish that? And how much better can margins get from here with that sort of kind of low-, mid-single-digit organic increase? I'm just trying to get an understanding on the operating side.

We understand. As you know, we have always been a relatively efficient operation as compared to our other publicly held peers. And so there has never been an area where there has been high amounts of efficiencies or globs of fat that you can just cut out.

Our efficiency comes from the fact that each one of our offices is decentralized, and they look at what they can do better each year. And so in our case, with the retail specifically, the leverage -- we already have an efficient operation -- so when a dollar of new revenue comes in, simply because the exposure units go up or the rates go up and create that new dollar -- you've heard us say that we don't have to buy another piece of paper or pencil. We do have to pay 20% to our producer if it is a renewal dollar that comes in. We may have to pay another 12% of bonuses to the profit center, and there may be $0.04 or $0.05 of extra frictional cost. So essentially on that $1.00, there may be $0.40 on that first incremental dollar.

Now, over the last three or four years, where we've had negative internal growth, all our offices all had to become more efficient. And so when somebody may have retired or left, they maybe didn't replace that person.

Now at some point in the future, when things look better, each office will decide independently whether or not they need to hire that next person. So that incremental dollar improvement where I showed you the 60% is not going to continue on for every dollar in the future. But at some point, there will be a stepped-up approach.

And so -- but right now, that incremental 60% is falling to the bottom line on our retail division. And I think you can see it in the numbers this quarter, when we only had an 80 basis points internal growth and yet a 1.1% growth. So it happens naturally. And I don't want to be cute about it, but I can tell you that does show the beauty and the efficiency of a decentralized organization. And the fact that the people that we have on our retail division specifically are just outstanding leaders and outstanding people.

And I think that is the most important concept of view when you're looking at our Company. And it is a Company that is built to last and we continue to try to improve every quarter. And I think that margins are showing that this particular quarter. So I hope that answers your question.

Great. Thank you. And then just one -- is retention improving, like are you seeing -- just with the environment and kind of low, mid-single-digit rate increases, are you seeing your ability to hang on to accounts longer, like -- so retention helping to support organic a bit more, is that starting to come through, or are you not seeing that?

Our retention rates are historical norms. I would tell you that I had several conversations over the last week with leaders of our businesses about those that -- we saw for a period of time a number of businesses go out of business. And so what we are seeing now, we are not seeing as many go out of business. But in certain areas of the country, those that have been weakened by the economy, we are seeing those that are -- they may have more incentive to merge or be sold because they've been sort of -- I hate to say this -- but they've been wounded. It has been a tough go. And so we're seeing a little of that, but generally speaking, our retention levels are at the historical norms.

Great. Thank you very much.

Sarah Dewitt, Barclays.

Hi, good morning. When I look at the 10% organic growth in the quarter, how much of that was from the flood-related claims related to Sandy? I think last quarter you had predicted it would be about 2.5 points, and I want to see where that ultimately shook out. And what about the Arrowhead acquisition, as well? How much did that contribute?

Sarah, out of the total internal growth dollars that we had, we ended up at $27.3 million for the quarter. $16.2 million of that came directly from Colonial Claims, okay?

Okay.

And from the national programs, we had total internal growth dollars of $6.6 million. Of that, as Powell had mentioned to you, the automobile aftermarket was about $7.4 million, but then Arrowhead, we don't break out. Arrowhead is now just lumped in, so we don't talk about Arrowhead in total. But the various components of Arrowhead, the vast majority of the programs had positive internal growth, but that was offset by that $2.1 million drop in the wheels program.

Now, in addition -- so all the other Arrowhead programs grew nicely in their own right. We had one Arrowhead program that was off about $187,000. Now, the other programs within national programs that had a slight decline is that Proctor Financial was down about $636,000 over last year, and that was primarily due to the fact that the lender place ratios are going down. Because as foreclosed properties are kind of working through the system, there are less policies being put into the lender place pot. And so that is the cause of most of that decline.

The good thing at Proctor is that they've got a lot of very good new business activity going. And of course, they've not lost any of their clients. And so over the next 12-month period we believe that Proctor will continue to grow nicely.

The other programs are all doing pretty well. So it was just the wheels program that had the only negative in national programs.

Okay, I guess what I'm trying to get at is how should we think about what normalized organic growth was this quarter?

Well, if you look at the internal growth rate and you take out the automobile aftermarket, which to me is a brand-new account and will continue, but if you take that out and you take out Colonial Claims, which for the most part, unless there is another large claim, will be kind of back to flat normal -- but if you exclude those two, our consolidated internal growth rate was about 1.4%.

For the total company?

For the total company.

Automobile aftermarket is an ongoing business.

Yes, and so if you want to -- if you leave in the automobile aftermarket, we basically had a 4.2% internal growth on a consolidated basis.

Okay, so the --

You can figure those numbers out yourself by just deducting the 16.2 or the 7.4, whatever number you want to look at.

Okay, great. Thank you for the color.

Greg Locraft, Morgan Stanley.

Good morning. Thanks. On the claims, the $16 million you got from that, which you guys had called out last quarter and it came through even better this quarter, how should we think about the profitability of those? Did that all just fall right through?

That did have very, very high profitability. And I would say it is in excess of 65% margins on that business, on that internal growth, $16.2 million growth.

Okay, great. And then you just answered the question -- there is nothing recurring from that. So we should be just pulling out that extra 16 with the margins, just sort of out of the model going forward? We're back to kind of a normal services business here.

That is true, up until the next major claim or, you know, catastrophe.

Got it. Okay, great. Great. And then back to I think the first question, just on the retail segment, the organic there, I think you had mentioned it is going to sort of sequentially improve from this lower base. One thing I'm wrestling with is just you all pulled -- the 5% bonus plan I think ended in the fourth quarter; is not going to recur. That obviously led to better organics in the fourth quarter and last year.

Or I guess this is really a question -- did it lead to better organics or did they pull forward? Did your guys pull forward their books into the fourth quarter that led to this lower organic in the first?

And then I'm just trying to get confidence on that sequential from this lower level for the rest of the year. Any further clarity there would be helpful, because that is really what surprised us.

There is nothing, Greg, that we are aware of that would indicate people were pulling, or in your term, pulling things through from one quarter to another. So we are not aware of anything like that.

I would just tell you that, as I said earlier, we had $1.1 million of nonrecurring life revenue at a minimum. This is the first quarter, as Cory said, the comp is against a better comp from last year. And like I said, we believe that the trend is moving north overall. That's the most important thing, that we are operating in a band or a range that is continuing to move up.

We think the economy is -- which is -- in the middle market, which is -- we are very tied to. And even though we believe the band is moving north, it is moving more north at a slow, but steady pace. And last year, as Powell had mentioned, we had internal growth in our retail division of 1.6%. And for the whole year, we see no reason why we are not going to do better than that. It is just going to be a much slower and steady process.

The middle market companies, we believe, are still somewhat in a bunker mentality. But they have cut back, and they are operating much more efficiently. And until they see much greater signs of significant increase in revenues, we just don't believe they are adding a lot of people confidently.

And so that is why the exposure units are flat to up a little bit, but it is a steady, nice growth. And over the long term, maybe that is better for the overall economy, because it will be more sustainable, as well as the rates. So we are positive about it. It is improving, and we think it will continue.

Okay, great. And again, it was actually a very good quarter at the highest level, so I didn't mean to sit in the negative. So congrats on a good start to the year. Thanks.

Mark Hughes, SunTrust.

Thank you. Good morning. The Colonial business, how should we think about that in terms of capabilities? If any disasters or catastrophes happen nationally, is Colonial positioned to provide service in those instances? Are there particular types of --?

Let me clarify, Mark. Think flood. So FEMA claims, so flood claims. And so that could be around a wind event, it could be around a river going over the levies, it could be anything of the above. They do have certain other capabilities in specialized emergency claims, but focus on flood. It is a flood specialty adjusting business.

Now, don't forget the fact that the first nine months of last year was some of the driest periods in US history. And so -- is last year the norm? I'm not sure it is. But right now, there are certain rivers that as the snow starts to melt, some rivers are starting to get up to the flood stage. So is last year a norm? I'm not sure. So you just have to watch for the catastrophes, and when that happens, Colonial Claims will increase their revenues.

Right. Powell, you had mentioned a brave new world in terms of the wholesale in I think New England. Is that fully reflected, would you say, in your wholesale organic growth numbers? They've been sustained at a pretty healthy rate here, high single digits. Should we see that hold steady, get a little better? What do you think?

I actually think first and foremost that I've got to give kudos to the wholesale team. I think they are doing a great job, particularly in some difficult markets. As an example, I know of several accounts that last year were written with one carrier in the Northeast, and this year, in order to get wind or flood, they've got to write it with five or seven carriers. And there might be only five or seven carriers that are capable of doing it.

And so I think that to answer your question succinctly, I think that it is indicative of what is going on in the Northeast. I would say that I think it is going to take a little while for it to really pan itself out, because I think a lot of carriers, they were trying to figure it out in Q4. They've started figuring it out and implementing whatever their strategy is in Q1. And then the question is -- will they stick with that strategy?

As we like to say, sometimes the best laid plans of mice and men are not fully executed or continued. And so it might occur, and it might not continue to occur. We think it will continue to occur, though, in the Northeast, and I think they are going to operate in a similar level. I think it's indicated in those numbers, Mark.

Thank you.

Josh Shanker, Deutsche Bank.

Thank you, everyone. Good morning. And I was wondering if I was a customer of Arrowhead Wheels this quarter, what happens to me and what's going to happen to me next year?

Well, if you were a customer, let's say, of Arrowhead Wheels and you happened to be located in a state called Michigan, then there was a possibility if you were renewing over the last two months or so that we might not have been able to give you -- not us, because we are distributing it through retail agents -- so remember, we are the provider of the product. We are not the retail agent on the Wheels program.

So there is a retailer that you're dealing with let's say in Michigan, and he or she would have had to provide you with another market to get coverage for you. Having said that, now we are able to write business again in Michigan. It might be slightly differently, but that is basically where the biggest change was in this period, where it went down in Q1.

Will you have any success in getting those customers back next year?

That depends. It is possible. And in that space, obviously, people buy for price and they buy for coverage. And so it depends on if our new product is competitively priced and has the appropriate coverage -- we believe it is, and we do believe that it is an opportunity to get it back -- but it may not come all back at once.

Okay. And given the (technical difficulty) looks a little different, would you expect any issues with growth for the remainder of the year, any negative growth associated with the program now being offered through Everest Re?

We are not aware of any.

No, we think with the new Everest program, that Wheels program will have a net growth for the rest of the year, as opposed to the $2.0 million down.

Okay. And the acquisition pipeline, how long do you expect the 2012 tax hike (inaudible) over to last and do you have any thoughts on that?

Sure, Josh. As you know, people sell their businesses for different reasons and have different timetables. And so our ability to project when people want to sell their business is -- that's kind of a shot in the dark.

I will tell you that there were businesses that we talked to at the end of last year that decided not to sell, that we are continuing to have conversations with. And so does that mean they might do something this year? It's possible, but I don't know.

I would tell you there are new organizations that we weren't talking with last year that we started talking with this year, that -- could we do something with? Sure. So I really -- it is hard to speculate on timing. I think the most important thing that you know is that our inventory is good, and we continue to talk with lots of people. And that is the hardest -- one of the hardest things I think for you to model, because it is not linear. And particularly as it is a larger base, it looks lumpier.

And so, like I said, we are always talking with people. We are proactive in our approach. And we are looking to invest in high-quality people who run high-quality businesses. And so we will complete transactions in the future when they are ready, and fortunately for us we have the balance sheet to invest in that.

And, Josh, let me -- and you've heard me say this before. From an investor's standpoint, I think one of the most important things to understand is that I believe that Brown & Brown has the best infrastructure in place, to where we have the most people talking to other independent agencies around the country, telling the Brown & Brown story and getting them interested and attracted to our model.

With that said, as Powell kind of alluded to, it does come in lumpy. We probably could -- if we wanted to, we could have done $100 million of additional revenues on acquisitions last year, if we wanted to. But we are very disciplined in who we attract, and it has to be a cultural fit, as Powell said.

And so again, we could add a lot more, but it is easy to make acquisitions. But for the shareholders, it is better to have the right acquisitions, and that is what we hold out for. So they are lumpy, but the fact that we didn't do much does not mean that the process is not working exactly the way it will. Each one of these acquisitions will ultimately sell, and it is just a matter of time. And we are going to always get our fair share of them.

Well understood. Thank you very much.

Adam Klauber, William Blair.

Thanks. Good morning. In the retail division, I guess what is the trend on audit premiums? And I know you don't forecast, but just any thoughts throughout the rest of the year on audit premiums.

Adam, what I would say is audit premiums seem to be turning positive. So remember, you've heard me talk about and us talk about it in two ways. One, we are starting to see more audit premiums. That is a positive.

And two, we've talked about the potential for a delay in clients who are renewing their business that have come down several years in a row, three, four years in a row, might be less apt to anticipate a growth in their exposure units, even though they have a very high likelihood of achieving those numbers.

And so what I mean by that is if you were a manufacturer of widgets and you were $20 million in sales three years ago and $20 million came to $15 million, which came to $13 million, and then you did $12 million last year, and you have an order that is confirmed that would get you to at least $15 million this coming year, I think many of our clients and prospects are continuing to talk with their insurance -- cover their insurance at $12 million and then accrue for that additional expense in 14 months after the audit is done, rather than go ahead and pay for it sequentially over the next 12.

So we would say it is a positive, but it is a slight positive right now, as opposed to in a normal operating environment. If you look at the risk-bearing community and you ask them what is the impact in a normal operating environment of additional premiums, I've been led to believe it is 2% to 4% impact on total written premium in a quarter.

So I don't know what it is on some of the larger carriers right now, but I think that it is turning positive, and that is reflected in what we are seeing.

Thanks. That's helpful. Also, on the benefit business, what was the organic for the quarter? And is there any more pressure on commissions for small accounts or is that pretty much done?

First of all, we don't break out the organic on benefits only. I would tell you that it depends on the state. As you know, many of the states in small group have gone to a per head per month. So the only way we get additional commissions would be you have to add bellybuttons -- that is their terminology, not mine -- so insured lives on the plan to get additional commissions.

If you actually have -- there are certain states, though, that are still on commission, and those that are on commissions seem to still be paying commission on the increased premiums. And so what I think -- what I'm trying to tell you is I think right now, it is neutral. We are not aware of anything that is dramatically forcing down commissions on small group at the present time.

Obviously, we are watching and preparing and watching with great interest the introduction of exchanges, and not only how we are prepared for it and what we can offer our customers and prospects, but what the states are going to provide and how viable are those options.

Okay. And then one last question. You have done two pretty nice deals with Zurich and Everest Re in the last say six months or so, very interesting deals, where it seems like you are essentially taking over distribution from the carriers, which isn't their core business. Would you say those are more aberrations or can you see more of those deals in the future?

I would say, number one, I wasn't really aware of a deal like that before we did the transaction with our partners at the Zurich. I want you to also know that the partnership -- with both of those two carriers, the partnerships are very good. So I don't know if it will lead to additional opportunities.

My instinct would be that we understand and have a platform -- we understand how to operate distribution and we have the platform and the technology to do it. So it's an interesting alternative -- it I'm not saying it's the only solution -- but it's an interesting alternative for some of our risk-bearing partners to potentially operate their business more efficiently.

So long-winded in saying I don't know. We are very pleased with the opportunity with Zurich and Everest. And it is not as though we won't be asking, but I would continue to operate in a mode that those were sort of one-time opportunities, and then if we see more, that's great, as opposed to thinking you can put something into a model and pop it in. I don't think that would be fair.

Okay, that's helpful. Thank you very much.

Ray Iardella, Macquarie.

Thanks and good morning. I just want to maybe touch, Cory, on the number you threw out for the retail margins, 110 basis points. Can you quantify what improvement was due to the ending of the bonus program versus sort of underlying margin expansion?

Well, the amount that we accrued last year in the first quarter for the 5% bonus program was $1.3 million. But as I explained, that if you take all the bonuses, the profit center bonuses as well as the other bonus we accrued, it only went up by $900,000 over last year. So basically, it is a little bit of a trade-off is that, yes, we didn't accrue for the $1.3 million, but because many of our offices were more profitable, the profit center bonuses went up. So the net -- net change was roughly $900,000.

Okay, that's helpful. And then maybe just sort of going back to the M&A question -- and I know it is lumpy and maybe a hangover from year-end -- but if you guys didn't close any more deals, how much sort of acquired revenues can we expect, I guess, for the rest of the year?

Remember, Ray -- I appreciate your question -- but we don't budget acquisitions, nor do we give guidance on acquisitions. And so we would be -- it would be purely speculative, and we don't do that.

So what I would say is this. We continue to look and talk with people all the time. We feel good about our ability to finance those transactions in the future. We feel good about our balance sheet and our existing operations, and we think that is good.

Now Ray, though, if you are talking about the acquisitions that we already have closed on and are part from last year, what will fall through without a new acquisition through the internal growth schedule, basically, we've got about $7.1 million of acquired revenues that will come through in the second quarter. We'll have about $5.7 million that will flow through in the third quarter, and about $3.2 million that will flow through in the fourth quarter.

Got it. No, that's kind of the number was looking for. So I appreciate that.

The other question, I guess, in terms of the employee benefits business, and you know, Powell, I know you've talked about the state exchanges. Maybe can you quantify, A, sort of the revenue you guys have to the small life/medical side; and then, B, how Brown & Brown will sort of work together with the exchanges going forward, or any updates can give there.

Last year, Ray, we did $225 million worth of employee benefits revenue. Of that, one third of that revenue was ancillary products. That would be group disability, group life, group vision, group dental. So two thirds of that revenue is health-related. Of that health-related, just under half is under 50 lives. So one -- just call it less than one third, just slightly less than one third of the total revenue.

And so in different states, as you know, exchanges are being -- there are several options that can occur. Number one, an exchange can be up and running in a state and backed by the state. That's option number one.

Option number two is if they decide not to or they are not in compliance by 2014, then allegedly, the government, the US government, is supposed to provide an exchange until they can get theirs up and running. But it's ultimately going to be the potato they are going to give back to the state to operate. So that's number two.

Number three, as it relates to us, we have a group-based, customized, private-label exchange at Brown & Brown. And so in addition to any of those other state exchanges, any of the other stuff, we have our own that we can bring to our customer or our prospect. And so the key is there is going to be lots of calculations on should I join an exchange, should I give health insurance. There is lots of -- a group plan. There is lots of speculation about the cost, which is obviously something that we haven't heard a lot about in the news for these plans.

I believe you are also going to see a lot of pressure on individual health rates, of which we don't write a lot of individual health ourselves. But I'm just saying it's a broad statement which will create a fervor in Washington when it starts happening by the end of this year. So somewhere in the -- I'm sorry, somewhere in the August, September, October time period, individuals that are insured -- individual health plans are going to start receiving letters which is going to show them what their projected cost is going forward, and it's going to be a lot more than it is right now.

So there is going to become -- I believe there is going to be a lot of political uproar around that. I'm not saying it's changing the exchanges. That's not the implication. I'm just saying you need to be aware of that out there.

But we feel good about what we can provide for our customers and our prospects, and we operate simply how do we give our customers not only the knowledge that they need to make the right decision, but to give them choices or solutions in this complex situation.

Okay. That's helpful, and thanks for the answer. One other quick one, if I can squeeze it in, for Cory. In terms of the contingents up year over year, I think you had mentioned sort of throughout last year that a couple other carriers had switched from guaranteed supplementals towards contingents. Did that have a positive impact on contingents in the quarter?

There was a little bit of that, but it wasn't a significant amount that made the net increase.

Okay. That's helpful. Thanks again.

Meyer Shields, KBW.

Good morning, everyone. I need to clarify something, because I can't read my notes. Powell, was the $1.1 million in life revenues, was that first-quarter 2012 or first-quarter 2013 issue?

2012.

Okay, so that impeded (multiple speakers) growth this year?

So we didn't have it recurring in 2013.

Okay, good. That's what I thought.

I think you talked a little bit about how you don't see any signs of employees kind of gaining last year's 5% bonus. But is there any concern that maybe the entire program should be reimplemented? Or is there any connection between the discontinuation of the program and the slowing retail growth?

We don't believe so, Meyer, but you know what we've said is we are all about driving growth and profitable growth. And so I've said that it is not our intent to continue that, and we are not continuing that plan.

If we decide to do something in the future that would be over a number of years or period that would reward performance, that is something that is up for discussion. But no, we don't think that the perception or what you are saying is real, that since there is not this kicker that we haven't grown as much. No, we don't believe that to be the case.

Okay, fantastic. I'm all set. Thanks a lot.

Brett Huff, Stephens Incorporated.

Good morning, Cory and Powell. Just a couple quick questions. Did you guys tell us how much annualized revenue you bought this quarter? Did you give us that number?

No, there were no acquisitions this quarter.

Okay. I wasn't sure if there was even a small one that we hadn't heard about. Okay, so that was one question.

The second is, I just want to make sure that I get how the organic growth is going to flow kind of through the year, at least from right now. I think you said including the auto but ex the flood, you were at 4.2% organic growth. Is that the right number (multiple speakers)?

For the first quarter (multiple speakers).

For 1Q, right.

Yes.

And then going forward, we are going to get I think you said $7 million for the next three quarters from Everest. Is that the right understanding?

Next year.

Next year.

[12-1].

Over the next year, okay.

Because Everest doesn't kick in until -- start until next month.

Okay, that's helpful. And then we know the flood more or less goes away, because it seems like basically it all happened in 1Q. Then we have what we think is --

Again -- hey, Brett, on that one, again, it is a normal operation. It is not a one time. It is a continuing operation. And we are comparing ourselves to the first nine month of last year, which was -- like I said, was one of the driest. So to say that it is not reoccurring, granted, it is tied to catastrophes, but unfortunately, the world we live in, there is always that. So I don't want you to discount Colonial Claims, because they've got a great operation and they are going to continue to contribute a lot to our organization.

Sure, okay. I was just trying to think relative to the very large $16 million benefit this past quarter.

Right, okay.

And then the last question is the $2 million in Wheels, it was a carrier transition switch problem. Do we expect that to sort of levelize to normal levels, i.e. should the $2 million run rate be now included in 2Q?

Well, now that Everest Re will be able to start writing some of that business in some of the states that the old carrier would not write in, it will, we believe, greatly diminish. And then on top of that, the new policies that we will renew that came with the Everest program, which is part of that (inaudible), that is going to overshadow it. So overall, the Wheels program we believe will have a net positive for the rest of the year.

Okay, and then on the life issue that I think Meyer just asked about, Powell, I just want to make sure I get this. So there was -- can you just explain that again? And should that $1 million or $1.1 million again come back sequentially in 2Q, 3Q and 4Q, or how should we think about the life --?

When we talk about that $1.1 million, think of it this way. There were large life cases that were placed in Q1 of 2012. Those are one-time only in nature. They did not reoccur in 2013 and they will not recur in the future.

However, we will sell life in the future, and particularly through those entities that have specialized life departments. But specifically, we have one office, as an example, that had $0.5 million of that, and they write big life cases like every other year, but not every year.

And so they are up and they are down, and there up and they are down. But when you put it all together, it does have an impact. So it did in this particular quarter.

Yes, and that is why we highlight it, because when you're dealing with just $1.1 million of net organic growth, we don't really think of life cases having a big fluctuation quarter over quarter. But because you take another $1 million, all of a sudden the internal growth is more like 1.6%, 2%, had it not been just the way it fell. We're going to write more life cases and it is going to come in at some unpredictable times. That's the only reason why we highlighted it.

Great. That's what I needed. Thanks, guys.

Al Copersino, Columbia Management.

Thanks so much for taking my question. I appreciate it. I had a general question. Powell, I'm not sure that you can look into a crystal ball and give us the answer, but I'm very curious what you are hearing from small-business owners. There is that portion of the Affordable Care Act which makes your 50th employee a very expensive employee on a marginal basis as far as health care benefits or a penalty goes.

And I'm just curious what you're hearing from small-business owners who -- people with 40 to 60 employees, what they are thinking about that in terms of their own business planning. And I'm not referring to employee benefits. I'm referring to the exposure units you expect to see from your clients on a P&C basis.

Yes, I think that right now, Al, my comment would be cautious to cautiously optimistic. And so I think what a lot of those people -- and this is not just that group that you're talking about of clients or prospects, but I think it is a large number of people -- they are trying to grow their businesses without adding new people or making major capital expenditures. And the reason they are is there is just a -- there continues to be a bit of a hesitancy about how the economy is doing.

And so it is one thing, as you know, to read in The Wall Street Journal the stock market is doing well and blah blah blah blah blah. But if you are in Little Rock, Arkansas or you are in Brooksville, Florida, in a smaller community, smaller than Little Rock, but someplace, and you talk to business owners, I can tell you they are still cautious.

Now, there is a perception that with the Obamacare that a lot of small businesses are just going to say, look, I'm going to cut everybody loose and tell them to go down to the post office and get into the public exchanges and fend for yourself. Our gut reaction is these employees and the employers, they know their employees very well. It is a close-knit family. And they are not going to have this wholesale cut-them-loose kind of theory. We believe that most of them are going to say, look, I know we had a plan and Brown & Brown is our agent and they have a private exchange. We're going to have them come and we are going to talk -- have them talk to you and enroll you. So it is going to be a much more logical progression as opposed to just this wholesale just cut everybody loose and let them fend for themselves.

And one thing also, Al, to add on that is we've always said there are three things you can say with certainty in an uncertain health environment. Number one, health insurance is expensive. Number two, it is utilized. And number three, it is complex.

So if you add those three things together, we believe there will be a place for a distributor or a partner like us. So whether you call us an insurance agent, broker, healthcare consultant or something other, this is a complex issue that we are going to have to work and help walk our clients and prospects through. So where there is great uncertainty for the prepared organizations, there is great opportunity.

That's very helpful, guys. Thanks so much.

Absolutely. Have a nice day, Al.

You too.

Elyse Greenspan, Wells Fargo.

-- for taking the question. Most of my questions have been answered, but just quickly on the auto aftermarket program, I know you guys had pointed out in the past that that was just a lower margin than some of the other businesses. I just wanted to find out how that is tracking versus expectations, and just in terms of trying to get a feel for the margin improvement overall going forward.

Elise, if you remember, we said that in the automobile aftermarket, that program would run approximately 10% margin for the first 24 months. And then we believed that it would not only improve because of the growth in the program -- which Zurich has expressed wanting to double it in five years -- but just lots of other things which would -- we think are positive for that organization and that operation.

I would tell you that the margin is tracking in line with expectations, so we are pleased with that. And we think there are some good opportunities for growth, as we've said. So I would say it is performing as expected.

And you would say that to us both in terms of revenue and on the margin front?

That's correct, yes.

Okay. Also, just -- is there anything -- I know we saw the life business in terms of impacting the organic number in the first quarter year-over-year. Is there any nonrecurring revenue that we should maybe look for in the Q2 or any of the out quarters this year, to kind of impact the organic growth trends maybe in the retail segment?

The short answer is I'm not aware of it, but I don't want you to say that I'm categorically -- that is obviously on my list after we get through Q1 and the earnings call. But I don't know the answer to that, but I don't believe so.

Okay, well, thanks for the answers.

Ron Bobman, Capital Returns.

Good morning, gentlemen. I had a quick question. Powell, in Florida, Florida homeowners in particular, what is the trend with respect to -- there has been a fair number of takeout the last, I don't know, 12 or 24 months. And I'm wondering what is the trend with these policies making their way back into Citizens or not making their way back into Citizens? Sort of has the normal historical flowback changed at all of late? Thanks.

Right, Rob, I think what I would tell you --

We are going with Ron today, Powell.

Sorry, Ron. Apologize. Ron, number one, this number might be a little dated, but I believe there are somewhere around 62 or 63 takeout companies in the state of Florida. As you know, in order to form a takeout company in years past, all you had to do is have $5 million of surplus, and it didn't actually have to be in cash. It could be pledges from people. Then that was moved to $15 million.

So all of the take-out companies have different philosophies in purchasing reinsurance. There are certain minimum requirements in purchasing that reinsurance from the state, but different companies have different views on it.

I could make the argument that in the early going in some of those companies, if they take policies out, it is on a temporary basis. And in the event there would be a storm early in their evolution, there would be probably a high likelihood that those policies would end up -- or some of those policies would end up going back to Citizens. So that is one side of the argument.

The second side of the argument is that here in the state, there is a feel, driven quite honestly by our governor, to try to depopulate Citizens, and so stem the tide of business rolling into it, meaning specifically homeowners, but as well as commercial, residential properties, and get it into the private marketplace. We are starting to see more of that in the commercial side, which I talked about the rational behavior.

On the personal lines side, it is an issue of cost. And the answer is they are still very competitive relative to the options that individuals have. It is not the only option, but it is an option.

So what I think you are going to see, Ron -- I apologize on that -- is I think you are going to see over the next year or two, barring a major wind event in Florida, continued rate pressure upward on Citizens, which is going to move it closer to what you and I and others would call a market of last resort, which would push it in -- push that coverage back and encourage it to stay in the private market. Long-winded answer of saying I think it is kind of a neutral right now.

Thank you, Powell.

And Ron, just to add to what Powell just said, there clearly is a focus on continuing the depopulation of Citizens. And one of the bills that is currently in the legislature that people have told us that we think has a very good chance of passing this time is setting up an independent clearinghouse on a go-forward basis, to where before a policy can be accepted by Citizens, it will have to go through this clearinghouse. And if there is any carriers that are willing to write that risk, which includes a takeout, it has to go to those takeouts. So that will, again, create a barrier for things just to be dropped into Citizens. So I think if it does get passed, it will further the depopulation of it.

Thanks, Cary.

Come on. You did that just to back at me (multiple speakers).

We have no further questions at this time.

Okay, Celia, thank you very much, and we wish everybody a great day and look forward to talking to you next quarter. Thank you very much.

That concludes today's conference. We thank you for your participation.