Operator: Good morning and welcome to the Brown & Brown, Inc. Earnings Conference Call. Today's call is being recorded.
Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward looking in nature and reflect our current views with respect to future events, including financial performance. Such statements are intended to fall within the safe harbor provisions of the securities laws.
Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made, as a result of a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the Company's reports filed with the Securities and Exchange Commission. Additional discussions 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, I will now like to turn the call over to Mr. Powell Brown, our President and Chief Executive Officer. Sir, please go ahead.
J. Powell Brown - President and CEO: Thank you, Alicia. Good morning, everybody. I'm here in Daytona with Cory Walker and Tom Riley.
The market continues to be very competitive. As you know, combined ratios in the first half of 2010 actually were 101.7, up from 100.8 in the first half of '09. The industry consolidated surplus at the end of June of this year was $530 billion, up from $511 billion in the first half of 2009. Standard carriers continue to take accounts out of the E&S market and even enter new areas of the standard markets that they haven't otherwise participated in. Finally, we are pleased to have a new business in our Services division Crowe Paradis, that Tom Riley will discuss later.
Now, I'd like to turn it over to Cory for the financial.
Cory Walker - SVP, Treasurer and CFO: Thanks, Powell. Our net income for the third quarter of 2010 of $44.3 million was up nicely from last year's third quarter net income of $41 million. Our earnings per share for third quarter of 2010 was $0.31, which was up 6.9% from the $0.29 we earned last year's third quarter.
From a revenue standpoint, our commissions and fee line for the quarter increased 1.3% or $3.1 million to $246.1 million, that's up from the $243 million we earned last year's third-quarter.
In the third quarter, we also received $9.7 million of profit share in continued commissions or $700,000 less than the $10.4 million we received last year third quarter. Looking into the fourth quarter, if we continue to be lucky enough to avoid a hurricane in Florida through the end of this year, we could receive somewhere between $4 million to $6 million of profit sharing contingencies at FIU.
Now looking at the internal growth schedule, we had a negative internal growth rate of negative 2.6%, which is a sequential improvement from the 4% negative internal growth rate that we had in the second quarter.
Our total core commissions and fees for the quarter increased 1.8%, or $4.2 million -- total new commissions and fees. However, within that net number was $10.3 million of acquired revenues. That means that we had $6 million less commissions and fees on a same store sales basis, and hence the 2.6% negative internal growth rate.
As the internal growth rate schedule shows, the vast majority of the negative growth dollars was primarily result of National Retail and Western Retail divisions. Powell will talk about the activities in each of those business segments in a minute.
Our investment income had a small increase of $200,000 from prior year and that was mainly as a result just increased levels of cash that we currently carry. Our other income increased $600,000 and that’s primarily due to just various books of business sales.
Our pre-tax margin for the third quarter of 2010 was 29.5% compared to the prior year third quarter margin of 27.7%. That's an improvement of 1.8 percentage points. One of the main reasons for this improvement is that we received in the third quarter of 2010, a $3.6 million reimbursement of legal fees, which we've had to expend over the last couple of years. We received these funds from insurance carriers that carried the E&O tail coverage for an acquisition that we acquired a few years ago. During the current year of 2010, we had expended around $1.6 million related to this case. The remaining $2 million reimbursement related to legal fees expended prior to 2010.
Employee compensation and benefits as a percentage of total revenue was 49.3% of total revenues, a slight increase of 2 basis points over the 49.1% cost factor in the third quarter of 2009. The total dollar increase on a net basis in employee compensation and benefits was approximately $2.4 million, which was really exclusively due to the acquisitions of new standalone operations since last year. Therefore, excluding the impact of these standalone acquisitions, employee compensation and benefit on a somewhat same-store sales basis, which includes the (indiscernible) into the existing offices, was essentially flat.
Our non-cash stock-based compensation cost was $1.5 million in the third quarter, which was down slightly due to some (forward purchase) of incentive stock options and PSP shares. In the current quarter, our other operating expenses decreased as a percentage of total revenues, 2 percentage points to 12.6% of total revenues. The total dollar decrease in the other operating expenses was $4.2 million, of which, $3.6 million related to legal expense reimbursements we just mentioned.
Thus excluding the reimbursements of the legal fees, other operating expenses actually decreased by $622,000 on a gross basis. However, within that number $574,000 of the aggregate total was attributable to just the standalone acquisitions. Therefore, again, on somewhere of a same-store sales basis those offices had a net reduction of operating expenses of approximately $1.2 million.
These decreases were mainly due to reductions in occupancy costs, as well as some supplies and miscellaneous expenses. Over the last year, our decentralized offices have been aggressively renegotiating office leases and the benefits of that are starting to show. We still have more to go on that.
Amortization and depreciation expense on a combined basis was fairly consistent with the prior year quarter. Our interest expense is normal at around $3.6 million. Our effective tax rate for 2010 is currently running at approximately 39.4%, and that should hold true through the rest of the year.
So with that financial overview, I'll turn it back to Powell.
J. Powell Brown - President and CEO: Thank you, Cory. Great report. In Florida Retail we were down 2.6% versus down 3.7% in Q2. Property rates are flat to down 15%. GL rates are down 5% to 15% and exposures are typically flat to down 10%. Auto rates in Florida are flat to down 10%, with exposures typically flat to down 5%. Work comp payrolls are flat to down 10%. I would like to mention that as of January 1, 2011, work comp rate increases have been approved in the State of Florida, the average across the board is 7.8%.
In the construction area it's still very soft. Rates and exposures are down 0% to 30% plus, and payrolls are down the same. In National Retail, we were down 5.2% versus 2.1% in Q2. In Northeast property rates are flat to down 5%, GL rates are down 5% to down 10%. Auto rates are typically flat to down 5%. Work comp rates can be up 10% to down 5%, and exposure rates are typically flat to down 5%. In the construction area, GL rates are still soft; slightly up to down at least 5% and auto is flat to down 5%, exposures are typically flat to down 10%.
In the Southeast, meaning Georgia, South Carolina, Virginia areas, property rates are flat to down 10%. GL rates are flat to down 10%, autos flat to down 5%, work comp rates are typically off 5% to 10%. Exposures, depending on where you are, may be up slightly, maybe up 5% to 10% to down 5%. Construction in the Southeast, GL, auto, and work comp still under pressure, some flattening out of rates, but typically, they're down 5% to 15%, exposures are typically down more.
In the Gulf Coast region, in Louisiana to Texas, property rates are down 5% to 10%. GL down 5% to 10%, auto is flat, work comp is down 5% to 10%, exposures are down slightly to up slightly with a deepwater drilling moratorium being lifted. Construction risks are similar in rates and exposures.
In the Midwest, rates are typically down 5% to 8% and we're seeing just a lot of companies go out of business in the Midwest or being sold. In the West, we're down 7.9% versus down 8.7%. Property rates are typically flat to down 10%. GL down 5% to down 15%, autos down 5% to 10%.work comp rates are down 5% to 10%, exposures are typically flat to down 10%. We are starting to see more significant rate pressure in Pacific Northwest, specifically, Washington State. In the construction areas, GL and auto rates are down 5% to 10%. Interestingly enough, we are watching, on the ballot in Washington State I-1082, which is the potential to privatize workers' compensation in the state of Washington. As you know, it’s a monopolistic state. One of the final remaining few and it’s on the ballot this November.
In the employee benefits area, small groups are typically seeing rates up 12% to 15%, and the exposures or number of covered lives are flat to down 10%. Large groups are seeing rates up 8% to 15% with exposures flat to down 10%.
Areas seeing larger to significantly larger pricing increases, Phoenix, Philadelphia, and New Jersey to name several. In the wholesale arena, we were down 2.5% versus down 1.1% in Q2. The property area should be segmented into catastrophic area or non-cat areas. In the non-cat areas, the market is very competitive, national standard markets and regional are driving that market, rates are typically down 10% to 25%.
E&S carriers really make a play in older frame apartments and condominiums. In the cat areas, typically most accounts rates are going down 5% to 10%, but large property accounts in cat prone areas can be down as much as 20% to 25%.
In Florida, the E&S market can compete with Citizens in certain places. Typically the domestic E&S market is between 10% and 15% cheaper than London, Europe or Bermuda from a rate standpoint.
In the GL arena and wholesale, exposures are starting to level off except in construction, standard and regional carriers continue to expand their appetites and are very competitive on pricing, rates down 5% to 25%.
In the professional and D&O arena, very similar to last quarter, 5% to 7% rate decreases on everything except financial institutions and real estate. In financial institutions, there's only four to six markets really willing to write the primary coverage, several national carriers continue to cut back on limits on community banks. Real estate errors & emissions, carriers want to attach above a higher self-insured retention, private company D&O is down 7% to 10%, and public company D&O is really all over the place in terms of pricing.
In the binding authority, binding authority rates are flat to down 5% on property in GL, exposure units are still flat to down slightly. Construction rates are down typically a little bit, to maybe 5% and exposures are flat-to-down 30%. Standard markets, as I've said throughout continued to take accounts out of binding authority contracts or E&S markets.
In the programs arena, our Professional segment was down 7.6% versus down 4.0% in quarter Q2. Dental, rates were down 10% with exposures down 10% to 15%. Interestingly enough, more dentist are coming back to work from retirement and many of them are finding work in large dental groups as opposed to wanting to go and start their own practice up again. We are writing lots of dentist.
In CalSurance, in the professional arena, rates are down 5% to 10%, large accounts can be down as much as 25%. New entrants continue in terms of carriers to enter that space. Lawyers continue to be under intense competitive pressure, rates are down 5% to 25% depending on the area, and lots of markets want to get in that space as well.
Special Programs were up 8.6% versus down 10.4%. Proctor is the big winner this quarter. They are up $1.7 million. They still have rate pressure down slightly in 5% to 10%, but they are writing lots of new business as you've heard me talk about in the past.
Finally at FIU, we're seeing one national carrier consider accounts over $75 million in TIV in the Tri-County area, which is new. E&S programs are getting closer in price to the FIU program, if they will consider a 5% wind deductible. Ex-wind, rates continue to be very, very competitive, and Citizens, as many of you may have seen, has filed for a rate increase next year. Those rate increases for commercial residential in 2011 do not apply to A rated structures over $10 million. That segment will be addressed by the insurance department early next year. In the Services area, we are down slightly, meaning 70 basis points versus up 30 basis points in Q2, but total revenues are up with the addition of Crowe Paradis on 9/1
Now, I'd like to turn over to Tom Riley for the acquisition report.
Thomas Riley - Regional President and Chief Acquisition Officer: Thanks Powell. Hello everyone. We continue to look at a number of possible transactions, many of which we hopefully we can close within the next 3 to 12 months. We closed $32 million in revenue in the third quarter, the largest of which was the Crowe Paradis transaction near Boston, with trailing revenues of approximately $23 million, which closed on 9/1.
Their principal business is as an advocate for people with long-term disability insurance who have an injury that may qualify the injured party to receive social security benefits. There are several reasons why the claimant will want to cooperate with us which we could elaborate later.
In general, any benefit received for the claimant would be a direct reduction for the long-term disability carrier. We represent several of these carriers.
We welcome Mike Crowe and Brett Albren and their very accomplished staff to our team. On 10/1, we completed two other transactions that I would like to mention; T.R. Jones with offices in Homestead, Florida, and Winter Park, Florida, with revenues of $6.7 million, and Martin Benefits in New York City with $3.1 million in revenue. We are very pleased to have Tom Johnson as his capable group, and Scott Martin and his team of benefit professionals join us.
We haven't seen any real changes in pricing that are different from our previously discussed pricing multiples, but we were involved in one potential transaction that we sold to another brokerage that the multiple was well above our terms. That is going to happen now and then.
The closure percentage on potential deals is still lower than we would like which means many people are looking at transactions but then deciding not to close with us or anyone else due to their own perceptions of the (8B) values. That just means we and the acquisition team have to work even harder to find the candidates who really do want to close a transaction.
Inventory is there and it could be a nice quarter for deals, only time will tell. Our total revenue closed year-to-date is a little over $61 million. As you remember, we only did $27 million all of last year.
Thanks, and now back Powell.
J. Powell Brown - President and CEO: Thank you, Tom. Great report. In conclusion, I'd like to point out that Florida is looking at the first rate increase in workers’ compensation in January 11 in a number of years, up 7.8 on average. Washington State, we’re watching closely on I-1082, which is the potential privatization of workers’ compensation, which is on the November ballot, and if in fact that would occur, it would happen in '12.
We’re continuing to see return premiums on portions of our book, but not as big as in the past. Good accounts continue to see -- are seeing lots of market interest and acquisition activity, as Tom said, we continue to talk to lots of people, but we don’t believe it until we close it.
The final comment is this, as you all know in the fourth quarter of the year, lots of markets are very, very aggressive. So, as I’d like to say in conclusion, there are blue light specials at the end of the year with many carriers going on today.
With that said, I’d like it to turn back over to Alicia to open it up to questions.
Operator: Keith Walsh, Citi.
Keith Walsh - Citi: Powell, just for you, first question, I mean, the detail around organic revenues is extremely helpful as always, but I just want to make this more simple so I can understand it, specifically around exposures, maybe if you can walk us through, when we think about 2009 over '08 and how exposures really dropped down and then we're almost through 2010, so how have we moved 2010 relative to ’09? And then assuming we are at the trend that you are seeing now, how does '11 shape up relative to 2010? To follow-up on that we know that exposures is a much bigger driver for your organic revenues than pricing is these days, If 2011 is looking a little bit more of a steady state or not as much of a decline, how don’t you grow your revenues in that environment?
J. Powell Brown - President and CEO: One, you are correct in saying that exposure units have been under intense pressure in ’08 and ’09 and into ’10. I would say we get asked that question a lot and there is a couple of way to look at it. Number one; a number of companies continue to have shrinking exposure units, in some places in the country may not be shrinking as much, some may have a flattening. That’s a fair statement depending on where you are around the country. I think that the other thing that we’re seeing and ultimately it doesn’t pan itself out for may be 14 months from whatever renewal you’re talking about is you heard me allude to the return premium amounts. Return premiums have been when the insured anticipates their expected exposure units payroll, sales whatever their auditable amount is and actually that was not in line with what actually occurred and therefore they are getting a return premium from the insurance carrier. So with three years of very difficult operating environment, what you find is clients are conservative relative to their exposure estimates. Now, we won’t know if they’re conservative, truly conservative or they were actually really right on the button until probably 14 months from the date that they renew their coverage and you say well why 14 months, it’s a 12 month policy? And the answer is the way it works is if you have the payroll on a company and insure it and you estimate your payroll is going to be $10 million for the 12 months ending 10/ – 1 actually 10/1 of '10 to 9/30 of '11. The answer is the insurance company will audit that policy within the 60 days after the expiration and if in fact the payrolls were up to $11 million they'll have an additional premium based on that $1 million. If the payrolls were down to $9 million, they are going to give an additional – I mean they return premium back to the client. And so, having said that. and I am not trying to be flipping Keith, your guess relative to the economic improvement is as good as ours. Having said that, everything that you read and some of the things that you will see in the investment community would point towards very positive rebound across America. You have heard us say that in the middle market we have not yet seen that and we are not yet in a position to say categorically that we are seeing exposure increases across the board on our book of business. I hope that’s the case but that’s not the case and we're just trying to sell a lot of new business as much as we can and retain everything we can on our existing book of business. Does that answer your question?
Keith Walsh - Citi: I guess what I am just trying to get at is, thinking about the trend that you are in now to exposures, do we start getting to a steady state if exposures are kind of – what is the trend continuing down as precipitously as it was in ’09 relative to ’08. I got Io got to assume 2010 wasn't as big of a decline as '09 was and based on that trend I would have to think 2011 has to continue to improve, maybe negative still but better?
J. Powell Brown - President and CEO: I think that if you make the assumption that the economy continues to do what it is doing, I think that that might be a fair assumption. But once again, we don't have a crystal ball relative to the way the economy continues to improve or deteriorate; we do believe it's improving – what I'm saying is – Cory, you want to say anything?
Cory Walker - SVP, Treasurer and CFO: As Powell has mentioned, Keith, the main thing is to look at the economic numbers relative to the middle market because our business is tied to the middle market and you'll have a lot of national news but it will influence the international carriers or operations, and that's not necessarily our marketplace, so whatever economic data you look at to determine if the middle market is moving that's where our business will be tied to.
Keith Walsh - Citi: The second question would be just on the Florida rate increases that we've been hearing about and you mentioned today. If you could just explain to me just real simplistically how does this exactly help your business, and how does these rate increases apply to where you're, right, and potentially help your revenues?
J. Powell Brown - President and CEO: Let's back up for just sake of discussion. Since 2003, there was significant reform enacted and rates have gone down on average in excess of 60% since that reform was enacted in workers compensation. So this is the first time since then that there has been a rate increase that has been proposed and therefore accepted by the insurance partner. And so obviously the way it would impact our book of business or our business in Florida is to the extent that exposure units, exposure units and worker’s compensation or payrolls stay the same that those risks would have slight increase in the premiums paid, and thus the commission received on that book of business. We are not in a position to say that the book of business will go up or stay the same, because we don’t know exactly what the payrolls are going to do in the overall book of business. We would tell you that in our book of business in Florida, it's probably in the neighborhood of 20, it’s less than 25% but about 20% of our book is worker’s compensation.
Operator: Adam Klauber, Macquarie Research Equities.
Adam Klauber - Macquarie Research Equities: I have one or two questions. How much of your California book is worker’s comp and when do you think those rate increases could impact your bottom-line?
J. Powell Brown - President and CEO: In the state of California, I would also say it’s probably 20% of the Retail revenue. California is our third largest state, but we obviously have wholesale and program operations there, so relative to other Retail state it’s not as large. Also, I would say that pending rate increases in the state of California, although sounding good, it’s such an incredibly competitive state that we don’t believe until we see it. So, I know, that’s a kind of a broad statement, but it is such a competitive environment, even with the so called rate increases until we see it we are not going to believe it.
Adam Klauber - Macquarie Research Equities: Then on the margin you have obviously done a great job holding expenses, as we look into the next year, it seems like acquisition revenue will pick up, potentially organic gets somewhat better, we can't say that for sure, can you hold expenses relatively flat going into next year?
J. Powell Brown - President and CEO: Adam, let me backup and say, you made an assumption, which may or may not be correct relative to the acquisitions. We would like to think that’s the case but remember there is a pending tax increase, because of sunset in the Bush tax cuts. So there is lots of speculation around those being extended and to what extent they will be extended number one. Number two, as Keith had said earlier, and you are alluding to, if the economy continues to improve or stay in a constant status it is now, then do we think that we could have similar or potentially improved growth options organically? And we think the answer to that is yes. All those things if in fact stay the same, we do believe that our expenses can continue to stay in line and that would be our goal.
Cory Walker - SVP, Treasurer and CFO: Adam, I tell you this is where you got to look at the beauty of our decentralized organization and I can’t say enough about just the quality of our individual office leadership teams. Each one has a profit centered leader. And they individually with their team they decide what has been and how their cost structure is. And over the last three years, with the difficult headwinds we face, each one of them have had to become more and more efficient every year, because their bonus system is tied to the operating profit and they’ve done a wonderful job over these years. So, the cost structure that you see is in fact very sustainable at office level, so we’re pretty pleased with it.
Adam Klauber - Macquarie Research Equities: Finally, you mentioned Proctor added a client, how is the pipeline going forward and how does the foreclosure issue impact Proctor right now?
J. Powell Brown - President and CEO: Adam, I basically said they've added clients not client, not singular but plural. The short answer is that they have written throughout this period of time a lot of new business and I would give great kudos to them in light of having lost one or two large clients, one going out of business and others as we talked about have been acquired. But the current environment and they are doing business primarily with smaller financial institutions, regional in nature, and we see the current environment continuing to present unique opportunities for them to service our existing clients and write more new business. So, we think that this time continues to present opportunities for them to do that.
Adam Klauber - Macquarie Research Equities: Has the foreclosure moratoriums, has that impacted their business at all?
J. Powell Brown - President and CEO: Not that we're seeing as of yet, but we don’t know the outcome of that yet.
Operator: Mark Hughes, SunTrust.
Mark Hughes - SunTrust: Based on the strength in Proctor, would you expect positive organic growth to continue into the fourth quarter in that business? Is that a decent assumption?
Cory Walker - SVP, Treasurer and CFO: Mark, you may remember that we had said that we anticipated a down draft in Q1 and Q2, and Q2 it was not as significant. I think we said $6 million to $8 million in Q2 down, and we were down $2.6 million, and we thought part of that would trickle into Q3 and Q4. Our estimates now is, I think that they will be, barring something we are not aware of, they will be flat to positive in Q4 as well. So, they have done a great job of retaining their existing business and writing new business. So from our position in Q2 to now, that's modified slightly, yes.
Mark Hughes - SunTrust: Then from an expense standpoint, you've got I think, Cory you mentioned $1.2 million in same-store expense reductions driven by some real estate benefits. You said there is more to come. If we look out 12 months, do we get another $1.2 million, a little more, a little bit less?
Cory Walker - SVP, Treasurer and CFO: I think, rent, once you renegotiate it, it's kind of embedded now for several years to come, and I'm just saying that over time that will continue on that side of the rent. We also had some improvements of supplies and just other miscellaneous. Again, come back to focus that it's really on a decentralized basis. So, the answer is that you're not going to see a doubling of that but you see a base line of that savings should continue on.
Operator: Dan Farrell, Sterne, Agee.
Dan Farrell - Sterne, Agee: Can you update us on your views on trends in the employee benefits business and then specifically maybe just update us on your thoughts longer term on the impact from healthcare legislation in that area?
J. Powell Brown - President and CEO: The short answer is, as you know, that health insurance premiums, meaning the rate themselves have been going up over the last several years, nothing new to anybody on this call. However, one of the things that we have seen or seemingly as a result of healthcare reform is, we've seen, particularly in certain regions of the country, rates go up more. So, if the rates were going to go up without healthcare reform, and I am saying this a broad statement let's say 8% to 10%, then carriers seem to be increasing rate another 2% to 10% based on the uncertainty around healthcare reform depending on the market that you are in. Having said that, there’s lot of speculation currently around the definition of medical loss ratios, MLRs; that are supposed to come out this -- meaning in Q4. I thought it would have come out right around 10/1 Dan to be specific, and there is lot of speculation now about what’s going to happen. I would tell you this is purely speculative on my part or our part. There is lots of discussion around how do small groups operate going forward with exchanges and how are agents involved, be it on a fee basis or on a commission basis, and the carriers currently are evaluating that. I believe and we believe that there will be definitely a portion or a space for retail agents, such as ourselves to give advice and counsel to our clients and prospects going forward. We’re selling lots of new employee benefits business now, both in the small group area that's under 50 lives and in the large group area, over 50 lives. The exchanges are technically supposed to be up and running by 2014, but we believe that they will be up and running before that. Now, for those of you that may not be as familiar with the State of Massachusetts and the exchange that they have there, the exchange in Massachusetts based on the people that we know in the insurance business there, meaning agents, has not dramatically impacted their business to a negative extent. There is a lot of confusions still around the exchange and it is not a model of efficiency. However, there will be people that will go and buy insurance through the exchange. So, it's yet to be determined. We believe that in our firm that we’re able to bring great value to our customers in a number of ways, be that on small group or large group, and the way we are compensated in the future in the small group arena, be it defined as under 50 lives or if it is something different than that, might be slightly different that’s currently on a commission basis now. It may be on a fee basis, but carriers are determining how they will pay us or specifically what they will ask us to be paid going forward. That may mean we are on a commission. That may mean that we are on a fee that is clearly described or delineated on the billing statement on a monthly basis to the insured or some variation thereof. That’s a lot to say Dan; that there is still a lot of confusion in the marketplace with the carriers and particularly with our clients and prospects. So, we’re doing our very best to bring clarity to people around healthcare reform and what that means to them and as a result of it we’re writing a lot of new business.
Operator: Mike Grasher, Piper Jaffray.
Michael Grasher - Piper Jaffray: A couple of quick questions. I guess the return premium, Powell, you said not as big. You feel like it's bottomed in here by and large now given the trend that we have seen over the last two or three quarters. If you look back a year, what it would have looked like?
J. Powell Brown - President and CEO: Yeah, Mike, I think that – I don’t know if we can say it's bottomed. I think what it is, is people are having – are able to anticipate their exposures better today in this market than they have been in the past. So, owners of businesses have been surprised as you know on the impact to their individual business as it relates to this current economic environment. They are now better able to anticipate those, but it’s just time will tell because if their individual businesses are impacted negatively, whether it's economic or otherwise is yet to be determined, but if you kind of go with your gut on that, you might say it would seem, if the economy continues to do what’s it doing or improve that that would make sense.
Michael Grasher - Piper Jaffray: So rate of change is definitely slowing in that regard or less negative. Your comments to businesses closing up shop at a greater pace, I guess for me that was somewhat of a surprise at least to at a greater pace in terms of what you are seeing there. Can you comment a little bit more, is it specific region of the country, well yeah, ant specific regions of the country where that’s most impacted?
J. Powell Brown - President and CEO: Mike, and remember we've talked about areas like Las Vegas and Phoenix and Southern California in the past, and particularly highlighting Las Vegas which we didn’t highlight on this particular call. This time, as we looked into the Midwest, we just saw an unusual number of one, businesses that were going out of business; or two, businesses being sold. So, what I am saying is, that’s one and the same. Those two things are being said together, so are we saying that it is an enormous amount of businesses, specifically going out of business in the Midwest; I don’t think I could say that categorically, but I am saying, when say the number of businesses that went out of business in Q3 and combining that with the businesses that were insurers of ours that were sold, so therefore, we have not an opportunity to renew that business, it was high in Q3.
Operator: John Fox, Fenimore Asset Management.
John Fox - Fenimore Asset Management: I have got few questions. Number one, can you tell us what the Proctor revenue was in the quarter?
Cory Walker - SVP, Treasurer and CFO: The Proctor revenue for this quarter without contingencies was $11.6 million roughly and prior year it was – the third quarter it was $9.8 million.
John Fox - Fenimore Asset Management: And then on Citizens you mentioned workers comp. Are there any other legislated increases for premiums at January 1, '11?
J. Powell Brown - President and CEO: The workers compensation John is separate from Citizens. Citizens Property Insurance Company, think of it as property only, primarily wind-driven, but it can be all payrolls. The workers compensation, which is regulated by the Department Of Insurance, is separate…
John Fox - Fenimore Asset Management: Right, through State of Florida.
J. Powell Brown - President and CEO: That's right in the State of Florida. So to your question, we only are aware of – in terms of at this point for this call two; one, the one here, which is 7.8% effective, that’s the average by the way, depending on the class of business you are in, your class codes, for 1/1/11 going forward; and the second one would be pending the possibility of change in the State of Washington, but if in fact that passes, which we don’t know, if it'll pass yet or not, that won’t take effect until '12.
John Fox - Fenimore Asset Management: I guess, I misspoke in my question. Taking workers comp out of the equation, I mean, I believe this year Citizens had a rate increase in January 2010?
J. Powell Brown - President and CEO: Yes, and they will have another increase on January 1, '11. And what I said in our FIU comments is, the increase that is roughly 10%, John, by the way, so this could be a second increase of roughly 10% on – and if you remember, year and a half ago we said those rates were somewhere between 50% and 70% low relative to the actuarial rates in that area, but they don’t apply to commercial residential properties, those are condos, apartments and certain assisted living facilities that are A rated, that are over $10 million in values. Those specific structures will be specifically addressed in the first part of the year by the insurance department.
John Fox - Fenimore Asset Management: So, does that mean that Citizens impact on you in 2011 will be relatively small until that is addressed?
J. Powell Brown - President and CEO: I think that we write roughly about $65 million worth of Citizens premium, and it is the vast majority of that business are A rated accounts. I can’t tell you what percentage. I think that your assumption is correct. Yes.
John Fox - Fenimore Asset Management: My third question, which I know will be difficult to answer, but can you give some type of estimate or feel of how these premium audits have affected your internal growth rate over this recent period of time?
J. Powell Brown - President and CEO: The answer John is we cannot give you an exact estimate. I'll tell you an interesting correlation. In the carrier space, so the risk bearers the national carriers and the regional carriers, if you ask them what their return premium impact is on their premium in the quarter, it is somewhere typically between 2% and 4% negative. That’s the carriers. Now, in our space, we can’t tell you – it’s not because we know it and we don’t want to tell you, it's because we don’t know the exact impact. We look at it periodically on the office-by-office impact, but we don’t look at it and aggregate it across the Company. So, I am sorry, I'm not going to be able to give you an answer.
John Fox - Fenimore Asset Management: Why would your experience be different than the 2% to 4%?
J. Powell Brown - President and CEO: I am not saying it is. I am just saying, I know with certainty, because I have talked to enough risk bearing companies recently about it that there is 2% to 4% on their total written premium.
Operator: (Sarah Dewitt), Barclays Capital.
Sarah Dewitt - Barclays Capital: When we look at the potential to turn the corner on organic growth, what leading economic indicators do you think we should be monitoring to get a better sense of the timing on when organic growth could become positive?
J. Powell Brown - President and CEO: As we’ve said, we haven’t seen any one perfect correlated leading economic indicator. However, we look at employment or more specifically unemployment, as it relates to the growth, or I should say the shrinkage in the unemployment rate, and how does that positively impact our clients or prospects going forward. But it’s not a GDP number, it’s not something else, because those don’t really accurately impact or reflect, Sarah, the middle market, at least, what we've been to determine.
Sarah Dewitt - Barclays Capital: Just to clarify, when you said 20% of your Florida business is workers comp, did you mean 20% of Florida Retail or all Florida?
J. Powell Brown - President and CEO: Yeah, just Florida Retail.
Operator: Keith Alexander, JPMorgan.
Keith Alexander - JPMorgan: My first question is for Tom Riley about acquisitions. Basically, in your comment you cited unsatisfactory closure rates, but at the same time acquisitions have increased. Is that a factor of an increasing closure percentage or more deals on the market or just the size of recent acquisitions?
Thomas Riley - Regional President and Chief Acquisition Officer: There are more deals on the market, yes. There is absolutely more deals on the market. As you know, last year the number of deals in ’09 fell off the table, about June, not just for us, the whole industry. And there is more deals for everyone this year and we've looked at a lot more deals but it’s been kind of frustrating because it seems like we are almost practicing in (indiscernible) just because people are just taking their toe into water to see if there is a transactional value that peaks some interest, where probably three, four, five years ago we would close a much, much higher percentage, now we just have to go along with the deal, because you don’t know which ones are real or not until they close, like Powell said. So, it just takes more work to get one closed right now.
J. Powell Brown - President and CEO: Keith, one of the main points I think, at least, from your perspective to keep in mind is that, we do feel like we have probably one of the best infrastructures in place to touch and talk to as many agents around the country of any of the large brokers, and we've got nine regional presidents and executive vice presidents that spend a large share of their time anywhere from 25% to 60% of their time doing nothing but talking to these other agents and telling them Brown & Brown story. So we're working hard to do that. We'll get our share and the folks who are high energy entrepreneurs that are agents, they like our model over decentralized basis, where they run their own operation. So we are very, very attractive for those people. We're going to pay a fair price for it and so we'll get our share over time.
Keith Alexander - JPMorgan: Just to follow-up on that. Do you feel like agency owners are coming to terms with the value of their practice over time? I mean, I know that as the economy deteriorated that may not have been the case, but now that the outlook has become probably a bit less positive, maybe they are coming to terms a bit faster?
Thomas Riley - Regional President and Chief Acquisition Officer: Yes, and obviously the – as Cory mentioned, with earnout, it's really the value of the agencies as you go forward. It really doesn’t matter that much what the value was, but obviously the number of transactions has improved dramatically for the industry since the last part of last year. So, to answer your question, I think, they are getting either happier with where they are now or the opportunity that over the period of the earnout, which typically is two, three years, that they're going to get into a better time, meaning 11, ''12, 13, when they will be able to generate revenues back to what they had enjoyed in the previous years. And that's really what the purchase price is going to be calculated on.
Keith Alexander - JPMorgan: Then just one numbers question, did contingents have anything abnormal in the quarter, and specifically I am asking if there’s anything related to FIU deferrals from ’09, and if that’s still a story?
Cory Walker - SVP, Treasurer and CFO: No, there’s nothing. FIU did get a little bit of contingencies but nothing unusual, most of the contingencies in the third quarter really relate mainly to the wholesale division, and most FIU contingents will, whatever they get will really come into the fourth quarter.
Operator: Brett Huff, Stephens.
Brett Huff - Stephens: Some of my questions have been answered, but I want to dig in just a little bit Cory on the legal return that you got. I just want to make sure that I get that -- in terms of looking for a run rate on the other operating expenses going forward, do we just add that back the 3.6, or how should we think about that?
Cory Walker - SVP, Treasurer and CFO: Essentially year-to-date through nine months, the legal expenses relating to this case are basically zero, because we've used at least 1.6, so if there is anything that's kind of a non-standard for this year's overall run rate cost is $2 million. So, I would look more to the operating profit percentage on a year-to-date basis, as the normal ongoing maybe less than $2 million, so that will be kind of worse case scenario if you want true run rate. Then just average that over a three quarter period.
Brett Huff - Stephens: Okay, and then the labor, you guys did a great job again on the labor expenses, you commented a little bit that that was primarily bonuses last quarter, is that the same – should we think about that the same way this quarter as well is that primarily where that flatness is coming from?
Cory Walker - SVP, Treasurer and CFO: With salaries, salaries are more consistent, so basically we're kind of a more -- I think looking at this quarter, is kind of a normal run rate, because we are almost flat with the third quarter last year when you extract the standalone acquisitions.
Brett Huff - Stephens: Then Powell, you had said a couple of quarters ago, you talked about a little bit region by region about pockets of optimism or whatever and I think people have been asking, it's tough to get a good read on the middle market, but I just wanted to get your perspective on, relative to a couple of quarters ago, how did those areas, where you guys, at least gut feel saw maybe some interesting things going on. Where are those locations and how do those locations look relative to what you guys saw a couple of quarters ago?
J. Powell Brown - President and CEO: Yeah, I would say Brett that you have a couple of scenarios. One of those I think I referred to was, San Antonio, Texas has never seen unemployment above 7%. So, kind of an interesting environment, however, you take Austin and San Antonio, the economy has been pretty good, and in several places in Texas, but it’s also a very competitive rate environment, so I would say that there probably continues to be, using that as an example, a pretty good feeling in those areas relative to what it was two or three quarters ago versus what it is today. In some of the other places around the country that we're feeling that way, I think it is sort of played itself out as we expected, but still the market, you heard me refer to the market, the rates being even more competitive in the Pacific Northwest, specifically Washington State, those rates had held up for a period of time, so they are a little later getting later into the party in terms of the rate pressure and yet their feeling about the economy up there, meaning specifically Seattle is a positive, but they don’t have numbers right now today to prove that out, meaning the economy specifically. So, I would just tell you that we are just continuing to try to do what we've done all along which is sell more insurance, do what’s in the best interest of our clients and manage our cost the best way we can.
Brett Huff - Stephens: Then the last question, just give us an update on the split of sort of the internal growth headwind. I think in the past you said two-third or 75% was exposure units and the rest was rate. Is that still holding true? Was that approximately right??
J. Powell Brown - President and CEO: I'd say that that’s still right. I think that’s a fair statement.
Operator: Meyer Shields, Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus: Cory, let me start with a quick numbers question, what is the factor that we should be applying to net income for the performance there going forward?
Cory Walker - SVP, Treasurer and CFO: First of all, it's shown in the footnote of the queue. So, you can always look it up, it doesn’t show up in the press release, but we did have a reduction on some of the – on the two class method, so that number changed but it’s going to be closer to the 98% range now.
Meyer Shields - Stifel Nicolaus: Powell, am I correct in inferring that you are seeing more pricing pressure in California workers' comp than in Florida?
J. Powell Brown - President and CEO: Well remember, I don’t know if I can say that. I think that it’s very competitive, and remember, California is different in terms of the way they rate workers compensation than in Florida. In Florida, you have filed rates and the plan designs can deviate. In California, you can deviate from rates. So, it’s kind of like comparing an apple and an orange. I ultimately say that the ultimate cost to the insured maybe very similar but the way you get there is different and maybe just to make one more statement, if you take a class code in Florida; everybody has got to use the same rate. So, let’s just say that rate is $1 per 100 of payroll. In California, that same class code, the rate might be $0.80 for somebody, it might be $0.67 for somebody, it might be $0.93 for somebody, but the plan design on the dollar rate in Florida meaning a dividend or a retro may ultimately get the person, if they have good experience to the same rate or the total premium that they would pay in California.
Meyer Shields - Stifel Nicolaus: On the employee benefit side, are you seeing any mid-size clients just consider getting out of, including healthcare as a benefit altogether?
J. Powell Brown - President and CEO: Yeah, we see that periodically. I think there is lots of people -- there are some clients or prospects where we see a scenario where the pain or the price, the price pain get so great that they cannot continue to offer it. However, that is the exception not the norm. So, we do see that periodically, but what you typically see is a scenario where they had a traditional plan and because of the cost increases they've had to move towards a plan that they skinny down the coverages offered, i.e., the participant or covered life or lives has to participate more in the cost of healthcare, (indiscernible) the plan.
Meyer Shields - Stifel Nicolaus: I just wanted to know when you see that cost (I think) of the employee, the reduction in the benefits, does that affect rent allowance compensation?
J. Powell Brown - President and CEO: Yes, it does because it would impact the scenario whereby we're paid on many of those on a commission based on the premium paid, so if the premium goes down then our total commission would go down, yes.
Meyer Shields - Stifel Nicolaus: Last question if I can, so far year-to-date, the book of business sales that you've done that are reported in other income have been up on a year-on-year basis, is that the same issue as what you're seeing in the M&A environment, in other words, last Q was unusually low?
J. Powell Brown - President and CEO: I just think it’s probably just an aberration this year, so yeah, I think that’s probably a fair statement.
Operator: Ken Billingsley, BGB Securities.
Kenneth Billingsley - BGB Securities: I just have a few follow-up questions on workers comp and you were talking about rate increases in Florida averaging about 7.8%. We have seen in California, and I understand you just described the differences between California and Florida, but some rate increases that went through there, the net rate increases could be down because discounts apply to customers. Are you expecting to see the same thing occur in Florida, so, the net rate increase could be zero to down?
J. Powell Brown - President and CEO: No, remember I said 7.8% is the average across all class codes, so it is possible that certain class codes could go down. I haven’t seen the filed rates by class code yet, but it’s possible certain class codes could go down, but overall, the entire number of class codes are up, but it would not be a discount factor, it would be just a class code specific factor.
Kenneth Billingsley - BGB Securities: Could you help me out here then aren’t underwriters allowed to make some adjustments to those customers based on some modification factors?
J. Powell Brown - President and CEO: No, that was my point earlier Ken that the rates are the rates in Florida, unlike in some other states, where you can deviate from the rates. What happens in Florida is the plan designs allow you to modify – the carrier could modify for the insured the potential ultimate cost of his or her workers compensation. So if you have an individual who pays the $100,000 on their payrolls, times their rates generates a $100,000. And the answer is, if somebody puts a dividend on that plan based on acceptable losses, one carrier might give them back $20,000 and another carrier might give them back $25,000, based on the same loss experience, meaning a loss ratio less than 50%. In the State of California, the way it would work is, if you took the average rate charged per payroll it would be $100,000 in premium, one carrier might just write it on a guaranteed cost basis for $78,000, another one might write it for $93,000 and another one might write it for $80,000. So then the insured buys the guaranteed cost of product. So on Florida you have dividend plans and retrospective rating plan as opposed to many other states, not only California that have rates that you can deviate from and they are just guaranteed cost plans.
Kenneth Billingsley - BGB Securities: Are you expecting an increase use of the dividends, since you talked about blue light specials?
J. Powell Brown - President and CEO: I don’t think I would say an increase in Florida in dividends because we already have a number of dividends there here in Florida. And we have a number of retro plans. I think it’s more specific based on the size of the premium. So, premiums over a certain threshold you are going to see more dividends, premiums in excess of another threshold mighty see retro plans.
Kenneth Billingsley - BGB Securities: The last question I had was, you obviously discussed premium rates and exposure rates generally being down across most lines. What about the terms and conditions and again getting back to what you talked about looking into the end of the fourth quarter as underwriters try to fill out their books, what type of changes are you seeing on the amount of coverage that they are offering? Are they offering a lot more bells and whistles?
J. Powell Brown - President and CEO: The answer Ken is, it depends but the short answer is, yes, we are seeing a broadening coverage and we are seeing rate decreases. So there is not one catchall statement for it, but yes we can see both.
Kenneth Billingsley - BGB Securities: So our expectations, obviously, there is a magnifying effect to the downside to underwriters for the moves that they are making right now?
J. Powell Brown - President and CEO: Well, once again, we can only tell you what we are seeing, but I would tell you that it is very competitive out there with not only rates but terms and conditions.
Operator: Sir, at this time we have no further questions.
Cory Walker - SVP, Treasurer and CFO: Okay. Thank you all very much and we look forward to talking to you next quarter. Thank you Alicia and have a wonderful day.
Operator: Thank you sir. That does conclude today’s conference. We thank you for your participation. You may now disconnect.