Operator: Good morning, and welcome to the Brown & Brown Inc. 2013 Second 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 further results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including those related to the Company's anticipated financial results for the first quarter of 2013, that 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 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 in those risks and uncertainties identified from time-to-time in the Company's report 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 any 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 would now like to turn the call over to Mr. Powell Brown, President and Chief Executive Officer. You may begin, sir.
J. Powell Brown - President & CEO: Thank you, Carl. Good morning, everybody. We had a 7.4% internal growth in Q2 and we are very pleased about that. All four divisions contributed to our $21.1 million of new growth dollars; retail was up 2.3% and Wholesale National Programs and Services were up 10% or more.
So, with that I would like to turn it over to Cory for financial update.
Cory Walker - SVP, Treasurer and CFO: Thanks, Powell. We did have another very good quarter and like we said previously we like the steady and consistent growth that our internal growth reflected. Our net income for the second quarter 2013 of $52 million was up 22.4% over the second quarter of 2012. Of course, finally our net income per share for the quarter was $0.36 and that is 24.1% over the $0.29 from the second quarter of 2012.
From a revenue standpoint, our commissions and fees for the quarter increased 11.8% to $324.2 million, and that's up from the $289.9 million from last year's second quarter. We did receive $7.9 million of profit sharing contingent commissions which represent a net increase of approximately $6.8 million, that's from the $1 million we received last year in the second quarter. Of the $6.8 million of net increase $1 million came from Wholesale Brokerage Division and $5.8 million came from our Program Division, of which $4.5 million was generated in our FIU programs. And as long as the wind continues to be quite and not blow, we should continue to see nice profit sharing contingencies from FIU. Our best estimate in how much profit sharing contingent revenues that we should receive in the second half of 2013 is between $13 million and $15 million of which we think $10 million to $11 million may come in the third quarter and then possibly $3 million to $4 million in the fourth quarter.
Additionally, we accrue $1.7 million of guaranteed supplemental commissions in the second quarter of 2013 and that is $560,000 less than the 2.3 that we accrued in the second quarter of 2012, this reduction is again in line with the fact that several carriers that used to pay us GSCs in lieu of profit sharing contingent commissions have switched contingent commission contracts.
Now looking at the internal growth schedule; as Powell mentioned, we had a consolidated internal growth rate of 7.4%. For the second quarter, our total core commissions and fees increased 10.4% or $29.6 million of net additional commissions and fees. However, within that net number, we had $8.5 million of acquired revenues. So that means that we had $21.1 million of additional commissions and fees from essentially the same-store sales basis. As Powell mentioned, all four of our divisions had strong positive internal growth and he'll talk about those a little bit later.
Our investment income was nearly flat with 2012 and our other income was up slightly of about $616,000, and that's due to a sale of certain books of businesses. Our pre-tax profit margin for the second quarter of 2013 was 26.5% and that's compared to the 24.5% we had in the second quarter of 2012, so that's an increase of 200 basis points.
Employee compensation and benefits as a percentage of total revenue was 50.2% in the current quarter, and that's a decrease from the 51.8% cost factor in last year's second quarter. The total dollar increase on a net basis in employee compensation benefits was approximately $12.8 million or 8.5% increase, of which only $1.7 million was attributable to stand-alone acquisitions since last year. So therefore, excluding those impacts of the stand-alone acquisitions, we actually had $11 million of additional compensation on kind of a semi-same store sales basis.
Of this increase, $1 million came from new salaries for new producers; $1.6 million was due to increased commission producer expenses because of the net new business $5.6 million was due to increase in staff salary, of which almost $3 million of that portion related to the new automobile aftermarket and the Everest programs in our National Programs division. We did have about $2.1 million of increased profit center bonuses and other bonuses because of the increased profitability, and that includes the net effect of the $1.3 million we accrued last year relating to the 5% bonus program for our retail commission producers. Then finally, there is about $1 million of additional payroll taxes relating to the increased compensation.
Our non-cash stock grant compensation was down slightly by about $115,000. However, on July 1, 2013, our Board of Directors approved a stock incentive plan grants to certain Beecher Carlson employees as part of the acquisition agreement. Additionally, the board also approved SIP grants to existing teammates. These SIP grants are generally based on 5 year performance measurements and invest over a 5, 6 and 7 year period. The total annual cost of these SIPs, including the grants to the Beecher Carlson teammates, is estimated to be about $15 million per year or about $0.06 per share.
Looking at our other operating expenses, they remained flat at 14.5% of total revenues for both second quarters 2012 and 2013. The other operating expenses increased $5.2 million or 12.3% over the same quarter of last year. The new standalone acquisitions amounted to about $533,000 of the new cost. So, when you look on a semi same-store sales basis, the net increase in other operating expense was about $4.6 million. This net increase related primarily to $1.2 million of additional insurance inspection and servicing expense fees as a result of net new business. There was a $1.8 million increase in legal and errors and omission reserves, which is partly the result of last year in the 2012 second quarter we had an $826,000 credit due to our legal E&O reserve reductions for certain cases. Additionally, we had $1 million of additional cost relating to our data processing and software licensing fees, and additionally, we had about $700,000 increase in various employee meetings.
From an EBITDA standpoint, our consolidated EBITDA in the second quarter of 2012 was 32.4%. With the internal growth, as we mentioned that, our leverage, our EBITDA margin for the second quarter of 2013 went to 34.1%, and that's a 170 basis points improvement.
If you look at our Retail division, last year's second quarter, our EBITDA margin was 32.8%; and with very nice 2.3% internal revenue growth, the margins for the second quarter of 2013 was 34.7% and that's 190 basis points improvement.
Our Program division last year had a 31.2% margin, and it moved up to 31.8%, a 60 basis points improvement. Our Wholesale division went from 32.8% EBITDA in 2012 second quarter to 36.3% margin. Our Service division went from 24.7%, and it shrank slightly down to 24.1% margin. So overall, very nice improvement on our EBITDA margins.
Our amortization and depreciation in aggregate was up about $720,000 and that was due primarily to the acquisitions. Our interest expense was flat with essentially no new debt as of June 30, 2013. However, on July 1, relating to the Beecher Carlson acquisition, we did add another $60 million of debt, so the interest rate will move up based on that in future quarters.
Our change in estimated acquisition earn out payable was a debit in this year's second quarter of $656,000 versus last year in the second quarter we had a $602,000 credit balance, so that's a $1.3 million swing in GAAP expense charge.
Our effective tax rate for 2013 is currently expected to be running at about 39.7%. So really, in conclusion, with our net income of $52 million, it reflects a very nice 24.1% increase and so we're very pleased with that.
So with that financial review, I'll turn it back to Powell.
J. Powell Brown - President & CEO: Great, Cory, thanks. A good report. On a retail basis, we are up 2.3% versus up 80 bps in Q1. In Florida, coastal property we're seeing flat to up 10%; inland property, usually flat to up 5%; GL rates could be down 2% to up 5%; auto could be flat to up 5% to 7%. Work comp is tightening. Carriers are less willing to offer consensual rate in Florida. Work comp and auto actually are the toughest lines to place in Florida at present. Everybody is working off a model profitable accounts are hard to get rate on; inland property you could actually see rate decreases every once in a while; poor construction, it's still hard to place; and contractors' payrolls in certain areas are up slightly.
In the Southeast United States, particularly Texas, Oklahoma, Georgia, South Carolina, coastal property is plus 3% to 8% in South Carolina and Louisiana. Inland, it's usually flat to up a little bit. In Texas, the coastal property is under a little more pressure, 5% to 10% plus. GL and auto rates are flat to up 5%. Work comp would be down slightly to up 10% in rates. Exposure units in that part of the country are flat to up slightly. Work comp continues to tighten. Regional and mono-line carriers continue to remain aggressive with scheduled credits. Texas, of the states listed, seems to have the most rate pressure and the most exposure unit growth.
In the Northeast United States; property inland is typically up 2% to 6%; coastal is up 10% plus and the deductibles are being forced higher. Casualty and GL and auto are flat to up 5%. Work comp is flat to up 7%. Exposure units, depending on the class of business, but is flat to up, no more than 5% typically. New business is still very competitive and seems to be actually a little softer in the northeast than Q1. There is still 10% to 15% pricing difference between new and renewal accounts.
Construction GL and umbrellas in New York City continue to be tough. Monoline work comp in the city is very tough to place. We are seeing some New York City developers though that are becoming more active. So we're going to see that roll through into the construction payrolls in the near future in the city.
In the Midwest, property is typically up 5% to 10%; GL rates are down 5% to 10%. Now, property carriers or carriers that are writing that property are looking closely at the valuations as well, so limits are going up and the rates are going up. So, if rates are going 5% to 10%, and then the limits are going up, they're getting a pretty healthy – they can be getting a pretty healthy increase in premium dollars. Automobile is flat; work comps, up 2% to 3%; payrolls and sales are up about 5% to 8%. Midwest, regional and super-regionals continue to be the most aggressive.
In the West, property, general liability and automobile are flat to up 5%; work comp rates are up 5% to 10%; exposure units are flat to up 5% on a very broad basis. Work comp in California and Arizona, they've continued to tighten. We're starting to see some signs of life in the construction industry in Arizona, some of the exposures on some of our contractors are up 5% to 15%. Regionals continue to be very aggressive in that part of the country as well.
In the Northwest, Oregon and Washington, carriers continue to cut back on earthquake limits and increasing their price for that earthquake coverage.
As a general statement in the Pacific Northwest, I think people are feeling better about the economy, but we are not seeing much new hiring. So people are doing more with the same amount of employees. On employee benefit side; on a small group basis, we're seeing rates probably up 8% to 12% and large group could be up 10% plus depending on the experience. We're not seeing a lot of new bellybuttons added, once again, flat number of employees.
From a wholesale standpoint, we're up 10.8% versus up 8.8% in Q1. Binding Authority, we're seeing slight exposure increases. Rates are flat to up 5%, coastal rates are up, and inland is flat to potentially down. Liquor liability continues to harden and thus, bars and nightclubs continue to be under pressure, meaning going up. Habitational GL rates are also going up as well.
On a brokerage standpoint, on property, coastal property, it's typically flat to up 5%. We are seeing some large accounts that are seeing rate decreases now for the first time. Then New Jersey and Long Island continues to present challenges for poor construction. As it relates to Citizens, we always get a couple of questions about that, in Florida, if the building is older or not A-rated, meaning under $10 million of value, citizens keeps it. If it's larger and A-rated, meaning over $10 million in value, the E&S market has a chance because it's not total parity, but it's closed.
From the liability standpoint, rates are flat to up 5%. In the brokerage liquor market, liquor liability continues to harden as in the binding market, habitational rates are also going up. Professional liability private company D&O is up 5% to 10%, it's all driven by employment practices claims. Standalone employment practices coverage, these higher claims are leading to increasing retentions and at least the 10% increase. Non-real estate accounts are flat, real estate related is up 5% to 10%. Public company D&O is up 5% to 10% on the primary. On the excess layers, they are down 5% to 10% or even more percent. National Programs are up 18.3% versus 12.3% had a great quarter for Programs, now we had some nice growth in a number of our programs. The big winners were in Arrowhead, so all I want to say way to go to Chris Walker and his team. We are hearing in the National Programs area about some downward pressure on reinsurance rates, but we are not seeing the primary carriers pass those decreases through yet. We hear it on the retail and the brokerage side as well, but like I said we haven't seen it yet be passed through the primary carriers.
On the services side, we had 10% organic growth versus 62.8%. Obviously, in the first quarter we had a big quarter with Colonial. I'll tell you in Q2, Colonial Claims did $2.4 million more in the second quarter than they did last year in the second quarter. So, there was some things that rolled over from Sandy into Q2 that we did not anticipate, but those are pretty much closed now, but it was a good quarter for services.
On an acquisition front, we are really pleased that the Beecher Carlson transaction is closed. Very excited to have the 400 teammates from Beecher Carlson join Brown & Brown. All of their teammates and leaders are right in the thick of it servicing their clients and we are writing a lot of new business. So, we are excited about that. We continue to actively look for acquisition opportunities and as you saw we also close another very fine acquisition in New York State 61, just outside New York City, Roland.
So, in conclusion, all carriers want rate but the competitive pressures are moderating those rates more today than in Q1. Regionals continue to be very aggressive. The acquisition pipeline continues to be good as I like to say last year it was good and a year from now I think it will be good. So, we continue to talk to lots of people and when they sell and if they sell is up to them but we look forward to talking to them. We continue to deliver for existing clients and aggressively seek new business.
So, with that said, I'd like to turn it back over to Kyle and we will start with our questions. Kyle?
Operator: Michael Nannizzi, Goldman Sachs.
Michael Nannizzi - Goldman Sachs: Just quick question on the Wholesale Brokerage segment. Can you talk little bit about organic growth here, I think last quarter you had mentioned some rate increases in (mass) affected areas that helped contribute to the organic growth. Was that relevant again this quarter or was there something else there.
J. Powell Brown - President & CEO: No, I'd say, Michael, the way I would focus on the wholesale arena is, as you know, you can have sometimes a little bit more violent swings in rates, up or down. But I would tell you that at this point in the cycle, it's more of a function of one, there are accounts that sometimes are in the standard market and sometimes they're in the E&S market. I would tell you that we call those tweeners. Those tweener accounts are starting to move back towards – away from standard market into E&S carriers and the wholesale markets. They are typically looked like a wholesale account, I would acknowledge that upfront. Number two, we're just aggressively out looking for and soliciting and getting a lot of new business. So the fact that you have a lot of new business, you have accounts that are moving across somewhat from standard markets that are typically E&S markets moving back to the E&S market and we are getting a little help with the rate. But I would say that it's more just a function of that market expanding slightly and our ability to get more new business. Tony Strianese and his team has done a great job, they've done a really good job, a number of quarters. So, we're really pleased with that 10.8%.
Michael Nannizzi - Goldman Sachs: Then in the National Programs business, just let me get a little bit more color. So you saw margins expand even with the contributions, it sounds like Arrowhead and ESIC contributed nicely to premiums. Can you talk about just the margins there and if you were to peel those two out, what were the legacy margins in that segment? Then maybe just give us a little more color on Arrowhead and ESIC in particular.
Cory Walker - SVP, Treasurer and CFO: So, in the programs market we have been able to enjoy 35% plus margins historically. If you remember, when we acquired Arrowhead, they had $40 million of EBITDA on $107 million of revenue. They have, obviously, grown a lot organically, which we are very pleased about Chris Walker and his team. The automobile aftermarket program that came in effective October 1 of last year, we said it is going to be $20 million to $25 million of revenue in the first year, and it was going to be about 10% margin for the first two years and then it will move towards our historic margins. As it relates to the Everest program that we picked up on 5-1, we said that that $7 million of revenue and haven't given any color around the margins, but ultimately we would expect that to be in the traditional operating range of the rest of our programs.
J. Powell Brown - President & CEO: Now, one other item just to clarify. On the National Programs, we did receive $5.7 million of profit sharing contingencies, and so that's obviously high margins. When you extract that that probably added about $4.7 million of EBITDA. So because of the automobile aftermarket that Powell was talking about, and that's considered net new business since it was like selling a brand new account, those margins are lower than what historically Arrowhead or the National Programs had. So, when you extract the EBITDA impact of the profit sharing contingencies, the margins on the rest of the business did actually shrink a little bit, primarily because of this lower margin business on the aftermarket but we believe it will continue to grow over time to the segments?
Cory Walker - SVP, Treasurer and CFO: Key point, Michael, two years. So, October 1 of '12 that started, so two years from then we think that business will start going up but we are going to have some expansion just by growing the business organically. So, we think there is embedded positive – two embedded positives.
Operator: Mark Hughes, SunTrust.
Mark Hughes - SunTrust: On the expense front, Cory, the reserve and then the software licensing increase. Are those going to persist in the Q3 or thereafter?
Cory Walker - SVP, Treasurer and CFO: No, I think, first of all on the E&O reserve that's an item that can't fluctuate each quarter and it depends on how the whole legal environment works in the cases we have outstanding. So, looking at that at the net increase is really kind of not the right way to look at, it really came about just because an unusual quarter last year in 2012 where we had that $800,000 credit balance. So, clearly, it's not what we saw this quarter is probably on average, it's only above because of that credit. From a standpoint of software licensing that is a combination of some of the roll-in acquisitions that we – the fold-ins that we had and some increase in some of the software cost. So, I don't think that would continue at that same level each quarter but it will be overall up a little bit.
Mark Hughes - SunTrust: Then the $0.06 a share in the stock comp. How much of that is for Beecher, which I assume you would have incorporated into your guidance when you provided it? And then how much of the legacy plan expenses might be dropping off?
J. Powell Brown - President & CEO: I can answer Mark the first one. About $0.013 on the first part of the question with Beecher and that's meeting certain growth and profitability hurdles, which we feel good about, number one. Number two, Cory, are you referring to the expenses dropping off on old PSP?
Cory Walker - SVP, Treasurer and CFO: Right.
J. Powell Brown - President & CEO: Yes. Can you answer that?
Cory Walker - SVP, Treasurer and CFO: That would just be a gradual amount. No big drop-offs in the foreseeable future.
Operator: Gregory Locraft, Morgan Stanley.
Gregory Locraft - Morgan Stanley: I wanted to just ask about the margins. Again, you guys are showing tremendous improvement year-over-year in margins. I think you've called out, the last couple of quarters including this one, some reasons why. But I guess this is more of an out-year-type question. Can you continue this trajectory or should we begin to see the year-over-years decelerate? I'm wrestling with whether you can get above historical averages as a corporation on the margin line given how the mix is shifting.
J. Powell Brown - President & CEO: I was going to say, remember, if you've heard some of the last earnings calls, I have said that we and yours truly reserves the right to do whatever we think is necessary to grow the Company organically and profitably. So, do we think we can have the margins go up? Yes. If you notice, our goal, our next intermediate goal was $2 billion of revenue. There is not a margin component with that, and there is not a timeframe upon which we will accomplish that. But what we can say is that the margin is going to be good and we are going to be growing organically. So, we are very pleased with our organic growth and as you saw with all of our businesses growing as they did, we had nice margin expansion. So, we think that there is continued opportunity for improvement, but the most important thing is we grow and grow profitably.
Gregory Locraft - Morgan Stanley: Again, I mean, the one-off – it's not one-off, it's actually the core business is performing just super well. So, I guess, we'll continue to kind of be conservative, but you guys are in a really good spot on the margin line, so okay. The other thing is just the impact of – you mentioned that the reinsurance market, you are seeing a little softening there, especially it sounds like in the large account side, but it's not passing through. But I think in your commentary, you mentioned it's not passing through yet. And so I'm just curious in your experience, how does this typically work when reinsurance comes off, when you begin to feel that in the retail side?
Cory Walker - SVP, Treasurer and CFO: Well, let me clarify, Greg. I've only been doing this for 23 years. So, unlike our Chairman, I don't have 60 years, 50 plus years to draw on, but I would say the following; when reinsurance rates go up or down, typically they don't pass through right away. And so, if you are talking to a primary carrier, they are going to say, we are bearing either more of that cost or less of that cost, and they can't pass it through, i.e. in an increase, so then if they can't – if they get a decrease they don't want to pass it through as quickly. I would answer the question little differently, what I would say is this I think that the rate market is moderating already. I think that, that will continue as a result of if primary carriers have downward pressure on reinsurance. I also think that if we do not have a large wind event this fall somewhere in the Gulf Coast, Florida or the Northeast that the E&S market will flatten and potentially go down in terms of rate slightly starting January of next year, that's not a negative for Brown & Brown, we can still grow when we are doing that, the answer is its creates lots of opportunity for us to do a good job for not only our existing clients most importantly but for new client that we don't already have. So, although some people say, wow, the rates are going down so, therefore the rates have to the reinsurance rates are going down and primary rates have to go down immediately. I believe there is always a lag, I think, there are other external factors. I think it is a very competitive environment and there is a lot of surplus. So, it's not just the reinsurance issue, Greg, that's going to moderate rates further.
Gregory Locraft - Morgan Stanley: And then if I can sneak one last one in just because you are sitting in the markets. Are you seeing Berkshire Hathaway yet, what are your thoughts on their initiative and anything you can help us as we think through them in the market that you care a share would be great?
J. Powell Brown - President & CEO: Yes, we are seeing – they started really open for business on 7/1. They have a talented team of leaders. They have an unencumbered balance sheet. As I understand, they don't have to buy reinsurance. So, all of those things in our opinion will lead to good things over a long period of time. There what I would. We consider them and we'll consider them a good trading partner, already do, and they're growing, and we look forward to growing with them. But as it relates to specifics, they have done, I don't know all the particulars, they've written some good accounts on 71 I understand. But I haven't seen them personally write much yet. But I think that in the coming months that I will and we will, so we look forward to it.
Operator: Adam Klauber, William Blair.
Adam Klauber - William Blair: Were audit premiums more positive in the second quarter versus the fourth or first quarter?
J. Powell Brown - President & CEO: I would say they're probably similar.
Adam Klauber - William Blair: Is momentum building or is it still just slightly positive?
J. Powell Brown - President & CEO: I think that it's more – I think it's more slightly positive. I think as I said in Q1 Adam, I think people generally feel better about the economy. But I think that people are cautiously optimistic about how they invest in their businesses. So, as I think I've said, the example I used in Q1, something close to this, if we need to buy a new $3 million machine, we may be reticent and may want to do some maintenance on that machine, rather than buy the brand-new machine and make sure that our business continues to grow as we anticipate a little longer before we go out and borrow the money to buy the $3 million machine, that's really what we're seeing. We're seeing uptick. If I made a broad statement, I think that you see sales outpacing payroll growth, obviously. I can't tell you how much but that's a broad statement. Some of the information that I shared this morning showed a similar one-for-one increase like in the west it is 5% to 8% – I think in the Midwest 5% to 8% increase is up and sales in payrolls. I think most of the places around the country though there is a little bit of a divergence there. So, sales are going to be up more than payrolls. People are slow to add new headcount. So, we are starting to see though continued positive on audit premiums, yes.
Adam Klauber - William Blair: Then as far as Arrowhead, clearly, they've had strong performance. Which programs are growing and is Zurich beginning to grow or is it a little too early for that to happen?
J. Powell Brown - President & CEO: Yes. The answer is we've been very pleased with some of our earthquake programs and some personal property programs in that area. As you know, we had a change in the auto program from a prior carrier to Everest, so that's coming back online. I would tell you that the Zurich is a great trading partner and we are working through a couple things that will help us enhance distribution in terms of they are totally committed to it, but I'm talking about ease of getting it done and so we are working through that. So, we haven't seen the growth yet organically that both groups would want, but we can see how to achieve it and we are working towards that.
Adam Klauber - William Blair: One last question. Organic in the benefits was that better or not as good as the overall organic in the retail area?
J. Powell Brown - President & CEO: Organic; we don't breakout the difference on benefits and other than benefits, but I would say that the growth in benefits was good.
Operator: Ryan Byrnes, Janney Capital Markets.
Ryan Byrnes - Janney Capital Markets: Just one quick question on obviously the retail organic growth you showed solid promise growth this quarter. Just trying to figure out with any kind of one-timers in there? And then secondly, obviously, it showed nice improvement quarter-over-quarter, should we expect that further in the back half of the year?
J. Powell Brown - President & CEO: Number one, relative to retail we are very pleased with the performance and Charlie Lydecker and the team has done a great job. And as you remember in Q1, Ryan, we said that retail operates in a range. Q4 of last year we did 5.4% organic in retail. Q1 we did 18 bps, now we've done 2.3%. Our budget see that retail can improve over the year but until we deliver it we don't believe it and so, I like to say show me first and so we are out trying to grow our retail business which as you know is now on a run rate about 57% of our revenue whereas it was 54% last year. As the economy continues to grow, the middle market economy we believe that we will see more positive growth in retail that we feel good about it.
Ryan Byrnes - Janney Capital Markets: And my last one is can you – is it possible to breakout the revenue coming from the Zurich and Everest programs in the quarter?
J. Powell Brown - President & CEO: No, but we can tell you what it is on annual basis because some of it is lumpy – I shouldn't say lumpy, but we haven't gone through an entire year. What I would tell you is Zurich is $20 million to $25 million annually and Everest is $7 million annually.
Operator: Brett Huff, Stephens Inc.
Brett Huff - Stephens Incorporated: Two quick questions. One, the contingents were a little bit higher than we thought, Cory or Powell, I'm not sure who wants to take this. But what is your sense of how the annual contingent number will look sort of over time? Should we expect the levels that we've seen in 1Q, 2Q and then I think, Cory, you articulated what you expect for 3Q and 4Q; is that a level that should be sustained assuming no big changes in losses?
J. Powell Brown - President & CEO: I think there is two ways to look at it, Brett. I think that's a fair assumption with a caveat and the caveat would be certain carriers were asked nicely to change to guaranteed supplemental commissions, and some of those that went to GSCs have now reverted back. In the reversion or reverting back you always want to know exactly how those contracts actually work. So, the way people have contingency or profit-sharing contracts might change. We don't know something, that's not like – I'm not trying to lead you to something. But I'm saying if, in fact, carriers change the way they pay those amounts, we don't anticipate that, but it is an important part of our business and we think about it a lot. And we think it aligns our interest and the insured's interest in our carrier partners, and we think that we can continue to do a better job in growing that; that's a goal of ours.
Brett Huff - Stephens Incorporated: Then were there any one-time costs associated with the acquisition in 2Q numbers, any closing costs or anything like that?
J. Powell Brown - President & CEO: Nothing material.
Brett Huff - Stephens Incorporated: Then last question from me. Powell, you talked a little bit about rates in your overview of the different regions. But in particular can you just tell us again how Florida units are looking? I think you said flat to up 5%. Any additional detail there just given how much of your revenue comes out of Florida?
J. Powell Brown - President & CEO: Here is the way I would break it out. If you go to Southwest Florida, that's Naples to Sarasota, the economy is still slow. Actually it's just kind of bumping along actually. If you go to Boca Raton on the East Coast to Miami, it's white hot. Construction, all kinds of things being sold, there is a lot of activity. If you go to Orlando and you talk to a contractor in Orlando, and the contractors in Orlando are generally starting to see good pipelines. Now, I qualify that remember pre-slowdown that 18 months of backlog, today, that's 9 months to 12 months. You talk to a contractor, they feel good about it, but remember if you had 2 years or 18 months, and it's only 12 months now, they don't feel it is good. They feel better, but they don't feel as good. In the north, from Jacksonville across the Panhandle I would tell you that generally business is better. So, the mindset of Floridians is very positive. It actually is always positive. But we know in Florida that we have a fine state, we have tax advantage state relative to personal income tax and we know then when all and you all are up there in the winter time working hard in New York City and far-off places in the north at 4.30 in the afternoon on a Thursday and February, it is going to be cold and dark and we know that it's going to be sunny and warm and probably 72 in Florida. So, people are going to be coming to Florida in the future and if anybody on the call wants to buy some real estate or insure something in Florida, we could help you.
Operator: Meyer Shields, KBW.
Meyer Shields - KBW: I don't if this is a question for Powell or for Cory, but can you talk about the margin compression in the services unit, is it related to the extra claim activity at Colonial?
Cory Walker - SVP, Treasurer and CFO: Sorry, could you repeat the very last extra what claim that, what was the last part of the question? Yeah, no, it wasn't, what we got is we had if you remember we have in-services we have two large work comp TPAs, two Medicare satisfied companies, one social security disability advocacy firm and one specialty flood claims business. So, in Q1 we had, obviously, a really big quarter. Two; this quarter, it's just like anything else, some of the business in some of those – the revenue in some of those businesses comes in, sometimes it's not as predictable. So there could be expenses incurred in Q2 that there is not an offsetting revenue yet, but that revenue may come in next quarter. So there's no magic to it, Meyer. I don't…
J. Powell Brown - President & CEO: Meyer, there is two small things. First of all, on the Claims Management, the margins shrunk a little bit because of the revenue of aberration and you can't remove costs as quickly as the revenues moved in that, and that's a little bit of that. The second thing is on our Social Security disability. They have been staffing up a little bit more in some additional cost, as they are planning to grow in some of the individual marketplace, and so their costs have increased slightly. So overall, there is only about margin compression of maybe $800,000 in that particular segment for the quarter over the previous year's quarter. So it's those two major areas.
Meyer Shields - KBW: From a different perspective, are you seeing any change in loss cost trend or loss cost inflation rates?
J. Powell Brown - President & CEO: The answer is, on a broad statement, no. Are we seeing that in regions? Yes. Carriers are addressing it differently in different regions, but on a broad basis, no.
Operator: Michael Nannizzi, Goldman Sachs.
Michael Nannizzi - Goldman Sachs: Just a quick follow-up, if I could. I'm just looking at Retail. So in the last couple of quarters, you've had decent organic growth, but margins actually either outpacing or very close to that level. How should we think about the relationship there, I mean, is that – what level of growth in retail do you think you need in order to continue to generate margin improvement?
J. Powell Brown - President & CEO: Michael, what we said basically is we can expand our margin when we have organic growth. Now, having said that, last year as you remember we had a one-time sales incentive that was an income event, that income event as you know was an additional 5% paid to retail producers who grew their book 5% or more over the prior year. So, we had a potential expense of up to $12.8 million and personally Cory and I both wanted to pay the $12.8 million. We ended up paying out $6.8 million, 53% of our producers participated in that payout and we were very pleased with the results. We said that if we knew what we knew now then we would have done it exactly the same way. Having said that, we do not have that five point expense in there and as we have said earlier and I like to say that I reserve the right to do what we think is necessary to grow the business in any way we see fit organically and profitably. Thus we have input or installed a new wealth creation mechanism that's the new SIP grants. And so once again that's a performance over a multi-year period that producers and others can participate in which creates wealth as opposed to income. And so the answer is I know there are other firms that say when we grow X we have Y expansion and we are not really saying you got to get to this point. The way I want you to think of it, Michael, is borrowing unusual expenses, we can have margin expansion when we grow our business organically, the more rapidly we grow our business organically, the better chance we have to rapidly expand our margins.
Michael Nannizzi - Goldman Sachs: And then, just one last one, I guess, on the grants you mentioned the July 1 grants. Have you talked about the sort of metrics or hurdles that either the company or the Beecher unit needs to achieve in order for those incentives to pay out. Have you discussed that?
J. Powell Brown - President & CEO: Well, the answer is we haven't gone into the specifics as it relates to Beecher, but suffice it to say that they have to grow dramatically on the top and bottom line to get that, hit those payouts which we fully think they are capable of doing and hope that they will, number one. Number two, as it relates to the traditional SIP grants, remember there are five-year measurement period which whether you are a producer, you are a leader of a business unit or an office or group of offices or you are a senior leader, everybody has component of that 50% for producers and leaders, a 100% for the senior leadership where it is on earnings per share growth, that's 7.5% compounded annually over a five year period. As it relates to the producers and the leaders in offices and multiple offices they have 50% of their grant based on either personal production as a producer or as a leader on growing the business organically, meaning the organic growth and operating profit growth. So that's typically the way the measurement periods work on SIP grants and also on the Beecher grants.
Operator: Elyse Greenspan, Wells Fargo.
Elyse Greenspan - Wells Fargo: I just had a couple of quick questions. So, just in terms of the organic growth, aside from the Colonial Claims businesses quarter, was there any kind of one-time items that you would point to that we shouldn't expect to continue?
J. Powell Brown - President & CEO: No. No, Elyse.
Elyse Greenspan - Wells Fargo: Then just within retail, it seems that some of the questions that you're kind of are looking for that to continue to improve throughout this year. I know last quarter, you had pointed to seeing the full year organic growth for '13 to exceed last year's growth number. Would you still say that that's the case as well?
J. Powell Brown - President & CEO: Yes.
Elyse Greenspan - Wells Fargo: Then just on the programs front, in terms of we've seen, obviously, some growth on the Everest and Zurich programs coming online. Are you guys looking at potential additional programs from here that you can potentially speak to similar in nature that we might see in the near term?
J. Powell Brown - President & CEO: Elyse, the short answer is I wish that we did. I know that we've been asked before is this a trend and I'd like to say that it would someday become a trend. But at the present time, I would want you and everyone else to think of the two businesses that we have picked up in automobile aftermarket and the Everest as one-time events. So, if we are fortunate enough to pick up others, then I still think that's a bonus. But the short answer to your question is no, there is nothing pending. Would we like something to be in the pipe? Sure. But these are very unusual. That doesn't mean that we are not talking to people, and we'll always talk to people, but that's not different than any other time in our evolution. But I would think of those two as isolated one-time events. We need to grow our business in programs organically, just like we are doing in other parts of our business, which we are, and we are excited about it, and we think that there are some neat opportunities going forward.
Operator: Josh Shanker, Deutsche Bank.
Joshua Shanker - Deutsche Bank: So I have two questions. This is really the same question, but where are we in terms of total commission volume generated by the State of Florida compared to where we were in 2007? And then what does that mean. It's hard to figure out with M&A and everything, what does that mean for the total commission pool outside of Florida?
J. Powell Brown - President & CEO: I don't have the 2007 number right here in front of me, but I am going to be pretty close, and I am going to look at Cory. I would tell you that $333 million of revenue last year out of the $1.2 billion were in Florida. Of that number about $168 million was retail. That means that the others were in programs, services and wholesale. That retail business, not all of that is domiciled accounts in Florida. They could be produced – they could be accounts in Seattle, Washington handled by offices in Florida, although that doesn't happen that often, it's very possible, number one. So, the services business is not nearly as contingent upon the economic swings and commission levels. The wholesale business is you got exposures and going back in four accounts from both sides of standard markets the wholesale and wholesale to standard markets. Then in programs, a lot of that business is all around the country. So, I think the biggest probably indicator would be what our total revenue in retail was in 2007, and so if I had to guess, and this is a guess, I would want to check this, pretty good guess, but $147 million. If I had to guess it's somewhere between...
Joshua Shanker - Deutsche Bank: Again what's the 2012 number you said?
J. Powell Brown - President & CEO: $168 million.
Joshua Shanker - Deutsche Bank: So still, we're still – I guess, I think in aggregate, if I had trends for about M&A, I think we're slightly behind in total commissions generated from where we would be I guess in 2007. Where do you think the missing gap is in terms of growth? How long do you think it would take you to fill in those gaps?
J. Powell Brown - President & CEO: So I know you know, Josh, that we had $188 million evaporate between 2007 and 2011. As we know, that's bigger than a lot of firms out there, most firms. So in places like Florida, if this is a Florida-specific question, I would point to – the first area I'd point to is every office that writes construction business. One of the reasons we try to give that nuance around construction is we kind of believe Florida is a little bit of a service based economy and it's a little bit of the field of dreams, a little bit. It's you will build it and they will come. As the economy slowed down, they stopped building and therefore people stopped coming. They stopped coming and then therefore they stopped building. Now we're starting to see that uptick in building. So you can have accounts that were x before in 2007 that went down to 0.3 of x, so 30% of what they were. Now they could be 55% of x. So, are they incrementally better? Sure, we think that they're healthier. But it's going to take potentially some time for them to get back, if they get back to that number and some of those people went out of business. So do we think about are we behind? I think that's a matter of opinion. Are we happy that the business went down $188 million? No. Did that impact other businesses? Yes. Do we think that we're positioned well to grow with our clients as they grow in their middle-market endeavors and upper-middle market? Yes. Are we writing a lot of new business? Yes. Are margins expanding? Yes. So we feel like a lot of those indicators Josh, are all pointing towards good things, as opposed to thinking, well, we're behind. By the way, on a combined basis, if you took last year's revenue with Beecher, we'd be at $1.3 billion and if you put $188 million on top, we'd be just under $1.5 billion, that's a wishful concept. But we believe that we're going to continue to grow organically with our existing clients and meet their needs and write a lot of new business, which translates into good organic growth.
Joshua Shanker - Deutsche Bank: Is your market share today higher than it was in 2007 for the State of Florida?
J. Powell Brown - President & CEO: I would say the answer – I don't know the answer to that. I would say incrementally, yes. We don't think about market share. We think about revenue dollars because we can only invest revenue dollars back into our business by hiring, retaining and rewarding top people, quality people across the entire platform and investing in new agencies.
Operator: We have no further questions in the queue. I would now like to turn it back over to Mr. Powell Brown for any closing or final remarks.
J. Powell Brown - President & CEO: Thank you, Kyle. We like to thank everybody today. We are very proud of our performance in Q2, and we look forward to talking to you after our Q3 performance. Hope you have a great day. Bye-bye.
Operator: This does conclude today's conference call. Thank you all for your participation.