Brown & Brown, Inc.
Q2 2011 Earnings Call Transcript

Published:

  • Operator:
    Good morning and welcome to the Brown & Brown Incorporated earnings conference call. Today's conference is being recorded. Please note that certain information discussed during this call including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature and reflect our current views with respect to future events including financial performance. Such statements are intended to fall within the Safe Harbor provisions of the Securities 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, a number of factors including those risks and uncertainties that have been or will be identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. With that said, I would now like to turn the conference over to Mr. Powell Brown, our President and Chief Executive Officer.
  • Powell Brown:
    Thank you, [Laura]. Good morning, everyone. We're calling in this morning from the Advocator Group in the Boston area and I'd like to thank [Mike Crow] and his team for doing a great job. We're going to have a board meeting here the next two days and are really excited about it. Markets in certain areas and certain lines of coverage are seeking rate increases. Most markets are not willing to lose a renewal. New business pricing continues to be aggressive. There is a pricing gap that continues between new and renewal pricing. We're pleased to announce that we've completed $47 million of annualized revenue year-to-date and now I'd like to turn it over to Cory for our financial report.
  • Cory Walker:
    Thanks, Powell. Our net income for the second quarter of 2011 of $37 million was down 10.2% from last year's second quarter net income of $41.2 million. Our earnings per share for the second quarter of 2011 of $0.26 is $0.03 lower than the $0.29 in the second quarter of 2010. The difference in the quarterly earnings per share results can be summarized in three areas
  • Powell Brown:
    Thank you, Cory. Florida retail was down on, one versus two, five last year. Property rates are down 5% to up 10%. Liability rates are flat to down 5%. Exposure units are generally flat to down slightly. Auto rates and work comp exposures are flattish. The most competitive pricing areas in Florida are from Jacksonville out into the Panhandle to Panama City or Pensacola. There are certain national markets that are willing to use their property capacity and they are very active in new business being written in Florida and there are certain regional markets that are also very, very active in new business. Florida retail, as a group, had a net decline of $451,000 for the quarter. However, last year in the second quarter, there was a $518,000 accounting adjustment to reduce our SAB 101 reserve for future policy cancellations. That did not have a corresponding adjustment in the second quarter this year, so thus when you aggregate all the individual offices, some were up and some were down, but the aggregate, there was a net positive growth of $67,000. National Retail, negative 8.1% versus negative 3.3%. In the southeast, excluding Florida, property rates are down 5% to up 5%. GL rates are typically flat to down 5%. Auto rates are flat. Work comp rates are flat to down 10% and exposure units typically are flat to up slightly on certain accounts. The marketplace, markets are looking for rate on renewals and a few of those carriers are willing to walk away if they cannot get a flat renewal. Most markets continue to be aggressive on new business and regional carriers are the most competitive. In the northeast, property, GL and auto rates are flat. We're seeing downward pressure on auto rates in North Jersey a bit. Work comp rates are flat to up 5% and basically exposure units in the northeast are flat to down slightly, construction flat to possibly up slightly in areas but the markets are saying they need slight increases. We're seeing low-single digit increases stick on some accounts. But, once again, no market wants to lose a renewal. In the Midwest, property rates are flat to up slightly and GL rates are flat to down slightly. Auto rates are flat. Work comp rates are up several percent and exposure units are typically flattish. In the construction area, GL rates are flat to down 10% and we have -- we're seeing bigger -- the payrolls bigger on contractors or some of ours down substantially in the Midwest. In Texas, coastal property rates via [ENS] markets are up 5% to 15%, yet certain standard markets want rate increases and others are gutting the pricing. Smaller standard market property is basically flat. GL rates are down 5% to 10%. Work comp rates are down 10% and certain national carriers are tightening up on their work comp position in Texas while the former state fund remains very competitive. That said, there were a handful of offices that experienced a unique set of circumstances that contributed to the vast majority of the downdraft in Q2 and I'd like to elaborate on several of those for your benefit. One office saw a former owner a number of years retired come back into the business and take several accounts. The result was a reduction of over $1 million of revenue and there's current litigation ongoing in this matter. Another office that writes employee benefits in a particular state for school boards has seen a dramatic impact on their business, down approximately $1 million plus due to
  • Operator:
    (Operator Instructions). Your first question comes from the line of Keith Walsh - Citi.
  • Keith Walsh:
    Can you talk a little bit about excluding Proctor within your book? When I think about the market now it seems prices are still soft but maybe decelerating, the decline is decelerating. Exposures seem to be a little better. So is there something going on with new business or retention, if you could just talk to that a little bit?
  • Powell Brown:
    Yes, now, I tried to -- we tried to give you a little color around in the National Retail scenario. You're correct in saying relative to several offices in our business right now we're seeing rates, depending on where you are around the country, rate pressure upward. Some areas of the country, as I said, appear in the Northeast. We're seeing it stick a little bit more. I'm talking excluding coast property, number one. We continue to see rates move around because nobody wants to lose a renewal. I alluded to in the Southeast outside of Atlanta and some of those areas that the carriers are willing to walk away on business if it goes below a flat renewal. We continue to write a lot of new business and in most of our offices we do not see a change in historical retention ratios. However, as I alluded to in one example in National Retail where we write a lot of business with large contractors, that office was dramatically impacted downward. They renewed all their business but the exposure units were down substantially. So it's very difficult to make a broad statement, Keith. But to try to make that, no, we continue to write a lot of new business and our historical retention ratios in most offices are the same.
  • Keith Walsh:
    Then just another on revenue, it seemed the trend heading before this quarter you had four consecutive quarters of just improving organic. I think the consensus out there was probably you guys were going to be flat to up the second half of the year and then this quarter throws a monkey wrench into that. It seems like -- I know you did a nice job explaining some of the things but is that now off the table for the second half of the year? Is this a new trend we're looking at or should we just go back to what we had been seeing previously?
  • Powell Brown:
    Well, let's go back to what we talked about in Q1. What we said was that obviously we were pleased with the incremental improvement in our internal growth rate, yet -- and I don't remember my exact terms -- we thought we would probably see more of historical performance between now and the end of the year. That was not broadly defined but knowing that there were some people on this call that thought because we were negative 1/1 that we were going to go positive in Q2. Cory and I, I thought, tried to articulate that we didn't think that because we haven't seen improvement in middle market as much as some people may have thought. I don't know if those people are on the phone or if somebody thought that on the call today. But thatโ€™s what my recollection was, Keith, relative to that.
  • Keith Walsh:
    So for the second half of the year we're still looking at probably a negative scenario.
  • Powell Brown:
    When we said in the first quarter that we thought we would be operating between now and the end of the year -- that was 90 days ago -- in a similar operating environment. We're sticking by that. So from a historical performance scenario -- Cory, do you want to allude -- ?
  • Cory Walker:
    Yes, Keith, I do think that the second half of the year will reflect something closer to what we saw in the first quarter as opposed to a slight aberration with a handful of our offices this quarter. Does that answer it?
  • Keith Walsh:
    It does. Then the last question just on contingents; if you could just remind us, what percent of your contingents are driven by profitability of [P&C] companies? It just seems like the outlook for 2012 has got to be reduced on the contingents at this point, if you could talk to that.
  • Powell Brown:
    Yes, well, I would say generally off the top of my head all of our profit sharing is based on profitability. That is always a function of it, Keith. There might be other criteria like persistency or new business or something like that. But the core foundation of profit sharing commissions really is profit sharing. So the fact that the loss ratios are going up, I think your assessment is correct that profit sharing in 2012 should be lower because the loss ratios are going up.
  • Operator:
    Your next question comes from the line of Mark Hughes - SunTrust.
  • Mark Hughes:
    The pricing gap between the new and renewal business -- you described that there still is a gap there -- how does that compare to say Q1 or Q4? Then through the last cycle, how does that normally trend when the markets start to firm up? Does that -- do those close entirely or what would you expect going forward?
  • Powell Brown:
    Well, I would say that it's similar to Q1 and probably similar to Q4. I think I said the last time on the call if you take in account that you get a renewal account and the account is -- the market is looking for a 4% rate increase and you negotiate it down to a 1% to 2% rate increase, if you took the same account, which you wouldn't, but if you took the same account and it was a different operation, meaning all the same exposure units, and you submitted it to the exact same carrier, I've said before that that could be priced 10% to 15% less than expiring. So, Mark, to your comment, depending on when a market changes, I normally think of property sort of leading the way. Can there still be a change in the new and renewal business pricing in a firming market? The answer is yes but the gap closes. In a perfect world, static state, you would think that would be the same. But the answer is the market is inefficient and that inefficiency is not bad but that inefficiency creates the opportunity for us to write a lot of new business and do good things for our existing customers. So have we seen that gap close? No, not yet.
  • Mark Hughes:
    Then, Cory, the expectation for the change in the earn out liability, should we normally assume that's going to be flat? Is there something about the trend in these recent acquisitions that would make us think that would be a positive number similar to this quarter?
  • Cory Walker:
    No, I mean, our goal is when we make the acquisition we have to predict what that earn out will be three years from the date of the original acquisition. So you've heard my diatribes before about how much noise this 141R creates. The fact of the matter, the only thing it really does matter is how good of a predictor we are of a date of acquisition. So in this case, our objective is always to be 100% accurate but you'll never be 100% accurate. But we always would hope that some -- half would be up and half would be down and net zero. In this particular quarter, there were situations where we had acquisitions that did perform better than we anticipated and there were an acquisition where it was an early termination because we wanted to combine the offices that move their earn out closer to their maximum. That's what created it. So in the future I would hope it would be lower but I tell you it is such that it's a very unpredictable number and it doesn't mean anything other than create noise. So all we do is highlight it for you and that's why we have it as a special line item. But the positive is that when it is a debit it does mean that the earn outs are doing better than what was originally predicted. But that's just a point estimate three years before it actually happens. So I would hope in the future it would be less but I can't assure that.
  • Operator:
    Your next question comes from the line of Mike Grasher - Piper Jaffray.
  • Mike Grasher:
    Just wanted to follow up on the exposures issue and just -- I know you've mentioned the large contractor account where they renewed everything but the exposure units fell. Is there any area or any line of business, I guess, where you were actually seeing exposure units accelerating across the board? Maybe accelerating is too strong but up modestly.
  • Powell Brown:
    Yes, I think that I wouldnโ€™t use the term accelerating. Are there areas of the country and classes of business -- and I think it's real specific to the office and what they are soliciting. So for example, if you went to our Atlanta office and you asked them about the contractors that they've worked on recently and/or their existing business, the contracting business has been down so low there that they're seeing slight increases on their accounts. Does that mean that their back close to where they were? Not even close. So there are stories, Mike, like that across the country but there's no -- when we go into offices I ask the entire team, all of our teammates in the office how many accounts to you see that have 25% exposure increases and very few hands will ever go up. When they do, they're unusual type of accounts. So I'll give you an example. I was in an office recently where one was a manufacturer of a medical product, an evasive medical product. That was the scenario. Their exposure units were up 25%. The next one was a technology company and then you start asking does anybody have 15% or 10% or 5% and most of the accounts are flattish. That's a very broad statement. So that's how we go into it on our renewal books and we talk to people in our offices about it but we're not seeing anybody expanding dramatically in terms of their exposure units.
  • Mike Grasher:
    Those are just on the renewal accounts you're speaking to there. How about just new business where they're establishing new accounts?
  • Powell Brown:
    Yes, in the new business you like to think that you may know a historical perspective on their exposure units and we may not know all of that up front. We get that in the process and, if we get it, for the underwriter up front. Some are growing and some aren't growing. But as a general rule I would say more are flat to potentially up or down slightly.
  • Mike Grasher:
    Then a second question would be around worker's comp reform. There's been numerous states that have enacted some sort of reform, be it positive or negative, for underwriters. But how does that impact your business and your approach to the market?
  • Powell Brown:
    Well, work comp reforms creates an opportunity for us. So you've heard us talk about in the past that in Florida -- we'll just use that as an example. In Florida there was meaningful tort reform in 2003 for worker's compensation. As a result, rates went down an average, compounded average of 60% plus since 2003. On January 1 of this year, Mike, as we've talked about before, rates went up I think an average of 7.8%. So that is an opportunity for us not only to do a good job for our existing clients but to work on new business and bring those solutions to our prospects. Couple that -- go to the other end of the United State, go to Washington State. Washington State is one of four monopolistic states left. In the state of Washington we talk about there was the possibility of meaningful reform and opening it up to the private market this year. That was defeated. It surprised us and it surprised a lot of other people. It was defeated by an effort led by several interest groups in the state of Washington. I just heard yesterday that the rates in Washington, I believe, are going up across the board 30% plus this year. Now, would that have happened in a private market? I tend to doubt it. So if, in fact, that market becomes privatized, then that, in turn, creates a great opportunity for us because we will go to our existing clients and new prospects and offer work comp solutions. So then you look at some place like California, which is always sort of the forefront of most of your [minds] relative to comp issues. What we're basically saying is -- I would say it carefully but I would say that there are markets that are getting religion and they are saying if you have bad loss experience you are going to not get the credits that you once got. If you have good loss experience you can still get flat to slightly down renewals. So that's a long-winded answer of saying, Mike, that we think that reform generally is an opportunity for us for our existing clients and new business.
  • Mike Grasher:
    Then I guess the final question I had just if you can give an update to the degree you will around the litigation with your former employees. Is that having any impact at all in the Florida business or with the [inaudible] impairment?
  • Powell Brown:
    No, no and no. But as you know, we don't typically talk about ongoing litigation. However, we currently have an agreement in principle with the individuals that you have discussed. But several of the substantive terms have not been performed, thus, we're not at liberty to discuss at this time in detail.
  • Operator:
    Your next question comes from the line of Matthew Heimermann - JPMorgan.
  • Matthew Heimermann:
    A couple of questions; first, just with respect to -- I know growth has been on the top of the mind for everybody, I guess, as we've gone through the Q&A roll today -- but I think originally you discussed 2011 being a transition year for growth. Certainly, the headwinds that you started the year with haven't really eased all that much. I guess if we were looking to 2012, what factors need to change to actually get you into the positive growth column? Is it a function of rates changing, just having a little bit more positive economic growth behind us? Just as you survey the landscape, what factors do you feel are most important to getting there?
  • Powell Brown:
    Yes, the most important factors by far, Matt, are exposure units. We have said before that the current rate environment, particularly in areas where you still hear us saying there are rate decreases or flattening, that's not -- we don't need the market to firm up and rates to grow organically. We just need to have a little bit better economic operating environment for the middle market customers across the country. So remember, we are a middle market agency broker firm that basically is paid by commissions. So we are still not seeing economic expansion in the middle market. That's the biggest single thing that impacts our business.
  • Matthew Heimermann:
    Just with respect to that, I mean, from the psyche of your clients right now, has that just come back to uncertainty with some of the issues we've talked about in the past in terms of healthcare legislation and what the actual implementation looks like. Is that just a function of maybe payroll or employee counts not coming back in the middle market maybe as significantly, not that they're significant anywhere, but not getting maybe the relief you might be getting at the large end of the market? Are those the factors that still we should think about in terms of maybe trying to gauge where we are on that front?
  • Powell Brown:
    Yes, I think that, number one, in the middle market clients of ours, there was not a dramatic shift optimism. There continues to be what I call a cautious view moving forward and you've heard us talk about the bunker mentality. I don't think that owner of a business has come out of the bunk yet. So that said, you will hear in our offices if you were to ask individual offices that you're seeing on some accounts expansion of business without adding new individuals or employees. So we have thought all along what we've read in national papers and here on the news up until about eight weeks ago -- maybe it was 10 weeks ago -- that the economy was doing better and everybody was feeling good and all that other stuff. The answer is we were scratching our heads saying we're not seeing that with our middle market customers and our new business prospects. So I think that it's not as though they went from bunker mentality to joy and optimism to back to the bunker. It was more they've been in a bunker the entire time, although it was just not as difficult but it's still a difficult operating environment but getting better. That's how I think that they view it.
  • Matthew Heimermann:
    Then just one of the things I struggle with just looking at the brokers visa vie some of the insurance underwriters is that for the last several quarters a number of the insurance underwriters have talked about premium [audit the] adjustments upward quite significantly in the work comp area and that doesn't seem to be a trend that you all have confirmed in your own commentary. So is there any color you could just add there because I guess I'm curious if work -- the reason Iโ€™m asking is just why the difference but also if work comp rates start to go up a little bit how material -- I guess I'm trying to gauge how material that is relative to payroll still not looking like they've expanded either?
  • Powell Brown:
    Right, first off, I'd say I think you're focused on the right thing, which is payroll as opposed to rate in the carriers and/or the broker segment, number one. Number two, I only worked three years as an insurance carrier in the beginning of my carrier, so my comments might be slightly off but my suggestion or commentary would be the following. If you ask in a normal year an insurance carrier what percent of additional premiums or what impact of additional premiums on worker's compensation what that impact has been to their total premium writings in the quarter, I would believe the answer will be somewhere between 2% to 4% positive. So 2% to 4% of the total premium written would be as a result of payroll audits. In this economic environment, my understanding in talking with people that we know at these firms is it's been the reverse. The reverse is basically down 2% to 4%. So what they may be saying -- and I don't know and you might inquire about those carriers in question -- is they may be saying that it's getting closer to flat or very slightly up. I don't know that and, see, it's funny because when you hear carriers say that they're getting rate on their commercial book of, let's just say, 2%, that's on their renewal book. But if they tell you what their new business pricing is, their new business pricing is still down substantially in terms of if you -- if they know the comparative on expiring, which most of the times they don't talk about that; some do but not all of them. So I think there's a 2% to 4% swing positive or negative as a result of premium audits and worker's compensation and I think -- my impression is that it's going back more towards flat as opposed to positive than it has been in the past.
  • Matthew Heimermann:
    Is it fair to say that in a normal -- when we've been in normal years in the past, when carriers have seen those audit premium adjustments, those aren't things that necessarily you would have seen -- are those things that would have -- I guess I'd be curious from a commissions standpoint, from your standpoint, is that stuff that you just capture up front and it doesn't really flow through to you? I'm just trying to understand.
  • Powell Brown:
    No, no, no, no, no, no, no. We capture it and it flows through to us. What I would tell you is you get the good with the good and you get the bad with the bad. So what I mean by that is in an expanding economy you get clients growing and then typically they are going to have net more premium audit positives, those would be called additional premiums, versus return premiums. That is actually put into our numbers and the growth of our business. On the flip side, when you have a shrinking economy, as we've been going through for the last several years, you get not only the down draft on your renewals of accounts but you get return premiums on top -- I call that the double whammy -- which is baked into the negative down draft. So we've said before that remember a lag on a work comp policy positively or negatively could be up to 14 months. You say, well, why? Well, if we renew your business, Matthew Heimermann, Inc, you're a manufacturer, today and you've renewed it and you have $10 million of sales and so we go 12 months down the road and actually you knew that you actually had another contract in the pipeline which was going to get you to $14 million but you just have had this bunker mentality. You've been very cautious about updating your payroll or your sales figures with us. So basically at the end of the exposure period or the policy period next year, the carrier will have 60 days to come in and do a premium audit. In doing a premium audit they will determine that Matther Heimermann, Inc, did $14 million in sales and they will send an additional premium. So you would pay the additional premium to us. We would get our commission. They'll get their premium. Conversely, in a shrinking environment, if you had said your sales were $20 million and when in actuality the market was going on your manufacturer product and now it's $14 million, they're going to have a return premium of that $6 million and we've got to give that commission back to the carrier on that.
  • Matthew Heimermann:
    I guess then the takeaway is that some of the comments we're hearing on positive adjustments of 2% to 4% just aren't representative of what you're seeing in the business overall. That's probably the takeaway.
  • Powell Brown:
    I think that's fair. I don't know how those statements were made but I find it unusual to say broadly speaking that somebody's comp book -- which, by the way, comp books in average have been -- they're heating up on the temperature; I call it running a slight temperature at about 114% combined ratio and expected to go towards 120% year end based on everything we can gather. So if the book is growing, even if it's growing and the temperature is going up, profitability may be in question.
  • Matthew Heimermann:
    Yes, and then -- sorry to take so long -- this one question for Cory is just -- and I've asked this one in the past, so I just wanted to know any updated thinking with respect to some of the maturities, the maturity this year and then just the capital structure in total from a maturity standpoint given that it still seems to be a relatively favorable environment to be an issuer.
  • Cory Walker:
    Matt, are you talking about our debt?
  • Matthew Heimermann:
    On the debt side, yes.
  • Cory Walker:
    Well, we've already got -- we had $100 million that's coming due in September and that's already been replaced with another debt from our provincial partners and the rates are going to go from 5.3% on the $100 million that's retiring down to 4.5%. So there is no other really change in our capital structure. We've got a lot of cash, so don't really foresee any significant change right now; looking just to make acquisitions.
  • Matthew Heimermann:
    Yes, no, I guess I was thinking more in the standpoint that I think your other maturity is 2016 and whether it made sense to -- even though you may not necessarily have a need burning a hole in your pocket whether or not just with the environment or whether it makes sense because you certainly have the capacity I think from a financial leverage perspective to maybe put another maturity out there.
  • Cory Walker:
    At this time, we're not talking about it just because we've got so much of ready cash and are not considering that until a bigger deal comes along.
  • Operator:
    Your next question comes from the line of Brett Huff - Stephens Incorporated.
  • Brett Huff:
    A question -- and I want to make sure that Iโ€™m hearing you right -- it sounds like rates, there's some room for hope on rates, which seems a little bit different than the past couple of quarters. If that's the case, even if it's small, and given that exposure units haven't changed much in the last couple of quarters, and it sounds like they won't in the next couple of quarters, why would the second half organic growth still look like the first quarter if rates are getting a little bit better? Or is that a wrong interpretation?
  • Powell Brown:
    I don't know if I think that's a wrong interpretation. I think that basically that as we've said if you consolidate my comments on the market you have a lot flack and down slightly I think in exposure units. There are some that are up slightly but we would say that I think that the expectation for our internal growth going forward is, as I said earlier, more similar to the historical range. As Cory alluded to earlier, we'd like to think that it would be closer to what you might have seen earlier in the year than what you've seen this quarter but that's our best estimate right now.
  • Brett Huff:
    Then as you guys looked at Proctor in '12, it sounds like you've been -- even though there's some shifting between quarters it sounds like your estimates -- you're still feeling pretty good about the $37 million or so in contribution there. Have you -- is there anything that's happening in Proctor that should change -- should cause the meaningful fluctuation as we go into '12 or are the rocky seas with Proctor behind us once we get done with this year?
  • Powell Brown:
    Don't think so, Brett. But that's an interesting space that -- and we like that business but there is a couple 800 pound gorillas that operate in that space that you always got to contend with from a competitive standpoint but we're not aware of anything right now that we would need to give additional color on.
  • Brett Huff:
    The last question on comp, the comp number I thought was -- it came in better than we expected. I'm sure part of it was because the revenue was lighter than we thought. But any thoughts there on containing cost as -- are we seeing more competition for talent? Has anything changed meaningfully there that we should think about in terms of escalating cost going forward?
  • Powell Brown:
    No, I donโ€™t think so. I mean, remember, we want to get the best people on the team and we're looking to add teammates in terms of revenue producing teammates through both M&A transactions and hiring them from other industries and teaching them the insurance business. So, no, but we're very focused on high-quality people on a team, getting them, keeping them, retaining them, training them.
  • Brett Huff:
    Then last question, it seems like you guys are - I feel very strongly that you guys are running leaner than you have maybe ever in the past. When rate and/or exposure units goes up, how should we think about your margin versus historical margins?
  • Powell Brown:
    We believe that we can go and approach back our historical operating results and may be able to exceed those. But, once again, what we're trying to do is grow our business and obviously we did not grow our business internally this quarter and so it's something that we're focused on and we think that we have the discipline to drive the results in a normal operating environment.
  • Operator:
    Your next question comes from the line of Meyer Shields - Stifel Nicolaus.
  • Meyer Shields:
    Powell, can you talk to us a little bit about what's actually driving the relative outperformance in wholesale because I hadn't heard a lot of the quasi specialty business moving back to the [ES] markets and Iโ€™m wondering what's actually [inaudible].
  • Powell Brown:
    Yes, I think there's two things. One, as you know, coastal property rates are up as I said 5% to 15%, so that helps. Two, depending on the market, be it brokerage or binding, the uncertainty/confusion that is surrounding RMF11 is creating some opportunities for us. What I mean by that is there may be scenarios where in an open market, if you want to call it that, and binding authority, there will be lots of binding authority markets that will be quoting our renewals. Whereas, if RMF11, if the company is saying just wait until we figure it out, they may not -- the competition may not be able to quote a renewal on it, number one. Conversely, if we have a market that's open, is not confused and we are writing more potentially new business or taking it from a market that is sort of in a state that is trying to figure it out, there's still just a lot of competitive forces at play, which we think are very positive for us and are really pleased with all the teammates and the wholesale division, everything they're doing. But it's a combination of rate pressure on the brokerage property, RMF11 in a very broadly defined term and I know you don't want to hear that and we don't either but it is amazing how one -- I'm going to call it one Monte Carlo simulation model can drive so much confusion or create so much opportunity.
  • Meyer Shields:
    [Inaudible].
  • Powell Brown:
    Right, but like I say, if a rating agency places a lot of value in the model, then somebody's forced into using it.
  • Meyer Shields:
    No, that's absolutely true. Cory, is there any rule of thumb connecting the outperformance of newly acquired agents in a quarter and the adjustment to the earn out?
  • Cory Walker:
    It's not a quarter-by-quarter phenomena. It's over the whole period of time. So, I mean, we've not made any specific tie-ins because out of all the acquisitions we do, some are doing better than our original projections and some are doing a little bit worse. They generally, we hope, average out. This particular quarter it just went the other way. They did better but I don't think it's necessarily something that's as predictable. We try to make it as good a faith effort as possible to try to predict a point in time three years down the road on the earn out and just naturally it's going to change. So generally we feel like we get the best acquisitions because we focus on the people. So generally they do pretty well. But I'm not sure exactly how to answer your question.
  • Meyer Shields:
    I think you are. There's not enough relationship on an individual quarterly basis.
  • Cory Walker:
    Yes, I mean, the unfortunate thing is that that particular line item is nothing but noise because the only thing it's measuring is how good a predictor we are at the time we make the acquisition and so you know my feelings on that one.
  • Meyer Shields:
    [Inaudible] if I can, when we look at other income, for the first three quarters of 2010 it was above $1 million and it's come down. I understand that that's related to let's say litigation in many cases. Should we expect the first and second quarters to be a good run rate for the next Q?
  • Powell Brown:
    Well, not necessarily. I think it will probably be slightly up in the second half. As a general rule, you can look at between $400,000 to $600,000 as the normal baseline, which is additional rent, income that we might have and other operating income that is normal. Anything outside that $400,000 to $600,000 range is something that is a one-time occurrence, either a gain or loss on a sale of fixed assets or a book of business or a litigation settlement. But as a general rule I think you'll see that number be higher in the second half than it is right now for just this year. But, again, it's not quite susceptible to accurate prediction as our normal operations.
  • Operator:
    Your next question comes from the line of Adam Klauber - William Blair.
  • Adam Klauber:
    Sorry if you said this before, but what was the organic this quarter of the benefits versus the second quarter last year?
  • Cory Walker:
    It was -- you're talking about our services division.
  • Adam Klauber:
    Yes.
  • Cory Walker:
    That was we were negative 0.8% versus negative 0.3% in the first quarter.
  • Adam Klauber:
    Could you give us some color? What's going on with benefit commissions as far as the new healthcare legislation? Is that having an impact?
  • Powell Brown:
    The answer is it is, Adam -- I would categorize it as very regional in nature. So you might have something going on in south Florida that might not be going on exactly in Texas versus in Phoenix versus in southern California. It might all be a little different on how the carriers are addressing it. But a couple things that we're seeing
  • Cory Walker:
    Now, Adam, I wanted to clarify something because when you started the conversation about the internal growth rate what I was giving you was the internal growth rate of our service division. Everything that Powell was just talking about, the employee benefits and the healthcare, those are all embedded in our retail division. So the service division is primarily the TPA services, our social security set aside groups as well as our social security disability advocacy group.
  • Powell Brown:
    Medicare set aside.
  • Cory Walker:
    So those internal growth rates I gave you in the first part didn't have anything to do with the employee benefit healthcare side of it.
  • Adam Klauber:
    One final question, could you give us an update on citizens? With the new legislations, are homeowners' rates coming up or is it a little too early to actually see the impact of that?
  • Powell Brown:
    Well, remember, when we talked about it last time, the issue where the rates will go up are around the sinkhole legislation, Adam. I haven't seen it yet but I know that it's going to be occurring if it's not already occurring. But the bigger issue that we talked about and I've been asked about before is the A rating of the larger properties. What we said on Q1 was that we thought that the governor was going to call the legislator back in for special session and basically address that head on and increase rates another 10% on commercial-residential properties, so think condos, apartments, certain assisted living facilities. That has not occurred. So that's surprising to us because in facilities like QBE -- in FIU, which we write on QBE paper, their big competition has been historically citizens and, to a lesser extent, the excess and surplus lines market, which is continuing to be what we alluded to, I think, in Q1 is as the rates for citizens go up the competition that citizens was presenting will probably be supplanted by the E&S market.
  • Operator:
    Your next question comes from the line of John Fox - Fenimore Asset Management.
  • John Fox:
    I'm a little unclear on the impact that Proctor had this quarter, so could you just go through that on the internal side?
  • Powell Brown:
    Proctor this quarter was down $2.4 million in revenue this quarter and we had said to everybody that we thought they were going to be down about [$500,000] and then be down about $2.8 million in Q3. That's what we said in Q1. So going forward, they were down $2.4 million and we're saying in Q3 we think they're going to be down somewhere between $1 million and $1.5 million.
  • John Fox:
    That's in special programs.
  • Powell Brown:
    That's in special programs.
  • John Fox:
    Then I think for Cory, do you have an estimate, Cory, for cash payments s you'll make this year for earn outs?
  • Cory Walker:
    Well, year-to-date we've made cash payments roughly of about $86 million. So the second half of the year, it will be up, will be equivalent to the $86 million. It's going to be somewhere $130 million to probably $140 million right now. But we've got $86 million year-to-date.
  • John Fox:
    I'm sorry, that's for earn outs or for acquisitions?
  • Cory Walker:
    That's for total acquisition cost.
  • John Fox:
    Right. I was looking for just the earn out piece, which was $358,000 in the first quarter.
  • Cory Walker:
    Well -- .
  • Powell Brown:
    Is he talking about -- ?
  • Cory Walker:
    I don't know if we -- .
  • Powell Brown:
    $358,000?
  • John Fox:
    Yes, it's in the financing section of cash flow statement. I'll just call you back on it. That's okay.
  • Cory Walker:
    Yes, I mean -- .
  • John Fox:
    The total amount acquisitions and earn outs is $86 million.
  • Cory Walker:
    That's correct.
  • Operator:
    Your next question comes from the line of Dan Farrell - Sterne Agee.
  • Dan Farrell:
    Just you mentioned the M&A environment, you still feel that the pipeline is looking good. But could you talk about the competitive environment in terms of closing deals and any -- where pricing of deals are right now?
  • Powell Brown:
    We think that pricing on deals remains in the historical range that we've talked about before. Relative to that -- and that's typically six to seven times an operating profit definition. Everybody can define it a little differently. We define it EBIT A as on our definition because there's very little D. But as it relates to a pipeline and then the sourcing of deals, what we said is we meet with lots of people and talk to them about Brown & Brown and talk to them about their business and try to figure out if there's a cultural fit. For every 10 firms that we meet with there is a group of them, maybe five let's say, five or six, that up front you can probably determine there maybe is just not a fit. That's okay because you want to learn that up front. But of those that we determine that there's a fit, let's make this easy for the math purposes, if we had four that we were going to give term sheets to, typically we get two of those plus or minus slightly. So let's say we have 50% quoted or offered to close ratio. So we feel like acquisitions, as we've talked about in the past, go in waves. You can plant seeds today and that's going to bear fruit six years from now or it could be 90 days from now. Just using the current location as an example, I can tell you that we at Brown & Brown met [Mike Crow] and his team four years ago and we met and thought very highly of him but it was just not an opportunity at the time to do a transaction, so we did a transaction here last fall, in September, as you know, so what happened? Well, they continued to grow their business. We stayed in touch and over a three-year period continued to foster a deeper, better relationship. [Mike] and his team continue to grow and prosper and then we figured out a way to make it obviously mutually beneficial and they joined our team in September. So every deal is a little different, Dan. But I think the important thing is we want to be out talking to people all the time, which we are and we're focused on doing this for a long term. As you know, there's really, we call it, four types of buyers in this space. You have people like us and some of the other publicly traded firms that have a history and have done it for a long period of time, have a defined culture and it's a long-term play, a long-term investment and operating environment. Two, you have banks. We've said that we believe that banks in aggregate are net sellers of insurance assets. We obviously closed on one this last quarter. It seems to us that Wells and BB&T are the only two banks that are committed long term to the insurance space. That assumes that they don't change their mind on their view on insurance for whatever reason and then they might sell it. Or if there was a regulatory environment change such that they couldn't own it in the future, that might change it. The third would be private equity. Private equity, as we all know, is short term in nature. I would say three to seven years. We all know that you can't define and develop a very significant culture in that short period of time. So that's going to attract a different type of seller as well. The finally, it would be, I call it, the cross town rival, which is the smaller, local or regional agency that has probably been competing head to head with that firm and then do they ultimately come together. That's a possibility. But ultimately, one of the good things about Brown & Brown, we believe and our acquisition strategy and this is pretty commonly known about Brown & Brown is there are three things that we say with certainty. Number one, we pay with cash; hard to argue with green backs. Number two, we do what we say and say what we do, ie when we give a term sheet and we do due diligence we don't start negotiating from there. We stick to the original terms and conditions. Three, we can close quickly because we have everything done in-house. Having said that, that's an observation of ours. That's not a criticism of anybody else's but I think that's pretty widely known about us out there and it's something that we're proud of because we view ourselves as operators that do a lot of -- we happen to do a lot of acquisitions as opposed to the alternative.
  • Operator:
    There are no further questions in the queue at this time. I would now like to turn the conference back over to Mr. Brown and Mr. Walker for any additional or closing remarks.
  • Powell Brown:
    Thank you, [Laura], and we appreciate everybody's time and have a wonderful day. We'll talk to you next quarter.
  • Operator:
    Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.