Brown & Brown, Inc. (BRO)

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Brown & Brown, Inc. (BRO)

Q3 FY08 Earnings Call

October 21, 2008, 07:30 AM ET

Executives

J. Hyatt Brown - Chairman and CEO

Cory Walker - Sr. VP, Treasurer and CFO

J. Powell Brown - President

Jim Henderson - Vice Chairman and COO

Analysts

Keith Walsh - Citigroup

Michael Grasher - Piper Jaffray

Nikolai Fisken - Stephens Inc.

Mark Hughes - Suntrust Robinson Humphrey

David Lewis - Raymond James

Keith Alexander - JPMorgan

Presentation

Operator

Good morning and welcome to the Brown & Brown Incorporated Earnings Conference Call. Today's call is being recorded. Please note that certain information discussed during this call including answers given in response to your question 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 and that such statements are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties that has 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.

Listeners are cautioned that any such forward-looking statements are not guarantees of future performance. And those actual results and events may differ from those indicated in this call, such differences maybe material.

With that said, Mr. Brown, I will now turn the call over to you.

J. Hyatt Brown - Chairman and Chief Executive Officer

Thank you very much Elizabeth. And we have Jim Henderson; and Cory Walker; and Powell; and myself. And so, we're going to start off with Cory. It's all yours.

Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer

Thanks Hyatt. Well, an honor of Yogi Berra, its Déjà vu all over again, relatively to our third quarter earnings statement two respects. The first; it's the same that you there... that you saw when it was inadvertently released a week ago. And two; the net results are very similar to results of the second quarter.

Our net income for the third quarter was $40.6 million, which was down 12.2% from last year's third quarter. Correspondingly, our net income per share for the quarter was $0.29, down from $0.33 earned in the third quarter of 2007.

From a revenue standpoint, commissions and fees for the quarter increased 8.1% to $243.8 million. That is up from $225.4 million last year. As part of total commissions and fees in the third quarter of '08, we received $9.7 million of profit sharing contingent commissions and as compared with $8.9 million that we received in the third quarter last year. We estimate that we will receive of an additional $1 million to $2 million of profit sharing contingent commissions in the fourth quarter.

Now looking at the internal growth schedule, somewhere to the past six quarters, we had a negative internal growth rate. However, this quarter we're slightly better at only a negative 5.1%. Our total core commissions and fees which exclude those profit sharing contingent commissions for the quarter increased 9.3% or $19.9 million of total new commissions and fees. However, within that net number was $30.9 million of acquired revenues.

That means that we had $11 million less commissions and fees on a same-store sales basis. As the internal growth schedule indicates the vast majority of the negative internal growth dollars are from a broad based impact on our retail and wholesale operations. Hyatt, Jim and Powell will talk about the activities in each of these business segments in a minute.

Moving on to our investment income, it decreased by $2 million primarily due to lower interest rates and less investable funds due to our increased acquisition activities. For other income, we had approximately $2 million in the current quarter. In the third quarter of last year, we had $8.6 million of other income, which was primarily due to gains on the sales of various books of businesses. This decrease of $6.6 million in the other income revenue accounts, it accounts for almost 80% of the $8.3 million of the total reduction in our pre-tax income of the current quarter when compared to last year's third quarter.

As it relates to our expenses in pre-tax margins, our pre-tax margin for the third quarter was 27.2% compared to last year's third quarter of 31.8%, a reduction of 4.6 percentage points. As we've mentioned on previous quarterly earnings conference calls, as long as we remain in the soft market cycle that creates the negative internal growth we'll probably continue to see some margin compression.

In the current quarter, employee compensations and benefits increased 2.9 percentage points to 49.5% of total revenues, or an increase of $11.7 million of total dollars. If you look at just employee compensation and benefit that relate to just new acquisitions that are standalone by themselves since October 1st, they account for actually $13.4 million of total employee compensation and benefit charges versus the net of $11.7 million.

So therefore, just the opposite on a same-store sales basis actually had a net reduction in employee compensation of about $1.7 million. Now that's compared to the revenue decrease on those same existing office is about $7.7 million of commissions and fees and about $16 million of total revenues, when you look at other income and that is the main reasons why the margin compression occurred on that line item.

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