Brown & Brown, Inc. (BRO)

BRO 
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Brown & Brown (BRO)

Q4 2008 Earnings Call

February 17, 2009 8:30 am ET

Executives

J. Hyatt Brown - CEO

Cory Walker – SVP & CFO

J. Powell Brown - President

Jim Henderson - COO

Analysts

Mark Hughes - SunTrust Robinson Humphrey

Keith Alexander – JPMorgan

Eli Leminger – Stifel Nicolaus

Nikolai Fisken - Stephens Inc.

Unspecified Analyst – RBC Capital Markets

Michael Grasher - Piper Jaffray

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 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 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 that actual results and events may differ from those indicated in this call, such differences may be material.

With that said, I will now turn the call over to Mr. Hyatt Brown, Chairman and Chief Executive Officer.

Hyatt Brown

Good morning everyone, we have Powell Brown and Jim Henderson and Cory Walker here and we’re going to lead off with Cory for the financials.

Cory Walker

Thanks Hyatt, our net income for the fourth quarter was $33.4 million which was slightly more then the $33 million we earned in the fourth quarter of 2007. Total revenues for the quarter were up 6.8% to $232.1 million versus the $217.2 million in the fourth quarter of 2007.

Commissions and fees for the quarter also increased by 7.8% or $16.7 million of net new commissions and fees. Total core commissions and fees which excludes profit sharing contingent commissions for the fourth quarter of 2008 increased $15.8 million over last year. However within that net growth number is $25.7 million of revenue from acquisitions.

The good news is that we had another excellent year in terms of acquisitions. The bad news is the continued soft market and now the weaker economy that created another quarter of negative internal growth in the core commissions and fees.

The net loss of $9.9 million of core commissions and fees on a same store sales basis reflects a negative 4.6% overall internal growth rate but that’s an improvement from last quarter of negative 5.1%. The specific internal growth rates by business segment is listed in the press release and Hyatt and Powel and Jim will talk about that in a little bit.

Moving to our investment income we earned $1.7 million less in 2008 fourth quarter compared to the 2007 quarter and that’s exclusively due to the financial market meltdown that caused us to move most of our cash investments into the safest available vehicles that carried little or no interest returns.

Other income was $1.3 million compared to $1.4 million last year and again most of these gains relate to sales of various books of businesses that we do in the normal course of operations. Our pretax margins for the fourth quarter of 2008 was 23.4% compared to last year’s fourth quarter margins of 24.6%, that’s a reduction of 1.2 percentage points. As we’ve mentioned in previous quarterly earnings calls, as long as we’re in a soft market that creates a negative internal growth you will see slight margin compression.

Looking at the employee compensation and benefits it increased 1.8 percentage points to 52.5% of total revenues and that represents $11.7 million of net additional costs over the prior year comparable quarter. The employee compensation and benefits relating to just the standalone acquisitions that we’ve done during 2007 and 2008 that weren’t there in the comparable quarters, that accounted for $11.1 million of that $11.7 million. Therefore on a comparable same store sales basis, we had an aggregate net increase in same store sale compensation of only $631,000 which is really more then accounted for by just the fold in acquisitions we did that go into the normal operations, Brown & Brown offices, that is not included in that $11.7 million I was talking about.

As of the end of 2008 we did have 5398 full time [equivalent] employees, 489 of those employees came from the 2008 acquisitions and so when you compare it to the 5047 employees that we had at the beginning of the year, we actually had a net reduction of employees in the offices that existed at both year ends of 138 employees. The one area that we do not reduce is for new salaried producers that we are constantly bringing into the company to train.

The cost of salaried producers generally increase each quarter and this quarter it was $1.3 million more then the fourth quarter of 2007. Our noncash stock based compensation cost was $1.8 million in the fourth quarter of 2008 which is an increase of approximately $400,000 and that is due to the new performance stock plan grants and incentive stock options that were granted in February and April of this year. In the current quarter our other operating expenses decreased by 0.9 percentage points to 15.2% of total revenues which represents approximately $400,000 in net additional cost over the prior year quarter.

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