Brown & Brown, Inc. (BRO)

BRO 
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Brown & Brown (BRO)

Q1 2013 Earnings Call

April 16, 2013 8:30 am ET

Executives

J. Powell Brown - Chief Executive Officer, President and Director

Cory T. Walker - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Sarah DeWitt - Barclays Capital, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Raymond Iardella - Macquarie Research

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Brett Huff - Stephens Inc., Research Division

Al Copersino

Elyse Greenspan - Wells Fargo Securities, LLC, Research Division

Ron Bobman - Capital Returns Management

Presentation

Operator

Good morning, and welcome to the Brown & Brown, Inc. 2013 First 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 future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the first quarter of 2013. Such statements are intended to fall within the Safe Harbor provisions of the securities law. Actual results or events in the future are subject to a number of risk and uncertainties, and may differ materially in 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 is financial results differ from these current preliminary unaudited numbers set forth in the press release issued yesterday, other factors that the company may not have currently identified or quantified, and those risks and uncertainties 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.

We disclaim any intention or obligation to the update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

J. Powell Brown

Thank you, Celia. Good morning, everyone. We're very pleased with our 10.2% organic growth in Q1. This shows the contributions of all of our divisions and our consolidated margins expanded, and it shows we believe a positive trend for the future. Now I'd like to turn it over to Cory for our financial report.

Cory T. Walker

Thanks, Powell. We did have a very, very good quarter, and our net income for the first quarter of 2013 was $60.1 million, and that's up 21.6% over last year. Correspondingly, our net income per share was $0.41, and that's 20.6% over the $0.34 we earned last year. Now if you draw a line through the change in estimated acquisition earn-out payables, which was an expense of $1.5 million versus 388 last year, we really made $0.42, and that's compared to $0.34, which is really a 23.5% increase. So very nice.

From a revenue standpoint, commissions and fees for the quarter increased 12.6% to $333 million, and that's up from the $296.5 million we earned last year. And of course, as always, in our press release, we have a table that summarizes our total growth rates and the internal growth rates from our core commissions and fees, and that excludes our profit-sharing contingent commissions, as well as our guaranteed supplemental commission, the GSCs.

For the quarter, we received $25 million of profit-sharing contingent commissions, and that's approximately $818,000 more than we earned last year in the first quarter. If you look at the breakdown of that $818,000, our Retail division increased their profit-sharing contingent commission by $3.7 million, and the wholesale brokerage division increased theirs by $500,000. Those are both as a result of basically better loss ratios from our insurance carriers. And on top of that, the impact from the Superstorm Sandy really was not as big of an impact as we had feared.

Now those increases then were offset by $3.8 million in less profit-sharing contingent commissions in our National Programs division, and that's primarily due to our Proctor Financial operations. Looking at how much profit-sharing contingent commissions we're going to receive for the rest of the year, based on kind of what we've seen so far and what we've talked to our carriers about, we think we will receive about $17 million to $20 million more of contingent commissions through the next 3 quarters.

Now on an estimate of kind of where that's going to fall out, we think that we might receive between $5 million to $6 million in the second quarter, $10 million to $11 million in the third quarter and then maybe another $2 million to $3 million in the fourth quarter. Now, additionally, we did accrue in the first quarter this year $2.2 million of GSCs, and that's about $370,000 less than the $2.6 million that we accrued the first quarter of 2012. And of course, this reduction is in line with the fact that several carriers that used to pay us GSCs have switched their contracts back to profit-sharing contingent commissions, and so we'll -- that accrual basis of about $2.2 million should probably carry forward for the next 3 quarters.

Now looking at the internal growth schedule. We did have a very nice a positive internal growth rate of 10.2%. For the first quarter of 2013, our total core commissions and fees increased 14.5% to $38.8 million of net additional core commissions and fees. However, within that net number was $11.5 million of acquired revenues, and that means that we had $27.3 million more commissions and fees on the same-store sales basis, and the most important aspect of that is that all 4 of our divisions had positive internal growth, and Powell will get into the activity of each of those business segments in a minute.

Looking at our investment income, it was relatively flat relative to 2012. Our other income decreased by $4.8 million, and that was due to the fact that we had -- in last year's first quarter, we had $3.1 million of gains on certain sales of books of businesses. And we also had last year $2.2 million of settlements from the enforcement of our non-piracy agreements, both of those which did not reoccur this quarter.

Jumping down and looking at our pretax margin for the first quarter of 2013. It was 29.7%, and that's compared to last year's first quarter pretax margin of 27.4%. Our employee compensation and benefits as a percent of total revenue was 47.6%, and that's a decrease from the 49.5% cost factor in the first quarter of 2012. The total dollar increase on a net basis in employee compensation and benefits was approximately $9.9 million. That's about a 6.6% increase, of which about $2.2 million of that was attributable to just new standalone acquisitions. Therefore, when you exclude the impact of the standalone acquisitions, we had about $7.7 million of additional compensation, and it's kind of on a semi-same-store sales basis because that does include some of the fold-in acquisitions.

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