Brown & Brown, Inc. (BRO)

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Brown & Brown (BRO)

Q4 2012 Earnings Call

February 04, 2013 8:30 am ET


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

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


Gregory Locraft - Morgan Stanley, Research Division

Sarah DeWitt - Barclays Capital, Research Division

Brett Huff - Stephens Inc., Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

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

Raymond Iardella - Macquarie Research

Mark A. Dwelle - RBC Capital Markets, LLC, Research Division

Justin C. Maurer - Lord, Abbett & Co. LLC



Good morning, and welcome to the Brown & Brown, Inc. 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 further results and events or otherwise be forward-looking in nature and reflect our current views with the 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 risk 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 risk 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 discussions 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 call over to Mr. Powell Brown, our President and Chief Executive Officer.

J. Powell Brown

Thank you, Rochelle. Good morning, everybody. Our goals in 2012 were to grow organically and incrementally improve quarter-over-quarter. We're pleased with our fourth quarter results of 5.4% internal growth. We had positive organic growth in all 4 divisions of Brown & Brown.

And with that, I'll now turn it over to Cory for our financials.

Cory T. Walker

Thanks, Powell. It was a very good quarter. Our net income for the fourth quarter of 2012 of $42.6 million was up 16.8% over the fourth quarter last year. Correspondingly, our net income per share for the quarter was $0.29, and that's 16% up from the $0.25 from last year's fourth quarter. But really, more importantly, when you exclude that ridiculous line item, change in acquisition earn-out liability, our net income per share for the fourth quarter of 2012 was $0.30 versus $0.23 from last year's fourth quarter, and that's a nice 30.4% increase.

From the revenue standpoint, our commissions and fees for the quarter increased 24.4%, to $30.3 million (sic) [$300.3 million]. That's up from the $241.4 million in last year's fourth quarter. Included in our press release, as always, is our normal table that summarizes the total growth rates and the internal growth rates from the core commissions and fees, which excludes profit-sharing, contingent commissions and the guaranteed supplemental commissions, the GSCs.

We did receive $6.3 million of profit-sharing contingent commissions, which represents a net increase of approximately $1.5 million from the $4.8 million that we received in last year's fourth quarter. The vast majority of this net increase was from our FIU operations. Additionally, we accrued $1.9 million of guaranteed supplemental commissions in the fourth quarter, which is $522,000 less than the $2.5 million that we accrued last year in the fourth quarter.

Referring to the internal growth schedule, we had a positive internal growth rate of 5.4%, as Powell mentioned. For the fourth quarter of 2012, our total core commissions and fees increased 25.7%, or $59.6 million of net additional core commissions and fees. However, within that net number was $47 million of acquired revenues. That means that we had $12.7 million more commissions and fees on a same-store sales basis. The real strength of this internal growth is the $7.8 million -- of that was the $7.8 million of the $12.7 million was generated from our Retail division.

Our wholesale division continue to have strong new growth, with $3 million, which translated into an 8.3% internal growth rate for the fourth quarter. The services division had an excellent quarter also, and it was primarily due to our flood claims operation called Colonial Claims. Colonial's internal growth rate was $1.6 million of the division's $1.8 million total. It's important to note that Colonial Claims joined us on December 23, 2011, so this internal growth rate only reflects the last 8 days of 2012.

Relative to our ARROWHEAD's operation, we have treated their entire operation during 2012 as acquired operation, and thus, they are not reflected in our internal growth numbers. However, on a standalone basis, their internal growth rate for the fourth quarter was 24.1%, but that included $4.5 million of new revenues that were generated from the new Zurich auto aftermarket program that was started in October. Excluding the auto aftermarket program, their standalone internal growth rate was 6.8%, and this growth came primarily from the earthquake DIC program, the personal property program, and the workers' compensation program.

Now moving on, both our investment income and other income had minimal decreases, around $100,000 each. Our pretax margin for the fourth quarter of 2012 was 22.9%, and that's compared to our pretax margin of 24.5% in the fourth quarter of 2011. However, when you exclude the line item change in acquisition earn-out payables, the 2012 fourth quarter pretax margin is 23.4%, and that compares to 23.3% in last year's fourth quarter.

Employee compensation and benefit as a percentage of total revenues was 52.3%. That's a decrease from the 53.0% cost factor in the fourth quarter last year. The total dollar increase in employee compensation and benefits was approximately $29.1 million, of which $23.5 million was attributable to the new standalone acquisitions that we acquired since last year. Therefore, excluding the impact of these standalone acquisitions, we had $5.6 million of additional compensation on a semi-same-store sales basis.

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