Brown & Brown, Inc. (BRO)

BRO 
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Brown & Brown, Inc. (BRO)

Q2 2009 Earnings Call

July 21, 2009 8:30 am ET

Executives

J. Powell Brown - President

Cory Walker - CFO, Sr. VP and Treasurer

Jim Henderson - Vice Chairman and COO

Analysts

Mark Hughes - SunTrust Bank

Dan Johnson - Citadel Investment Group

Keith Alexander - JP Morgan

John Fox - Fenimore Asset Management, Inc.

Nikolai D. Fisken - Stephens Inc.

Meyer Shields - Stifel Nicolaus & Company, Inc.

Steven Labbe - Langen McAlenney

Beth Malone - Wunderlich

Michael Grasher - Piper Jaffray

Presentation

Operator

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 future results and events or otherwise be forward-looking in nature and reflect your 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 of a number of factors including those risks and uncertainties. A 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’ll now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.

J. Powell Brown

Thank you David, and good morning everyone. Q2 was another interesting quarter. The economy continues to have the biggest impact on our numbers and rates are under pressure all over and all around the country as we continue to watch Washington DC with great interest relative to health care reform. Today, Jim, Cory, and I are in Troy, Michigan at Proctor Financial for our quarterly board meeting and Jim will discuss Proctor’s success later in the call but now on to Cory.

Cory Walker

Thanks, Powell. Our net income for the second quarter was $40.7 million which was slightly up from the second quarter of last year where we earned $40.4 million and of course our earnings per share for both quarters was $0.29.

From a revenue standpoint, our commissions and fees for the quarter increased 2.4% or $5.8 million to $244.6 million. Now that’s up from the $238.8 million we earned last year in the second quarter. Included in the press release is our internal growth schedule and in that schedule you’ll see that we had $6.8 million of profit sharing contingency commissions in the second quarter of ’09 and that’s up $1.4 million from what we earned in the second quarter of last year.

For the rest of the year we estimate in the third quarter of ’09 that we’ll probably earn somewhere between $8 million to $9 million of profit sharing contingent commissions and it will probably only earn about $1 million in the fourth quarter. Again, those are just current estimates. When you look at the internal growth schedule, our total core commissions and fees for the quarter increased 2.6% or $6 million of total commissions and fees income.

However, within that net number was $17 million of acquired revenue, so that means that we had $11 million of less commissions and fees on a same store sales basis and hence a negative 4.7% internal growth. As the schedule indicates, the vast majority of the negative growth is still broad based impact primarily from our retail and wholesale operations.

Now moving onto our investment income, it decreased by $1.4 million and that’s primarily due to substantially lower interest rates that we’re earning on our short term money market accounts. Our other income we had $1.3 million which is primarily gains from the sales of a few books of businesses that we had during the quarter.

Looking down at our expenses and our pre-tax margins to start with, our pre-tax profit margin for the second quarter of ’09 was 27.2%. Now that’s compared to prior year second quarter margin of 27.6% so we actually had a slight reduction of 40 basis points.

As we’ve mentioned on previously quarterly conference calls, as long as we remain in a soft cycle and a weak economy that creates this negative internal growth, our margins will continue to compress a little bit, but you’ll notice that this particular quarter, our margin compression is less than it has been in really any quarter of the last two years.

In the current quarter our employee compensation and benefits decreased marginally 10 basis points to 49.8% of total revenues. The total dollar increase in the total employee compensation and benefits was an aggregate of $2.1 million but within that number, $5.1 million was attributable just to the standalone acquisitions that we’ve done since last year, so when you pull that out and you look at just the other offices that were here last year including any fold in acquisitions they may have had, they had an aggregate reduction of employee compensation benefits of $3 million of which approximately $2 million actually came from employee compensation, commissions, and bonuses and another $1 million came from a positive adjustment to our self-funded medical plan.

Our non-cash stock based compensation costs was $1.7 million in the second quarter of ’09 which is consistent with the estimated cost over the last few quarters.

Moving to our other operating expenses, they increased 30 basis points to 14.5% of total revenues in the second quarter of ’09 and the total dollar increase in other operating expenses was $1.2 million. However, again, $1.5 million of this aggregate total was attributable to the new standalone acquisitions since last year and therefore when you look at just the same store sales basis including those fold in acquisitions, those particular offices had a net reduction of their other operating expenses of about $300,000, the majority of which really is probably just lower T&E.

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