Brown & Brown, Inc. (BRO)

BRO 
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Brown & Brown, Inc. (BRO)

Q3 2009 Earnings Call

October 20, 2009 8:30 am ET

Executives

J. Powell Brown – President, Chief Executive Officer & Director

Jim W. Henderson – Vice Chairman of the Board & Chief Operating Director

Cory T. Walker – Chief Financial Officer, Senior Vice President & Treasurer

J. Hyatt Brown – Chairman of the Board

Analysts

Michael Grasher – Piper Jaffray

Keith Alexander – JP Morgan

Kenneth Billingsley – Signal Hill

Eli Fleminger – Stifel Nicolaus

Sarah Dewitt – Barclays Capital

Mark Hughes – SunTrust Robinson Humphrey

Presentation

Operator


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. Such statements are intended to fall within the Safe Harbor provision 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 current 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 have been given or will be given or identified from time-to-time with the company’s reports filed with the Securities & 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 & Exchange Commission.

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

J. Powell Brown

Q3 was another interesting quarter. Shrinking exposure units continue to be the biggest impact on our numbers, greater than decreasing rates. Rates are under pressure everywhere except we see some flattening in coastal areas. We continue to watch the healthcare reform debate take shape in Washington and I’ll tell you that Jim and Cory and I are here in Daytona with a special invited guest Hyatt decided to sit in with us today so he’ll be in the room as well. Now, I’d like to turn it over to Cory for the financial update.

Cory T. Walker

Our third quarter results look remarkably similar to our second quarter results. Our net income for the third quarter of 2009 was $41 million which was up slightly from last year’s third quarter net income of $40.6 million and our earnings per share for both quarters was $0.29 per share. From a revenue standpoint, commissions and fees for the quarter decreased slightly by .3 percentage points or $800,000 to $243 million from the $243.8 million earned last year.

Included in the press release is our normal internal growth schedule that you’re use to seeing and in that schedule it shows that we had $10.4 million of profit sharing contingent commissions which is about $700,000 more than the $9.7 million that we received last year in the third quarter. Our best estimate of the profit sharing contingent commissions that we will receive in the fourth quarter of this year is estimated at about $1 million right now. Now, if you exclude the effects of the profit sharing contingent commissions and the small books of business that we sold that were in the numbers from last year or about $500,000 our total core commissions and fees for the quarter shrunk by .4% or $844,000.

However, within that net number was $11.3 million of acquired revenues so that means that we had $12.1 million less of commissions and fees on the same store sales basis and hence the 5.2 percentage points negative internal growth. As the internal growth schedule indicates, 98% of that negative growth really was a broad based impact from our retail operations. Now, two quick points that I just want to make about the internal growth schedule is one that you know that when we buy a book of business from a producer or an agency, we exclude that from any of the revenue calculations and if we end up having a producer comes that brings a book of business, that is also considered acquired revenues and we exclude that.

The second point is that the last two quarters Proctor Financial had a very strong revenue base and it started in the fourth quarter of last year. This year fourth quarter for them we probably expect them to be down about $2.5 million from the big quarter they had in the fourth quarter of ’08 so I just want you to realize that when you project out their internal growth for the fourth quarter. So, leaving that area Jim and Powell will end up talking about each of the specific divisions in a moment.

Our investment income decreased by $1.1 million which was primarily due to substantially lower interest rates on our short term money market accounts. We also had about $575,000 of other income which is really just primarily the miscellaneous rental and other income, very little sales of books of business. Jumping back down to the pre-tax income line our pre-tax margin for the third quarter of ’09 was 27.7% compared with the prior year margin of 27.2% which was an improvement of .5 percentage points. This is an outstanding accomplishment of our profit center leaders that show an improvement in our margin in the face of the continuing strong headwinds of our lower client exposure units due to the economic downturn and the continued reduction in insurance rates.

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