Brown & Brown, Inc. (BRO)

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Brown & Brown Inc. (BRO)

Q4 2009 Earnings Call

February 16, 2010 8:30 am ET


Powell Brown - President & Chief Executive Officer

Cory Walker - Chief Financial Officer

Jim Henderson - Chief Operating Director

Tom Riley - Regional President


Mike Grasher - Piper Jaffray

Keith Walsh - Citi

Mark Hughes - SunTrust

Keith Alexander - JP Morgan

Meyer Shields - Stifel Nicolaus

Brett Huff - Stephens

Scott Heleniak - RBC Capital Markets

Sarah DeWitt - Barclays Capital



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 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 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 have 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.

With that said, I would now like to turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.

Powell Brown

Thank you, Rachelle. Good morning everybody. 2009, marked a first time in our history that we’d not grown top and bottom line. Yet in light of this difficult operating environment, the Brown & Brown team continues to deliver for our clients and generated a 34.3% EBITDA margin.

As we said in the past, we have margin pressure in a negative internal growth environment. The insurance industry as a whole continues to post positive underwriting results for Q4 with standard carriers combined ratios in the 90s and with written premiums generally lower 4% to 8% Q4-over-Q4.

The risk barriers are seeing the impact of shrinking exposure units as we are, and finally you should be aware that our Q4 numbers reflect $4.2 million less in contingency revenue for FIU that was received in Q4 of ‘08. This was postponed into 2010 and subject to favorable loss experience. We are potentially able to collect that in ‘10.

Now, I’d like to turn it over to Cory for our financial report.

Cory Walker

Thanks Powell. After three quarters of slight improvements, the weak economy, the continued soft pricing, the soft M&A environment, and again the lack of similar profit sharing contingencies that we got from the fourth quarter last year, all caused the fourth quarter of this year to be the worst quarter for the entire year.

As most of you that routinely follow our company know, as our internal growth rate goes, whether it grows or shrinks, as long as we have negative internal growth as Powell was mentioning, we will have shrinkage of our margins as some of that commission revenues evaporate.

With that said, our fourth quarter revenues did retreat more than any other quarter during the 2009 year and so our total revenues for the quarter did decrease 7.7%, and that represents $17.9 million of total loss revenues.

Commissions and fees, which is the main revenue line item, decreased 7.2% and that’s $16.6 million of that $17.9 million and within that, that’s where our profit-sharing contingent commissions reduced by $4.4 million of which $4 million as Powell mentioned was from FIU.

So taking the remaining total core commissions and fees which exclude profit-sharing, contingent commissions decreased $12.1 million from the fourth quarter of last year, and within that net growth number is $6.8 million of acquired revenues.

So therefore, when you add those two back together, our total net loss of core commissions and fees on a same-store sales basis was $18.7 million, and that reflects a negative 8.3% internal growth rate. That number really breaks out $13 million, a total from the broad-based reduction in the three segments of our Retail Division

Then secondly, $4.5 million of that came from our National Programs Division, of which that portion was really equally split between reductions at our FIU Proctor and public entity subsidiaries. So the specific rate growth obviously is in the press release, and Powell and Jim will talk about each of the divisions more specifically in a minute.

Moving to our investment income, we earned $700,000 less in the fourth quarter this year, compared to ‘08 and that’s exclusively due to substantially lower investment yields in 2009, even though we do have much higher average daily balances in our cash accounts.

We are currently making only 10 to 12 basis points on our overnight market accounts and really last month and early January we were only making one basis point as hard as that is to believe, but it’s substantially down.

Other income was $700,000 for this quarter, compared to $1.3 million in the fourth quarter ‘08. Most of the prior year’s fourth quarter gains and half of the 2009 fourth quarter gains resulted primarily from the sales of certain books of businesses and our normal course of operation.

So moving down and looking at the expenses during the fourth quarter, our employee compensation and benefits increased 1.2 percentage points to 53.7% of total revenue. Even though the actual net dollar cost dropped by $6.8 million, from the same quarter, the employee compensation benefits relating to just the new standalone acquisitions since the beginning of the fourth quarter was $1.9 million of new costs.

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