Brown & Brown, Inc. (BRO)

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Brown & Brown Insurance (BRO)

Q2 2011 Earnings Call Transcript

July 19, 2011, 8:30 am ET

Executives

Powell Brown - President, CEO

Cory Walker - SVP, CFO

Analysts

Keith Walsh - Citi

Mark Hughes - SunTrust

Mike Grasher - Piper Jaffray

Matthew Heimermann - JPMorgan

Brett Huff - Stephens Incorporated

Meyer Shields - Stifel Nicolaus

Adam Klauber - William Blair

John Fox - Fenimore Asset Management

Dan Farrell - Sterne Agee

Presentation

Operator

Good morning and welcome to the Brown & Brown Incorporated earnings conference call. Today's conference 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 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, 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 conference over to Mr. Powell Brown, our President and Chief Executive Officer.

Powell Brown

Thank you, [Laura]. Good morning, everyone. We're calling in this morning from the Advocator Group in the Boston area and I'd like to thank [Mike Crow] and his team for doing a great job. We're going to have a board meeting here the next two days and are really excited about it.

Markets in certain areas and certain lines of coverage are seeking rate increases. Most markets are not willing to lose a renewal. New business pricing continues to be aggressive. There is a pricing gap that continues between new and renewal pricing.

We're pleased to announce that we've completed $47 million of annualized revenue year-to-date and now I'd like to turn it over to Cory for our financial report.

Cory Walker

Thanks, Powell. Our net income for the second quarter of 2011 of $37 million was down 10.2% from last year's second quarter net income of $41.2 million. Our earnings per share for the second quarter of 2011 of $0.26 is $0.03 lower than the $0.29 in the second quarter of 2010.

The difference in the quarterly earnings per share results can be summarized in three areas: one, the change in the estimated acquisition earn out payable, which accounted for nearly $0.01 of that difference; reduced profit sharing contingency income, which accounted for about 1.8 cents; and then, thirdly, reduced other income, which accounted for 0.8 cents, which in aggregate, all of that is almost $0.04.

From a revenue standpoint, commissions and fees for the quarter increased 2% or $4.9 million to $246 million from the $241.1 million we earned last year's second quarter. Included in our press release is our table that summarizes the total growth rate and the internal growth rates from our core commission and fees, which, of course, excludes profit sharing contingent commissions and revenues from books of businesses or other operations that were sold.

In the second quarter of 2011, we received only $2.3 million of profit sharing contingencies. That's $4.2 million less than the $6.4 million that we received last year in the second quarter. The decrease is primarily due to the fact that last year we earned $3 million in profit sharing contingencies from one of our worker's compensation carriers that wanted to reduce their exposures and, therefore, we were asked to move the business and thus we did not receive any profit sharing contingency from that carrier in 2011.

Additionally, in the second quarter of 2010, we received $750,000 of profit sharing contingent commissions from the FIU program, which was not received this year. At the end of the first quarter of this year, we had estimated that we might receive between $3 million and $4 million in the second quarter. It turned out that the $1 million difference relates primarily to our wholesale brokerage division that now looks like it might come in the third quarter instead.

So, therefore, we now are estimating that we may receive an additional $6 million to $7 million in the third quarter and then for the fourth quarter whatever we receive from FIU is what we'll get, which, if there is no hurricanes -- I mean, if there is a hurricane that hits Florida in 2011, that number will be zero. But if we're fortunate enough not to have any hurricanes, we could possibly receive as much as $1 million in the fourth quarter on contingencies.

Now, if you look at the internal growth schedule, we did have a negative internal growth rate of negative 4.8%. If you exclude the negative impact this quarter of Proctor Financial, which we discussed in our first quarter conference call, our negative internal growth rate was negative 4%.

Our total core commissions and fees for the quarter increased 4.3% or $10.1 million of total new commissions and fees. However, within that net number was $21.3 million of acquired revenues. That means that we had $11.3 million less commissions and fee revenues on the same-store sales basis and, hence, the 4.8% negative internal growth rate.

As the internal growth rate schedule indicates, the vast majority of the negative growth relates to our National Retail division and our Proctor Financial operation. Powell will discuss each of these divisions in a minute.

Moving on to our other income, other income -- our investment income was just up slightly over the second quarter 2010. However, our other income was $1.8 million less than last year's second quarter and that was primarily due to the fact that last year we recognized a gain that resulted from a lawsuit that we won against former producers for violating their employment agreements.

Looking at our pre-tax profit margin for the second quarter of 2011, it was 24.9% and that's compared to our -- to the 2010 second quarter profit margin of 27.9%. That's a three percentage point decline.

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