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Brown & Brown (NYSE:BRO)

Q4 2012 Earnings Call

February 04, 2013 8:30 am ET

Executives

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

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

Analysts

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

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 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.

Of this increase, $2 million was due to our onetime 2012 producer bonus paid to our Retail division's commission producers for the growth of their 2012 production in excess of 5% of their 2011 production; $2.7 million was due to increased salaries of new producers and staff teammates; $800,000 was due to increase in commission expense due to the increased revenues to our commission producers; $600,000 was due to increased profit center bonuses; and another $600,000 was a result of higher matching contributions by the company to our teammates' 401(k) and profit sharing plan. If you exclude the standalone acquisitions that were not with the company last year in the fourth quarter plus that extra $2 million onetime retail commission producer bonuses, as well as about $622,000 in new salaries for just new producers that we're training, employee compensation benefit cost as a percentage of total revenues would have been 51.7%, and that's a decrease of 1.3 percentage points from the 53% cost factor last year in the fourth quarter. Our noncash stock-based compensation cost was up, on a net basis, $1.6 million. And of course, that was due to the new stock incentive plans primarily for grants we gave to the new ARROWHEAD teammates.

In the current year, other operating expenses as a percentage of total revenues increased 70 basis points, to 14.9% from 14.2% ratio in last year's fourth quarter. From a total dollar perspective, other operating expenses increased $10.4 million, or 30.1%. However, if you look at the new standalone acquisitions, they added approximately $10 million of new costs for the quarter. Therefore, our existing same-store offices had a slight net increase in their expenses of about $400,000. This increase primarily relates to approximately $1 million in higher inspection and related fees and costs on just new businesses that we've written. $500,000 was increase in data processing costs. But those costs were then partially offset by about $500,000 lower insurance cost, $400,000 in lower legal and claims expense and another $200,000 in cost savings from occupancy and office rental cost. Excluding the operations from these new standalone acquisitions, our other operating expenses as a percentage of total revenues actually decreased to 13.7% from the prior year's 14.2% factor.

Amortization, depreciation in aggregate was $3 million, which was expected from last year's fourth quarter, and that's obviously due to new acquisitions. Our interest expense increased $700,000 over the prior year, and that's as a result of the increased borrowings from the $200 million we borrowed on the ARROWHEAD acquisition at the beginning of the year. Our change in acquisition -- estimated acquisition earn-out payable was a debit, or an expense, of $1,552,000 versus last year, we had a credit of $2,862,000. And so, therefore, the change between last year's fourth quarter and this year, that's $4.4 million of GAAP income, and that's almost $0.018.

Our effective tax rate for the entire year of 2012 was right at 40%. But since the final true-up of the annual tax rate falls in the fourth quarter, the quarterly tax rate was 38.4%. We do expect that the 2013 annual tax rate to be between 39.5% and 40.5% rate for next year.

So to conclude, we did have a great finish to a year that was marked by significant transition in the direction of the U.S. economy and the P&C industry and the insurance agency in general. So with that financial overview, I'll turn it back to Powell.

J. Powell Brown

Thank you, Cory. Great report. In Retail, we were up 5.6% versus up 1% in Q3. In Florida, specifically South Florida, property business on large habitational accounts are up 5% to maybe 10%. Commercial business other than habitational is flat to down slightly. GL is flat to 5% up. Auto is flat, and work comp in Florida, effective 1/1, is up 6.8% as an average on the entire book.

Exposures in South Florida are flat to up very slightly. You are seeing some large carriers, national carriers, pushing for more rate on automobile. But typically, when push comes to shove, it stays pretty flat. We are starting to see habitational projects that were on hold that are now coming back online. Many of those are rental properties. We're seeing them also at builders' risk in the wholesale division, which we'll talk about in a little bit.

In the construction area other than habitational in South Florida, there's not a lot of backlog. As we've said, in Central Florida, property is up 5% to 10%. GL is flattish. Auto is flat to up 10% based on losses, and basically, exposures, both sales, payrolls and other, are flat to up 5%. In North Florida, property is up 5% to 10%. GL is flat to down. But everyone wants rate at first, so they quote an increase on GL and then they move back to flat. Auto is up 2% to 5%, and exposures are generally flat. There's a lot more rate pressure on personal lines in the Panhandle now.

In the Southeast, excluding Florida, property is typically up 3% to 7%. Liability is flat to up 3%. Auto is flat to up 5%. In the automobile area, we're not seeing net new autos. We're seeing new exchange for old, and that's a common theme across the country. Work comp, depending on the state, is 3% to 10% up based on losses. In Louisiana, we're still seeing RMS 11 driving the E&S market north of I-10. Texas is seeing a bit more rate pressure than the entire Southeast, and exposures were up, on average, about 5%.

In the Northeast, property is up 5% to 10%. GL is flat to maybe up 6%. Auto is up 2% to 5%, and work comp is up 5% to 7%. Exposures in the Northeast are typically flat to up very slightly. There's a lot of tough underwriting going on in workers' compensation, not just in the Northeast but around the country. States are seeing a jump in e-mod calculations due to the split point rating. Government contractors are seeing increase in payrolls, 5% to 15%, and other contractors in the Northeast seem to be pretty flat.

Midwest, property is flat to up 6%. GL is flat to up 3%. Auto is up 4% or 5%, and work comp is up 3% to 8%. We're starting to see manufacturing payrolls up slightly, 5%, maybe 8%, 10%. Construction is just getting started, so we haven't seen any uptick there yet to speak of. Regionals continue to be the most aggressive on pricing. National carriers are continuing to push for more rates. Regionals want rate, but it's usually slightly less or significantly less than some of the national carriers.

On the West, property is flat to up 5%. GL is flat to up 4%. Auto is flat to up 5%, and work comp is up 4% to 5%, excluding California. On the payrolls, in sales, you're seeing up -- it's flat to up 10% on exposures. California work comp is going up substantially. We're seeing 10% to 20% rate increases or more with losses. Most markets are re-underwriting their books. There are 1 or 2 markets that continue to be out there that are very aggressive, which are able to price at expiring or even under expiring, but it's a very small group, and DIC coverage for flood and quake is tightening, specifically Oregon and Washington, where lower limits are being offered and the rates are going up.

In the employee benefits area, small group is up, that's under 50 lives, 4% to 10% and large group is 5% to 12%. Obviously, if you have losses, you can have much higher increases than that. I did want to take a moment to talk a little bit about exchanges. We are working with exchanges now, and we will have additional exchange-based solutions for our clients by 2014, as other health carriers are added to the state-specific platforms, so more to come on exchanges.

From a wholesale standpoint, we were up 8.3% versus 2.8%. In the fourth quarter, property in the Northeast was generally flat after Sandy. However, we're now starting to see deductible changes, and obviously, flood limits that were offered are being reduced and -- substantially in some cases. In the mid-Atlantic, Maryland to north, there are changes, typically where deductibles were 1% and 2%. They're going to 3% and 4%.

Rates are flat to up a couple of points, 2%, 3%, 4%. Virginia south to Texas carriers, this is fourth quarter, want a 5% to 10% increase but they're not seeing it, so they're typically getting flat. There are some new markets coming into the space looking to grow, and, as I said, we're seeing new builders' risk submissions starting to come online.

On the general liability standpoint, wholesale rates are flat to up 5%. Certain classes are presenting difficulties. Condominiums and large apartment schedules, there's a lot of upward pressure on those 2 classes. Construction rates are flat. In the binding authority business, we're in a transitional period. The property market seems to be constricting. In coastal areas, you might see up 10%, 15%; inland, it's flat. GL is flat except on the hard-to-place condos that I referred to earlier.

On the professional side, D&O -- private company D&O is flat. Public company D&O, on the primary limits, are up 5% to 15%, but that is sometimes offset by reductions in the excess pricing. So overall, you're seeing flat to up slightly on nonfinancial institution public company D&O. Financial institutions, lots of markets are getting out of the space, 10% to 20% increases on primaries. On the EPLI side, you're seeing generally increases 5% to 15%. Retentions are up, and claims are up. E&O, nonmedical and non-real-estate are flat. Real estate is up 5%, and medical E&O is typically flat. I would say that there are several large national carriers that seem to be re-underwriting their books in the professional liability space.

In national programs, we were up 20 basis points versus down 3.3%. Proctor, American Specialty and FIU were up nicely in the quarter. ARROWHEAD, as Cory said, grew 6.8% without the automobile aftermarket in Q4, but they're not counted in our internal growth until after January 9. In the services area, services are up 11% versus up 7.7%. Colonial Claims had a very busy quarter. They did $7.4 million in Q4, and we believe the impact on Colonial Claims will continue to be seen in Q1 and possibly, possibly into Q2.

In the fourth quarter, we closed $20.7 million of acquisitions, and that brought our annual total to right at $150 million. We're quite pleased with all the new entities and teammates that joined our team in 2012. And as always, the acquisition pipeline is good. Cory and I, along with several other senior leaders, exercised 10-year options that came due at the end of December of '12. The options price was paid by exchanging existing shares we owned in our personal portfolios.

In conclusion, we had a good fourth quarter. We hope that the economy continues to grow in the middle market, as we are intrinsically linked to it. New business sales and what happens in Washington will also impact our growth in the future. With that, I'd like to turn it back over to Rochelle to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll first hear from Greg Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

Nice growth in the quarter, congrats. Just wanted to ask on ARROWHEAD, you mentioned it's included after Jan 9. Could you just refresh us, what has that growth been since you joined it? And then also, where's it going to come through in your reported financials or where is it today, just which segments?

J. Powell Brown

Well, Greg, first of all, the ARROWHEAD is primarily in the national program section, with the exception of ACM, which is their claims management. And ACM has...

Cory T. Walker

Roughly $25 million.

J. Powell Brown

$25 million in total revenues. And the rest of it, that will be in services.

Gregory Locraft - Morgan Stanley, Research Division

And that's in services? Okay.

J. Powell Brown

Yes, ACM is in services, right. So if you look at the entire year, ARROWHEAD -- ARROWHEAD's internal growth was roughly 9% for the whole year when you exclude the automobile aftermarket. And when you include that, the automobile aftermarket added about $2.5 million in the fourth quarter. So when you exclude that, it's -- when you include that, it's about 13.4% for the year, 9% without it.

Gregory Locraft - Morgan Stanley, Research Division

Okay. And that auto aftermarket is also going through in the organic growth beginning June 10, I guess, forward?

J. Powell Brown

January 10.

Gregory Locraft - Morgan Stanley, Research Division

I'm sorry, January 10, yes. Okay, perfect. Second is just what are you guys going to do with the broker incentive program this year? Are you going to continue it? Are you going to -- was it a onetimer? How do you think about that cost?

J. Powell Brown

If you remember, Greg, I said that, that was a onetime-only incentive program. We obviously thought it was very beneficial to the team, and I personally reserve the right to put in force, at any time in the future, an incentive plan or something else to drive the desired results, which is grow our business organically and profitably. That's a long way of saying, no, we're not doing the same incentive plan this year. And for the whole year, that entire program amounted to right at $7 million.

Gregory Locraft - Morgan Stanley, Research Division

Okay, great. So that's $7 million that does not recur this year, okay, on the cost side, great. And then last from me is just you were giving us a lot of detail as you went through, but you were sort of calling out the flood business. I wrote down it was 8 days. It contributed over $1 million, and it's going to continue in the first quarter, as you said, so we're going to pick up another -- I mean, that's another, call it, mid-teens millions of dollars that's coming at us from that business in the first quarter?

J. Powell Brown

Yes. What I would say is what we believe is that it will be $8 million -- roughly $8 million or more in the first quarter. That's what we're anticipating. But obviously, we're not there yet.

Operator

And next, we'll move to Sarah DeWitt with Barclays.

Sarah DeWitt - Barclays Capital, Research Division

First, on the organic growth, what's changed in the last 3 months that drove organic growth from 1% last quarter to 5% this quarter? And should we think about that 5% level as sustainable going forward?

J. Powell Brown

Well, remember, we don't give -- Sarah, as you know, we don't give internal growth estimates. But the internal growth in retail is highly dependent on 3 things that we talked about: one, the economy in the middle market; and it also depends on what's happening in Washington and will continue to happen in Washington; and third, new business sales. We feel good about our new business sales, and we're continuing to push and push and push. Some of those things are a little bit outside of our control. And once again, we say that hope and a prayer is not a good business strategy, but we're quick to identify that the economy in the middle market and what goes on in Washington will impact our internal growth.

Sarah DeWitt - Barclays Capital, Research Division

Okay. Maybe you could just give us a sense of within that 5% organic, how much was pricing versus exposure versus new-to-loss loss business.

J. Powell Brown

Yes, it depends on where you are in the country, as I sort of summarized in terms of rates and exposures. I would say, as a general rule, as a general rule, we've said all along that exposures have the biggest impact on our business overall. Having said that, when we are in areas where there is rate pressure, that can help us. But we have said over the past that 2/3 to 3/4 of the negative downdraft was exposure units, and the updraft, I would say, would be similar. So it depends on the office and the classes of business that they're writing. As I said, Southeast Florida habitational is one thing versus construction in Phoenix because of exposure units. But that's kind of how we see it.

Sarah DeWitt - Barclays Capital, Research Division

So generally 2/3 of the organic growth this quarter was from exposure growth, is that what you're trying to say?

J. Powell Brown

That's what we typically say. We don't -- once again, I'm just kind of trying to help you through the last 5 years and what we've said all along. One, that, that was what we saw in the downdraft. I think that in the updraft, I think the exposure unit has helped more to increase, and we're writing a lot of new business than rate increases, although rate increases are helpful. So if I were hedging, which I'm going to hedge on this, I would say it's slightly more impact on the exposure units than the rates.

Sarah DeWitt - Barclays Capital, Research Division

Okay, great. That's helpful. And then just lastly on the margins, I'm surprised that 5% organic growth wasn't enough to expand margins this quarter, even when you exclude the acquisition payables. So what's driving that? And if you were to continue to see 5% organic growth, should we expect some margin expansion or no?

Cory T. Walker

Sarah, on the margin growth, you really have to kind of get into the -- more into the detail by segment. And if you look at -- and we talked a little bit about this in the third quarter, where we kind of showed the differential on the revenues and then the EBITDA impact. And when you get to 10-Q -- the K, I mean, you'll may be able to see some of this difference. But on the Retail side, when you squeeze out the EBITDA impact, basically, we believe that there was about $1.4 million increase in the EBITDA dollars when you take out the differentials. Where the compression occurred is primarily in the program division and the service division because, overall, it was relatively flat. But we've always said the margin leverage is going to show itself fairly strongly, which I think it is in the Retail division.

Operator

And Brett Huff with Stephens Inc. will have our next question.

Brett Huff - Stephens Inc., Research Division

I just want to make sure I'm getting this right. In the organic growth, I'm trying to make sure what's in and what's out of the organic growth in the fourth quarter. So Zurich -- I think, before, you guys had thought that Zurich, the cost would come on and then you weren't sure if the revenue would really -- start really coming on until 1Q. So we got some revenue to the tune of $2.5 million from Zurich this quarter. Is that right?

J. Powell Brown

That is correct.

Brett Huff - Stephens Inc., Research Division

Okay. And was that -- given that it's -- what part of that was in internal growth, I guess, is my question?

J. Powell Brown

None of it. We -- again, this shows you how conservative we are on our internal growth. The Zurich aftermarket program was basically new business developed by ARROWHEAD. But since we kind of stick with this traditional, anything that's in ARROWHEAD for the first 12 months that we owned them, they're excluded. So that $2.5 million was lumped into ARROWHEAD numbers, and so it was excluded from internal growth. Then, beginning next year that will be part of internal growth because we'll be comparing that to ARROWHEAD's January -- normal January, February, whatever. So that was $2.5 million excluded. Now from a standpoint of the expense, essentially, we had on -- if you look at all of auto aftermarket, the net -- basically, the operating profit for the months that they were in 2012, there was really only a down swoop of about $108,000, $110,000 from net cost versus net revenues. So I know that there was some talk out there that there was going to be a much bigger startup cost, and I'm not sure where that all that originated, but the fact is it was pretty much a flat operation for the 2012. And when you go into 2013, from a budget standpoint, we're budgeting probably about $21 million in total revenues, and the operating profit right now is only budgeted about $1.5 million to maybe $2 million. So it's consistent with the 10% to 12% operating profit that we thought. But that number will continue to grow as we grow the program from the $140 million that Zurich currently has of that to where they want it to grow, to well over $300 million.

Brett Huff - Stephens Inc., Research Division

Okay, that's helpful. And then, just going through the Colonial Claims again, the flood stuff, is that -- that's also coming from ARROWHEAD, so also not included?

Cory T. Walker

No, no, no. Colonial Claims is an acquisition that we acquired on December 23 of last year. And it's a separate standalone operation, and they do a great job. And with Sandy, they've had a huge amount of claims that they're servicing, and so their revenues were very substantial, so the last 8 days was $1.6 million increase over the minimum, of '12

Brett Huff - Stephens Inc., Research Division

And so that was $1.6 million was new organic?

Cory T. Walker

Correct. So for 2013 first quarter, we're expecting, as Powell mentioned, a little over $8 million of new revenues. And of course, last year, they only had about $1 million in the first quarter in 2012.

Brett Huff - Stephens Inc., Research Division

Okay, that's helpful. And then, just looking at your -- as you guys look at the pipeline, Powell, you talked a little bit about the M&A pipeline, are you seeing price changes? I know that you all are typically pretty conservative in what you pay, but are you seeing increase in prices, particularly in benefits businesses or any of those businesses that seem to be coming under higher rate pressure and sort of what's your take on that?

J. Powell Brown

I think that there is some upward pressure on pricing, Brett. That's a broad statement. We've always said that it's 6 to 7 to slightly higher times in operating profit. I think it depends on the size of the business, where it is, how it's growing. There's a lot of variables but what we're focused on is finding the right people, and that's what anybody that does acquisitions is trying to do, but we're very focused on it. And we think that there's a lot of opportunities, as there always are, this year that will present themselves. And sometimes, you just never know when they come about, and so it's hard to budget for you, I know, and -- but that's how we view it.

Operator

And we'll move on to Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Just one follow-up on the Colonial Claims. So you said $8 million in the first quarter. Is there a way that we can try and run rate that? I mean, is any of that expectation still impacted by Sandy activity kind of after the fact or is that kind of more of a normalized number?

Cory T. Walker

No, that's Sandy impact. And once again, it is a very busy time for Colonial Claims, and their -- Doug and his team are doing a great job. But no, I don't want you, Michael, to think that's a normal run rate, that is because of activity that occurred in the later part of the fourth quarter.

J. Powell Brown

So obviously, Colonial Claims is obviously dependent upon how many flood activity, flood catastrophes occur during the country. So given there's always normal -- some flood around. But for the whole year, right now, we're only budgeting probably about $13 million for Colonial Claims for the whole year. Now if you read that all of a sudden the Midwest has a bunch of flood claims come April, May, then you'll have to adjust it. But it is dependent upon catastrophes.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So that should burn-down kind of normalize after first quarter, or get closer to it then, it sounds like?

J. Powell Brown

Yes.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. And then -- great. And then, just trying to -- on the Retail side, obviously organic has kind of inflected over the last 4 quarters. Acquisition growth seems to have gone the other direction. Is there something there that we should understand that's changed or is that just lumpiness or the lack of finding the sort of people fit that you were talking about before?

J. Powell Brown

Yes, you don't need to read into anything there, Michael. We're actively talking to people all the time. But at the end of the day, as we said, a year ago in October, we need to grow our business organically, and that's what we did in 2012. And I and Cory and all the other senior leaders are very proud of all of our teammates for what everybody did. So I think lumpiness on acquisitions and just good -- doing it in Retail and writing a lot of new business and retaining our customers and all that stuff helps add up on the internal growth.

Cory T. Walker

Mike, I think it's important to realize that neither one of those items, internal growth or acquisitions, are mutually exclusive activities. We're burning it hard at both ends, and Scott Penny, heads up the acquisition group, and is doing a great job. We're talking to a lot of people. But when we make an acquisition, we're very disciplined in it, and it has to be the right cultural fit. And so I can tell you that we've had a lot of opportunities where we could have added a lot of revenues, but we've walked away from because it's not a long-term cultural fit and it's not good for our shareholders in the long term. So we're going to continue to focus on just the right acquisitions.

Operator

And next, we'll move to Matthew Heimermann with JP Morgan.

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

Cory, just wanted to clarify. You said that Zurich was margin neutral this quarter, and then you're still sticking with the 10% to 15% kind of 2013 impact?

Cory T. Walker

That is true.

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

Okay. And then...

Cory T. Walker

And like I said, it's really probably, right now, budgeted-wise closer to the 11% to 12% range than the 15%.

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

Okay. All right. That's fair. And then, Powell, could you speak to -- just give a little bit more color on your exchange comments in your remarks. In particular, I'd be curious just what the conversation is like with the small- to mid-market employer, about what they're doing and what their plans and practically speaking how that transition might work and -- from your end and what your role will be and kind of what partners you need to see. Because, I guess -- sorry for the run-on way in which I'm asking this, but, I guess, I'm also curious in terms of whether or not you see yourself working with consulting partners to kind of create exchanges for these employers or disproportionately will be using the state exchanges.

J. Powell Brown

Okay. So first of all, I think that a broad statement, Matt, is that once exchange will not fit all the needs of all clients in a given territory state area. And as you're aware in exchanges today, many of them, not all of them, but many of them have one risk-bearer. And so as other risk-bearers alluded to this are added, there will be more choice on those exchanges. Several of the clients that we have written in exchanges so far are association-type business, so they could be larger accounts or they could be 2, 8, 12 people. And so what you're really referring to is there is a calculation, and the question is do you go into an exchange, do you -- how much does it cost to pay to play? There's all these scenarios, but what we've got to do is bring good options to our clients, which is what we're doing. I would tell you that in different states, there's a different level of -- how I would I say it is some states are far more advanced in where they are, as you know, in exchanges than others. And ultimately, exchanges will probably need to be run at the state level. Those that are currently bucking that trend are -- or it's my understanding they're going to push it back to the federal government, which would be a stop gap. And so we are -- we're focused on bringing more opportunities to provide health coverage and related ancillary coverages to our clients, and the exchanges may be one of those. So I didn't mean to walk around it but saying it could be a private exchange, it could be a state exchange, or in some instances, it could be a national exchange. We think it's ultimately on a local level, though, meaning state and even more specific than that.

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

And then is it fair to say that you will be working with different -- you might work with an HR consulting company that has a southeast regional focus to deal with that area of the country to potentially address the private aspect of the solution, for example, then as you think about that suite of products, does that how you actually create those options for customers?

J. Powell Brown

The answer is that might be one way. There are lots of people out there talking about technology as a delivery of some of these services, and so sometimes there are different technologies desired by different customers to do this. But here is what I would -- I'd back up, Matt, and say this. In a place like the Midwest, they may have several up and running, and so the level and the in-depth conversation about the options might be different than it would be in Florida, which is just getting started. And in New York, it's my understanding, New York State, there are exchanges that have multiple health carriers in them. So if you wanted ABC company, and I wanted XYZ company, we could still get them through the exchange. So it's not -- I don't think it's dependent so much on external parties. It's dependent on: one, what we see that's currently available in the marketplace; two, where can we have a relationship x -- outside that market area that might be able to bring a solution in there prior to it actually being used in that area; and then how do we talk with our risk-bearing partners to continue to be on the cutting edge of developing that stuff along with them, because ultimately in 3 or 4 years, the exchange may be only one of the solutions, and there may be something totally different that we're working with, in addition to the exchanges in local areas. But health insurance is very local, as you know. There's not a one solution for the entire Southeast and there's definitely not one for the entire country.

Operator

[Operator Instructions] Next we'll move to Doug Mewhirter with SunTrust.

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

Most of my questions have been answered. I just had 2, I guess, broader questions in opposite ends of the country. First, I noticed that you don't break out specific subsegments in retail, but would you characterize the Western -- what used to be called, I guess, the Western Retail segment as still underperforming the overall retail group? Or with the improvement in the workers' comp market and the construction market out there, would you think it's starting to catch up or even outperform the broader retail group?

J. Powell Brown

Remember, we don't break out segments of the country, but I would tell you that in the West, just like in Florida, we're starting to see more positive things with our customers; that's exposure units. And so my instinct is that it performs in line with retail.

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

Okay. And back to Florida. Even more broadly than that, you're so involved in so many aspects of that economy, where do you think Florida is in general in terms of its economic turnaround? Is this just third inning? Do you think a lot of it's played out? Do you think that there's a risk of it stalling? Do you think there's going to be a lot of follow-through in 2013?

J. Powell Brown

Doug, I think that we're still early in the game. And the reason I say that is if you go to Southeast Florida, there's a lot of noticeable uptick. If you go to Southwest Florida, it's still challenging. You go into Central Florida and North Florida, there are pockets of good things but lots of contractors, other than habitational, are just sitting tight, and just -- they don't have -- when they look into the pipeline of jobs, they don't have any work after 6 and 9 months, and that makes them nervous.

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

Okay. And so you -- there could be -- so there's -- the nervousness sounds like there could be some risk to this, but do you think that they're just unnecessarily nervous and that they could see some follow-through? I just wanted to see a bit more context on your...

J. Powell Brown

Yes, I think, once again, I would tell you that there are several businesses that are in the financial institution space that have reported on their results in Florida and have commented on a broader uptick. I would tell you that we haven't seen that yet in businesses. And the reason I don't think we've seen that, Doug, is, as we've talked about before, if you had a business that had $15 million of sales 3 years ago and $15 billion went to $13 million and $13 million went to $10 million, and then we're getting ready to renew, and they know they've got a big account or contract in place to do at least $12 million, when you meet with them, do you actually get $10 million on the renewal or $12 million? I would tell you we get $10 million. Now if a bank or a financial institution is there, they're going to say what? $12 million. So it's just -- I'm not saying that it's -- it's just there has been so much downward pressure that people would rather have additional premium than a return premium 12 months from now. And so I don't think all of the clients in the entire insurance space are accurately predicting their exact revenues, and they may be underestimating just for a conservative nature.

Operator

And we'll move on to Josh Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Yes. I just want to talk about that Proctor revenue recognition second quarter versus third quarter versus fourth quarter. I have in my notes that there was a $900,000 shortfall last quarter that was going to be earned out this quarter. That's correct?

J. Powell Brown

We said that we thought there was going to be -- some of the down swoop in the third quarter would come in through the fourth quarter, and it did. ARROWHEAD -- I mean, I'm sorry, Proctor did increase in the fourth quarter about $500,000.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay. And so I meant -- look, it's great quarter, great growth. You guys should be very pleased. But it makes it look even more so that national program's kind of lacking on internal growth generation. Is that just lumpy or where -- what needs to happen? Obviously, you're going to have ARROWHEAD come through next year, but what about the non-ARROWHEAD growth? What's going on there?

J. Powell Brown

That's actually this year, Josh. ARROWHEAD came online in -- on the 9th of January.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Right, right. No, I'm not -- I'm saying that if I look at back half 2012, internal growth at national programs wasn't very growth this second half of the year. Obviously, it's going to look good next year, but I want to know what -- at ARROWHEAD, what's going on in the business.

J. Powell Brown

Got you. And Josh, one of the -- as we have talked in the second and third quarter, obviously, Proctor was a little bit lumpy during the year. Overall, it finished okay for the whole year. But we also had -- we had Axiom, we had Acumen Re, which lost a fairly large group of accounts, and it was -- it had a substantial down swoop. And they were down another $700,000 in the fourth quarter. They expect next year to be back up over their 2012. CalSurance was also down a little bit this quarter. It was about $400,000. That expects to be up slightly in next year. So those are some of the -- if you go back to the second and third quarter, we give details of where the down swoop was in the program business. It continued that down swoop in the fourth quarter. We believe that most of the programs are now going to be generally up for the rest of the year. We think Proctor may be a little bit down for 2013. And I think CalSurance and one of our public entity businesses may be down for the whole year, maybe $1 million to $1.5 million on a combined basis. But generally, the rest of Programs will be generally up.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay, then. It's actually much easier to forecast ARROWHEAD growth than it is the non-ARROWHEAD growth, so that's kind of what I was looking for. I appreciate it. And the other thing I noticed that you had, obviously, a negative hit from higher earn-outs on acquisitions. And it's 2 quarters in a row after 4 quarters of it being, I guess, paying out less than you thought you'd have to. Is that a -- is there something going on that we should expect the acquisitions you've made last year are turning up much better than thought now and that's -- although it's great that they're growing, we should model maybe a soft drag in 2013, because the growth is happening and profitability is happening? How should I think about that?

J. Powell Brown

Well, there may be a little bit to that. I can tell you that this is one item that just sticks in my craw that is at -- that line item is something to be just ignored, because it truly is -- it's dependent upon not really how well they've done or how badly they've done, it's really what is our estimation, or really, more specifically, how good of an estimator am I on day one that we make this acquisition trying to predict 3 years from now the exact dollar that we'll pay out and earn out. And if I predict the actual max, we set that entire maximum up as a liability. And anything that they basically don't do from that level, they come down as an income item to us. It's crazy to think that that's part of the earnings culmination process. And then to say that well, you had to take income in on that and therefore, you didn't pay out as much liability, that acquisition didn't perform as well as you thought they would. And that's not true. They could be performing well, it's just that I overestimated it. And so that's why I'm saying you can't read too much into it, just because we had an expense, we ended up paying out more, therefore, they're doing better. It's just we tried to predict out so that it is close to 0. And so the only thing that line item's telling you is, yes, we did not predict as much on the earn-out as we thought we'd do, but that is not necessarily that they did better or that much more -- that better or worse than what they should have. It's just -- if you understand what I'm saying, it's just -- it's not a good measure to say that's how their operation was.

Cory T. Walker

Josh, I wanted you to make sure you know that ...

Joshua D. Shanker - Deutsche Bank AG, Research Division

I understand that. One thing I learned though, just to be clear, that number's more or less a cash number. It's not like in year one after an acquisition, you revisit that number and put an estimate up, because you think it's going to change. That's only a 3-year number. You don't make a change after 1 year, depending on how something's trending.

Cory T. Walker

No, no, no. We have to -- part of GAAP is, is that we have to constantly make modifications to that. And so part, like -- I'll tell you this quarter, we did have to move up the earn-out estimate on Colonial Claims, because it was very well definitive that they -- with Sandy, they hit a home run. But as a general rule, we try to look at every quarter, and so it's moving up and down. So it's not purely a cash number. It is a -- constant moving, so that as you get closer to the earn-out at 3 years, hopefully, we'd kind of constantly adjusted the liability so that at the very end, there's not going to be a lot of uncertainty left. Every month you go along you have one less month of uncertainty.

J. Powell Brown

And, Josh, as you can see, Cory doesn't feel very strongly about it. It really is -- it is a ridiculous statement, because it's just noise in the income statement and [indiscernible].

Joshua D. Shanker - Deutsche Bank AG, Research Division

No, it's not, but we're looking for signs.

J. Powell Brown

And you guys try to interpret too much from it.

Joshua D. Shanker - Deutsche Bank AG, Research Division

I'd like to interpret that things are getting better. I'm sorry I can't.

J. Powell Brown

I understand.

Operator

And we'll move on to Meyer Shields with Stifel, Nicolaus.

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

Can you take us through the mechanics of Colonial? When they've got this surge up -- that's a bad choice of words -- when we've got increased climate activity, does that disproportionately impact the margins for the services unit as well?

Cory T. Walker

It has very high margins. And it does impact it to the positive, yes.

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

Okay. Powell, can you talk a little bit -- I'm switching gears -- a little bit about the expected impact on organic revenue growth from the fact that the bonus program is not going to be renewed in 2013?

J. Powell Brown

Sure. As you remember, we have a stock incentive plan in place with all of our teammates that have certain side books. And so this particular 1-year payout did not in any way shape or form affect those, and those are, as you may recall, over a 5-year measurement period. And if you're a producer, half of that is focused on earnings per share growth, which is what the senior leader bucket is, and that 7.5% or more compounded annually, and then they have to grow their books of business. And so all of a sudden, I think that the fact that we incrementally got better all year is a positive. I think that the fact that there was this payout in recognition of a very difficult operating environment over the 4 or 5 prior years was very well received. And as I said earlier, if we were to do something in the future, it would continue to have a longer-term nature of it, kind of like the SIP that I'm referring to. So, we are focused on building the wealth of our teammates. And so we are always looking for creative ways to do that. This was an income event, as you know.

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

Okay. That's helpful. And last question. Is it too early to come up with expectations for contingents and supplementals in 2013?

Cory T. Walker

Yes. Yes, it is. Sorry, yes.

J. Powell Brown

And, Meyer, if I can just comment on that. Remember, there's going to be a lot of impact, we believe, in Q4 from the Sandy-related losses, and it's still early on knowing the true extent of those.

Operator

And we'll move on to Adam Klauber with William Blair.

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

As far as auto premiums, were they still running flat? And just -- any way we should think about that going through 2013?

J. Powell Brown

Adam, I think what you should do is think of it as more of a neutral today, where as it's been a negative in the past, that's a very broad generalization. There are places in the country where they will be ticking up, and there are places in the country that are still down slightly. But I would say, generally speaking, that's what I would expect. Also, one way that you can figure that out, by looking at some of the large national risk-bearers, you can look at on their quarterly -- when they report their numbers quarterly, you can find out what they're seeing as a percentage is of additional premiums versus return premiums. That can give you a little bit of idea of what's going on out there for that carrier.

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

Okay. Great. As far as the wholesale business, what would you say submissions were in the either third or fourth quarter compared to the first half of the year? And do you see that gaining momentum, stable or maybe losing momentum?

J. Powell Brown

Well, I think that there's a lot of activity. So I'm not trying to differentiate between Q4 and Q1. I'm just saying what's new, as you heard me say it, we're starting to see some builders' risk business, which is more noticeable today than it has been in the last several quarters. I don't have the exact number of submissions we've got in that space, but that's a positive sign because we're hearing about it as I alluded to in South Florida earlier on some of this hab business. I'm telling you, we're telling you about it in wholesale. And that could be anywhere in the Southeast all the way up the west -- in the Northeast coast. And generally speaking, I would tell you that there are a lot of standard carriers that I believe will have to rethink some of their strategies as it relates to traditional property in the northeast. And so that's what Sandy has done. And so I was reviewing last night the loss estimates by carrier, and that gives you only part of the story. What that doesn't give you is, are they putting out lower limits? Have they stopped providing flood? Are they all going to E&S, if they have it? Are they letting their standard probably go E&S and just keep the rest of the business? There's still a lot to be flushed out. And personal lines is going to be a big issue in the Northeast.

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

Okay. One other question. When you think about the business, you've done a fair amount of acquisitions, both in the retail. But then, obviously, with ARROWHEAD and Colonial, you've done some non-retail acquisitions. I guess, could you let us know how you're thinking about just mix-wise or opportunity-wise going forward, retail versus non-retail?

J. Powell Brown

Sure. Adam, first of all, we're looking to invest in all of our 4 divisions of our business. So as we said before, it's all driven and contingent upon high-quality people who find other quality people and run good businesses. Having said that, obviously, when you make a $100 million-plus acquisition in ARROWHEAD, that tilts the mix a little bit further towards non-retail than it had been historically. I would tell you this, if there were 2 other ARROWHEADs out there today, which there are not, we'd buy both of them. But having said that, we typically think that our business will be 60% to 70% over an extended period of time, retail.

Operator

And next, we'll move on to Ray Iardella with Macquarie

Raymond Iardella - Macquarie Research

Just wanted to -- had a quick clarification on one of your comments, Cory. I think you had mentioned when you're talking about sort of the margin picture between some of the segments that the services margin was actually weaker in the fourth quarter, but yet Colonial Claims, I guess, might have helped margins. So I'm just trying to get a little bit more color on that.

Cory T. Walker

Yes. On the margin for the -- and Colonial Claims did help a lot, but we also did have some extra expenses in there relative to our Advocator Group, where we're staffing up on -- for growth there, and so that helped pull that out. Now don't forget, in the analysis that I was giving to you, what I'd do is I pulled out acquisitions as a separate component of the growth of the revenue. So I've isolated Colonial Claims even though -- for instance, in acquisitions for the fourth quarter, we basically had about $16.1 million of new revenue. That created roughly $5.1 million of additional EBITDA that I add to last year's fourth quarter EBITDA of $4.8 million. And so what I'm doing, when I say that it's squeezed out or the margins were actually a little compressed, it's really looking at what was in the fourth quarter. You see what I'm saying? And so Colonial Claims is considered acquisition in that kind of analysis. So most of that -- a little bit of pressure on the margin in services was really because, primarily, Advocator Group was staffing up for future growth.

Raymond Iardella - Macquarie Research

Okay. No, that's helpful. And, I guess, is that staffing done with or do you expect that sort of to continue in the first quarter?

J. Powell Brown

I think we're all going to see much more of a similarity quarter-over-quarter after starting in 2013.

Operator

And we'll move on to Mark Dwelle with RBC Capital Markets.

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

A number of people have asked questions related to the sales incentive program this year, and I just wanted to take another try at that, because -- I mean, this is a fairly unique program for Brown & Brown, and, I guess, what I'm trying to gauge is how do you measure the ultimate success of that? I mean, you mentioned $7 million of expense in the quarter. Could you describe maybe how much incremental revenue you think you drove out of that program over the course of the year or the quarter? Just -- I'm really trying to get your kind of report card on how this program performed relative to your expectations. We can see in the numbers that internal growth ultimately rose, but I don't know that, that should be the only explanation for it being a good program or not a good program.

Cory T. Walker

Right. Let me comment on that. So first, Mark, as you know, we said that if in fact we paid the maximum amount out, that means everybody hit the bogey, it will be $12.5 million. Okay? So we paid $7 million out of the $12.5 million out. I, personally, would have loved to pay the $12.5 million out, because at the end of the day, we got the revenue with it. Having said that, what most -- what you'd say is we exceeded -- not everyone just grew 5%. There were a number of people who grew more than 5%. And so that's a positive in our mind. But remember, we have never -- we've not done anything like this before, Mark. And what I tried to say nicely, because I know several people have asked this, is you're asking, "Are you going to have another one?" And I said, "No, we're not going to have another one like that."

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

That actually isn't what I was asking, just to clarify my question. I appreciate very much that it was a unique program for Brown & Brown, and that's why I'm so interested in kind of the scorecard nature of -- you expected A, and you got -- now we have the perspective to say what we got relative to the initial expectations. And if there's any way to just quantify that out, so when we look back at our 2012 full year, we can say, all right, last year there was, you said, $7 million of incremental expense, so I know that, that's something that won't necessarily recur, but then there's also a revenue part of that, that was -- what I'm trying to get an understanding of is what was the boost that -- what did we get for our $7 million?

Cory T. Walker

Yes. Mark, and let me try to say it a little differently. And the quick answer that I'll I get to, but I want to take it back on history on part is that we do not measure precisely in terms of did somebody sell that new account, because they were incentivized by this program or not. And did they grow part of their 5% growth? How much of that did actually come from the rate increases or their clients' exposures exactly increase. We did not do that. We do know that roughly 54% of our commission producers hit the 5%. We had probably about 12% were 0% to 5% but didn't get it, a little bit less. I think it's important for you to understand the history, and I think we explained it all in the previous quarters, but we were talking about doing this in -- at the end of, basically, the third quarter of 2011. And we knew that the market was starting to show signs of starting to turn. And we thought that a lot of our competitors, who were the -- generally, more of the local agents, were all out there kind of tired after 5 years of rates going down and comps having to market it. And we knew that if we could get all of our folks really focused on hitting the ground running on January 1, 2012, we could have a big advantage. And so we came up with that onetime program, and it was -- from a motivational standpoint, it was really an acknowledgment to our commission producers that who, for 5 years have taken less income because they're -- not because they lost any clients, but just because of their clients' exposure, and we thought that this is a great recognition of the battle-hardened producers that have gone through the trenches in the last 5 years, that this is a way to get a little bit back. And we said we want everybody to get it, and so this is the program we had. So it was always designed as a one-year program. The idea was, is to get them really focused, and then, in fact, when the market started to turn, they're paid on commissions. And then all of a sudden, just like what has happened, the exposure unit, the economy have started to move up, the pricing is starting to move up, so, therefore, the tide was moving up. And so naturally, our producers are getting more commission dollars now that everything is rising, and it was a nice transitional program. So now, our commission producers are getting the natural lift and the natural increase in a compensation by the economy, and that was the intent. It was a transitional thing, and everybody knew that from day 1. So the precision as to did we get more than $7 million, I think if you just look at the internal growth, we did. Was it directly related, because they had that, or was it more related to the fact that we just got great producers, which I think is probably the right answer? Or -- and how much of it was the economy and the rate? It's all kind of blended. But the bottom line is, is it work, I think our producer group is always very motivated. They're very appreciative of that. And we're going forward and we're going to write more new business.

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

I appreciate that. I mean, it's a helpful recap. Just to ask 2 real quick questions. Just from an accounting standpoint, is there any way that a producer could have kind of front-loaded their number, which is to say, could they have booked business in December in order to hit their bogey that will be drawn away from 1Q,? Or do your practices and policies kind of preclude that?

Cory T. Walker

The answer is, is could it happen 1 or 2 places, small amount? Possibly, but don't forget whatever happened would impact the profitability of that particular office. And you have the profit center leader and the department leaders, commercialized whose bonuses would be negatively impacted. And so we have fairly -- we have very good strong controls at our local levels. So could that have happened in any widespread? No.

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

Okay. That's helpful. And then maybe just the last question. If you were to give the Program a letter grade, kind of from an A to an F. It's clearly not an F. How would you give them a score -- or give that program a score in terms of your overall reflection on it?

Cory T. Walker

I would say either an A or no lower than a B+.

Operator

And we'll move on to Justin Maurer with Lord, Abbett .

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

Sorry, Cory, to beat this dead horse on Mark's piggyback. The acceleration organic. I know, Powell, you talked to that point on Sarah's question earlier. But was there -- given that the folks new that the program was going away, did they have the ability to pull forward some business. So just thinking about sequentially, as we look into the first quarter, just kind of apples to apples on that basis, should there be any noise from that or no?

Cory T. Walker

No, I don't -- we don't believe so. Whatever happens in the first quarter will occur because of policies that have effective dates of 1/1 through 3/31.

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

And just, Powell, you made the comment in your opening remarks about options exercise, so you guys just took the stock? Was that the interpretation of that, that you just exercised in held?

Cory T. Walker

Yes, basically, I think the answer to that is yes. Basically, I brought and Cory brought existing shares that were exchanged for those options, and we got back a net new number. That's how we did it. I think it's important, because the reason I raised the issue, Justin, is this. It basically shows in the filing a sale and a purchase, when in essence, there was an exchange, if that makes sense. I know it does to you but. Believe me, it killed us to have to exchange those shares at $25.30 or something, believe me. But it had to be done by the end of the year. And unfortunately, Washington never got the financial cliff worked out before 12/31 and it hurt, but...

Operator

And there are no further questions. I will turn the call back over to the speakers for any additional or closing remarks.

J. Powell Brown

No, thank you, Rochelle. It's nice to talk to everybody. and we look forward to talking to you next quarter. Have a great day. Thank you.

Operator

And that will conclude today's call. We thank you for your participation.

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