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Brown & Brown Inc. (BRO)

Q3 FY07 Earnings Call

October 23, 2007, 08:30 AM ET

Executives

J. Hyatt Brown - Chairman and CEO

Cory T. Walker - Sr. VP, Treasurer and CFO

J. Powell Brown - President

Jim W. Henderson - Vice Chairman and COO

Analysts

Keith Walsh - Citigroup

Chuck Hamilton - Ftn Midwest

Michael Grasher - Piper Jaffray

Meyer Shields - Stifel Nicolaus & Company

Douglas Mewhirter - Ferris, Baker Watts

Keith Alexander - JP Morgan

Unidentified Analyst

Nikolai Fisken - Stephens Inc

Presentation

Operator

Good morning and welcome to 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 and that such payments are intended to fall within the Safe Harbor provisions of Security Laws. Actual results or events in the future are subject to a number of risks and uncertainties that may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of numbers or factors, including those of risks and uncertainties that have been or will identify 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 fillings with the Securities and Exchange Commissions. Listeners are caution to have such forward-looking statements are not guarantees our future performance and those actual results and events may differ from those indicated in this call, such differences maybe material.

With that said, Mr. Brown, I will now turn the call over to you.

J. Hyatt Brown - Chairman and Chief Executive Officer

Thank you Chris and good morning everyone. We have Cory and Jim and Powell, and actually one of the things we are going to add to this call this morning is that Jim is going to talk a little bit after acquisitions about Citizens and the Florida CAT Fund. Jim is the current Vice Chairman of Florida CAT Fund. So, I think you will find that information interesting.

So, without further a due, Cory will joint to talk about financials.

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

Thank you, Hyatt. Our third quarter financial results reflect the continuation of one of the most difficult insurance market environment for insurance agents that we have seen in the last 15 years.

Our net income for the third quarter of 2007 was $46.2 million was up 14.8% over the last year number. Correspondingly, our net income per share for the quarter was $0.33, and that’s up 13.8% from the $0.29 we earned in the third quarter of 2006. From the revenue standpoint, commissions and fees for the quarter increased 8.1% to $225.4 million, that’s up from 2 point… to $208.6 million earned in last year’s third quarter. Included in our press release is the table that summarizes our total growth rate and the internal growth rates from our core commissions and fees.

In the third quarter, outside the core commissions and fees, we received $8.9 million of profit sharing contingent commission compared to $2.1 million we received in the third quarter of last year. Now most of this increase in profit sharing contingent commissions came from our brokerage division and specifically Hull & Company subsidiary.

Now looking at the internal growth schedule, for the third quarter, we had a negative internal growth rate up 3% and that was mainly due to the significant insurance rate declines in state of Florida. Our total core commissions and fees for the quarter increased 5.6% or $12 million of total new commissions and fees. However, within that net number was $18.1 million of acquired revenues and that means we had $6.1 million less commissions and fees on the same-store sales basis. Hyatt, Jim, and Powell will going to talk about the activities in each of these business segments in a minute.

But moving on to the other revenue line items, our investment income was just slightly higher than prior year, so no real change there. Our other income was $8.6 million this year... or this quarter. And inside of that number, we had $7.2 million of gains from the sales of various books of business around the country. As we relate to our expenses in our pretax margins, our pretax margins for the third quarter 2007 was 31.8%. However, if you exclude the gains on sale the books of businesses, our pretax margin was approximately 29.6%, that’s a 120 basis point reduction over the prior year pretax margin of 30.9%. Excluding these gains, employee compensation benefits increased 40 basis points to 48% of total revenues. That 40 basis points represents approximately $1 million of net additional cost, which was principally due to just various miscellaneous expenses, ranging from group held insurance to employee education and just miscellaneous expense account.

Our non-cash stock-based compensation cost increased $700,000 in the third quarter, and that’s primarily due to the increased number of employees participating in our employee stock purchase plan that has a new annual plan year that starts each August. Other operating expenses as a percentage of total revenue, again, excluding the gains on the sales of the books of business was 14.3% of total revenue compared to 13.9% in the third quarter of ’06. That is also a 40 basis points change, and it equates to approximately $1 million of actual net average cost. And that was, again, no specific line item, it makes up the majority… it was just various expense accounts like T&E, legal, and insurance cost, but it probably had much more to do with the fact that in the quarter we had lower revenue growth and the general expenses just tweaked up a little bit.

Amortization and deprecation expense on the combined basis is consistent with last year’s third quarter when considering the acquisitions that we have done over the last 12 months. Our interest expense is consistent with the expected quarterly expenses of around $3.4 million. Our effective tax rate for 2007 is currently expected to run in the 38.8% range, and so, the quarter was consistent with that. And then, really if you look at the year-to-date basis, the trend that we talked about in the third quarter really are consistent with what happened year-to-date, and so, I will bypass just as line by line discussion and just say that look at the year-to-date earnings per share for 2007, excluding the gains that we have on the books of business sales and the gains that we had in the first two quarters on the Rock-Tenn, the year-to-date earnings per share was approximately $0.99 and that’s about a 4.2% increase over the $0.95 that we earned for the first nine months of September 30th of ’06.

So, with that, I will turn… turn back over to Hyatt.

J. Hyatt Brown - Chairman and Chief Executive Officer

Thanks, Cory. First of all, the Florida retail, which is the biggest surprise that we have had in a long time. As matte fact, I don’t think… I know that I don’t remember any quarter where we have had a negative growth rate in Florida. Last quarter, we were a positive 7.1 and this is the negative 12.3, and there were a number of reasons and some of which we were somewhere aware, but we are not… we do not expect them to be quite as voracious in terms of eating up topline.

First of all, in ’06, Q2 and Q3 were pricing peaks. There was a tremendous amount of anxiety among all the risk barriers in anticipation of the hurricane season. Now, the hurricane season is really July 1 through I think the end of October, but it is really July through 1st of October. So, last year, the highest prices for property insurance in the history of the world in Florida were written, and that was during the hurricane season. In Q3 of this year, starting in June and it really cascaded in July, August, and September, the carriers all put the paddles of metal and pricing of property is down 25 to 40 on every account and a substantial more even higher than that, and a lot of that did not admitted pricing or reduction. The largest single example that I know of personally was a premium that was in the third quarter of last year. The premium was $3.562 million and the renewal price was $1.560 million was down 56%. There are a number of other examples that that are in that neighborhood, and they are all the larger account, of course.

Now, the second thing, which is a little more difficult to think through, but it’s pretty simple let me think it about it for a while. In the quarter 1 and quarter 2 of this year, we did have a number of cancellations and rewrite, because of the dropping… the prices dropping so rapidly with citizens and so something that would be in Q3 and sometimes in Q4, we were canceling and rewriting in Q1 and Q2, and of course, that revenues was absent from this quarter. Exactly how much that is, we don’t know, although, we have a number of examples. The third thing is, is that casualty all of a sudden started down as pressures by all the companies to increase their topline in terms of writings. The casualties revenues and the casualties pricing was… which has been kind of flattish within a 10% to 20% and a new account, if you're going to write a new one you have to be at least 30% below expiring to get into the ball game.

Last and also not least is payroll and the housing related businesses are down 5% to 30% around the system where we do have a lot of home building kinds of exposure. And this would include artisans and etc. So not only do the payrolls go down but also the estimates for revenue. So, the coverages that are based on revenues are also down similarly for homebuilders and those people that surround homebuilding. Addition, and of course this is Florida, I mean this has happened before, not possibly not quite as severely as it is this time.

Additionally, non-admitted markets are continuing to reduce their prices and give better terms and conditions and of course, I think. Powell is going to talk a little bit about that in a moment.

One. A national admitted carrier is now writing property on a limited basis but not on the standard property form. It’s on an inland marine form. So they’ve got a certain amount of ability to move pricing around based on what they want to do. Umbrellas on a vanilla basis are down 20% to 30% and citizens now have 3.5 billion in premiums. I think that’s about 30% or maybe 35% of market, Jim’s going to talk about that and we're due for another workers comp rate decrease in January of, I think its 14% or 15%.

A general statement about employee benefits. If you go all around the country employee benefits is up 7% to 10%. Looking at national retail last quarter it was a positive 2-7, it’s now a negative 0.08% and all areas in national retail experienced continued downward rate pressures. Looking at Georgia and South Carolina, property casualty is minus 10% to 20%. Non-admitted is sometimes is as much off as 40% to 45%. Mid-market and workers comp in Georgia is not quite as competitive as South Carolina, which is very competitive. Costal Virginia is down 10% to 20%. Casualty only accounts can really be crazy 30% or more. This is for renewals and new business, both. Marine is going south fast when the two titans go after the same account. And the two titans are two risk barriers who have a thing for each other and when they get after an account and each knows the other is competition then you can throw the prices out the window.

Regionals are most aggressive and when you get away from Costal Virginia. New Jersey and New York City area casualty and property is very competitive. Its one of those things that 10% to 30% pending upon the kind of account. However one difference, if you look at Manhattan contractors and we've talked about that in the last two quarters, They had Manhattan contractors have been flat and now the good ones are down 10% maybe 12% that’s different from Q2 there but if you are a Manhattan contractor and you have a bad loss ratio, you're going to pay the price.

Some company's are limiting their costal exposure on Long Island and New Jersey. A product is flat unless its light exposure. Some umbrellas down 20% to 40% non-admitted is very competitive more than Q2. Condos and co-ops are resting around $0.09, which is, I think about as low as they can go. But, who knows? Not much more to go. Work comp rates, maybe down a little bit but not that much. Upstate New York, renewal pricing is more competitive than three to six months ago. Account and I’d bear in mind, upstate New York has been a haven for profitability for P&C Company’s since the beginning of time. Accounts, however, with losses, the companies are doing some underwriting. Accounts with losses are going to pay up. The state fund is aggressive in workers comp and there with the elimination of the second entry fund being pretty much abolished, that has an impact on pricing.

In Ohio, Indiana, Illinois, Wisconsin these areas excluding Chicago metro, those areas had the lowest rate to start with and so they are down by percentages but the, but again it’s pretty brutal. The terms, if you compare prices for accounts. Lets say in Ohio and Indiana and Illinois rural areas and you compare them with some of the more metropolitan states there the price is the base prices are much lower.

Again new business, to get a new account, got to be 30% lower. Occasionally there will be an account that will move based on terms and conditions. In the Golf Coast, the Louisiana, Texas and etc. The economy is very strong. Its oil related. Property non-admitted is going down 30% or more. Workers comp is very competitive particular in Texas. Texas is the oil business going on. The market in Huston and that area, other than costal is as competitive and possibly more competitive as it was in 1998, which was the depth of the previous market and one national company is in Texas buying business. Chicago metro, that’s a little different ball game, I talked about Ohio Indiana, Illinois, and Wisconsin. Here in Chicago metro those contractors were flat and they’re down now 5% to 10%.

Regional in the metro area are very competitive on contractors that are artesian and have moderate to low hazard on the heavier contractors as they not all play the game. In Western Retail there was a negative 4.1% it’s now negative 5.9%. More of the same except California work comp might be, starting to moderate and that’s not shown up in the pricing yet. But there’s all kinds of discussion about the rate they’re recommending a 4% to I think, 6% rate increase and the fact that loss costs are rising so maybe. In Arizona the state workers comp line is getting more aggressive and that’s making it more difficult to write new workers comp accounts.

Our renewals are down 10% to 15% not quite as bad as California. New, you got to be 25% to 30%. New Mexico and Colorado. Now here’s something, talking to our officers price reductions may?. And I’m not sure whether that’s real or not. It might be just, I've got the business for this quarter. Construction is off 5% to 10%. If it’s nonresidential its minus these are pricing, pricing numbers minus 15% to 20% and the workers comp may be steadying a little bit in Colorado and a little softer workers comparable is a little softer in Mexico.

If you get outside of, in California if you get outside of the Metro areas like Los Angeles and Santiago. It’s a little different ball game. Renewals maybe down 5% to 10% in certain areas. Workers comp goes down 15% to 20% still helping a 1:1 change and umbrellas are down about 15%. There is a little now change in Quake, Quake has been now going up. Some renewals now are coming in 5% to 10% below expiring. In Washington we have sort of same as it was last quarter, 5% to 15% down on renewals. If the account is heavy in GL then the company's very aggressive in that area. Marine is flat to down 5% and our travel business all 5% to 10% on renewals. So. Powell would you like to talk about the other…

J. Powell Brown - President

Thank you Hyatt. In special programs FIU. We would say more the same revenue Q3 in ’07 over ’06 is down about 50% as we anticipated. Citizens rates are about the same as they were around $0.50 but they’re erratic, on the interpretation of the rules. On a positive note we can now write Condotels, those are condos that have occupancy like a hotel where they have nightly rentals but have to be left in 50% of the time. The downdraft there this quarter was slightly off set by the performance of Proctor Financial which focuses on force placed property. And they have sold more new accounts and last year in Q3 we had lost an account. We got a new account back. Relative to brokerage in the property arena in costal areas rates are going down very substantially 20% to 50% Terms this is in Florida from Jacksonville rolling down through to the center part of the state are under a significant pressure with wind deductibles lowering to 2% and 3%, but they are typically holding at 5% wind in coastal areas, limits now are doubling even with the reduction of rate, so if you paid $100,000 last year for $5 million primary limit, you may pay $80,000 or $70,000 for a $10 million limit now in Q3. Significant number of mid term cancellations and rewrite. Property Inland is cheap, cheap, and getting cheaper. There is lots of standard market activity there.

In terms of causality business in the East, Eastern United States and Midwest, big automobile and residential contractors are typically down up to 15%. Commercial contractors are down 25%, or more. Regional carriers are attacking the umbrella business around the country. In the West, residential contractors not only are the rates down significantly, but payrolls were down significantly. And as we talked about in Q2 that has significantly impacted the revenues of international E&S. Premiums though as a number… premium under $100,000 in the West. Casualty are typically down 10% to 20%, premium over a $100,000 to $150,000 up or down 30% or more, the admitted market continues to be very, very active in the West. Professional liability brokerage is down 15% to 30% depending on the class of business. Winding authority in Florida, rates are down 20% to 30% we’re seen increased property capacity, which is afforded in those winding authorities. We are seeing more admitted markets there and citizens continues to impact the personal aligned segments of Hull as we talked about Q2. A one citizens note that we have referred to in the past is in June of this year, citizens rolled out a wind only product for $1 million coverage part of I think it $10 million of total insure value. On nine one of this year citizens was allegedly or supposed to rollout a $2.5 million all perils policy. That has not occurred yet. Apparently that will now happen 11 of ’08, but we don’t know anything… about it. But we know that it did not occur on nine one and we had alluded to that in the past.

Binding authority outside of Florida rates are typically down 15% to 20% and standard market continues to be active there as they are in Florida. Public entity business countrywide, depending on the watch ratio, typically rates are down 0% to 20%. In the services area, we are very… continued to be very please with USIS and NuQuest. However, we would point out that we wanted the clients of United Self Insured Services has taken part of that business and how and the impact of is roughly a shortfall of about $400,000 of revenue a month in USIS. In the professional national program dental professional rate countrywide seem to be relatively flat, but the corresponding package typically down 0% to 10%. Lawyers, larger firms are down 20% to 30% and smaller firms are down typically 0% to 15%. CalSurance professional rates are down 10% to 20%.

And with that, I will turn it over to Jim Henderson.

Jim W. Henderson - Vice Chairman and Chief Operating Officer

Thank you Powell and good morning. As reported in our earnings release, we are please to report the increase in acquisition activity in 2007. The run rate to acquisition is $81.8 million year-to-date. We believe that we… based upon current activity that number could exceed the $100 million for the year.

A greater significance is the quality of agencies and people that are joining Brown & Brown. 18 of the transactions announced, five were retail agency and two were wholesale brokerage. The total national deal flow activity for insurance agency and acquisitions are continues to increase for 2007 compared to previous two years. For 2005, there were 172 announced transactions, 184 for 2006, and the pace for 2007 could exceed 220. The increased activity has come primarily from the public brokers and from the three former public brokers now acquired by public entity or public equity capital. There is no significant change in activity for banks or for private agency deals. There is so many occasions in the agency acquisition market that to tie credit terms while restrict or having the impact to fund the growth, the acquisitions by the private equity firms. We are pleased that our cash flow and the access to credit will provide advantage to Brown & Brown for acquisitions.

Agencies with revenues of less than $5 million comprise a significant share of intermediately market. This size agency continues to be a target rich environment for Brown & Brown. We have a long-term success story of acquiring and integrating the small and medium size agencies and will continue to focus on this group and larger agencies. To handle an increased number of transactions, we continue to expand our agency prospecting teams and transaction capabilities. Acquisitions [inaudible] part of our leaderships responsibilities.

As Hyatt mentioned to you we wanted to give you an update on some of the activities of the Florida hurricane Cat fund and also citizens insurance company to give you another angle and view of the property pricing in the state of Florida. First, the hurricane cat fund. Necessity of the phenomenon of the 1994 legislature was an act in to provide lower cost reinsurance to the carriers for state of Florida. Over a period of time, the following chain years post 2000, 1994 to 2004, the cat fund accumulated approximately $7.5 billion in cash. The ’04 and ’05 seasons result in a pay out of claims Florida cat fund to various carriers in the state of Florida of approximately $10 billion, leaving a $2 billion shortfall, which has resulted in assessments now [inaudible] to policyholders throughout the state.

In recent activity cat fund has borrowed approximate $5 billion in pre-event cash funding to assist for any hurricanes in ’07 and ’08. The legislature increased the pay out capacity of the cat fund to a new level of $27.5 billion with options below and above that amount. Those options have not been picked up by the carriers. The lower cost reinsurance has been a factor in reducing property pricing for carriers in Florida and principally for citizens. The largest reinsure… reinsured by citizens are by cat fund is for the citizens insurance company. We will give you a few stats that’s been released on citizens to share with you. The current policies in force for citizen is 1.38 million. The forecast for 2007 is to reach approximately 1.58 million and for 2008, the forecast may grow to 2 million policies. There has been a decrease in the rate of growth, although, citizens continues to grow at a fast cliff.

The premiums in forced for citizens currently reported as $3.55 billion in annualized premium. The market share that announced for the property as of June 30 of ’07, citizens now represents 30% of the property market for the state on the financial side for citizens the current surplus levels for citizens based upon their reserving program, represents $1.2 billion surplus within citizens. The amounts PML, the problem maximum loss for citizens, and this announcement was associated with 100 years forecast, not 250 for which most carriers are required to reserve. The PML amount was 24.5 billion.

Citizens are retention before recovery from the flood cat fund, it amounts at 1.8 billion and their recovery from the cat fund is approximately $8 billion. Citizens rights remain frozen through ’07 and ’08 to be reviewed and adjusted to market conditions on January 1 of ’09. The assessment accumulations in citizens under a 2004-2005 storm scenario, it could result in assessments to citizens policyholders representing anywhere from 80% to 90% of their current premium levels. The growing concern about the accumulation of values given the low market pricing conditions for citizens that concern has manifested in a growth of values of PML now that makes the assessment capability for citizens and for the cat fund. And this has been certainly talked about by CFO [inaudible] in terms of ways to restrict citizens growth and restrict the growth of Florida cat fund. So, that’s kind of update of those two entities and its impact upon the Florida property market.

This time, I turn it back over to Hyatt for closing comments and then open for questions.

J. Hyatt Brown - Chairman and Chief Executive Officer

Okay. Thanks Jim good report. Relative to the forecast for the next quarter 0% to 5% growth, excluding Florida… 0% to 5% growth, excluding Florida.

So, now Chris will open up the phone for any questions.

Question and Answer

Operator

Thank you, Mr. Brown. [Operator Instructions].

Now, we go first to Keith Walsh with Citi

Keith Walsh - Citigroup

Good morning everyone.

J. Hyatt Brown - Chairman and Chief Executive Officer

Hi Keith.

Keith Walsh - Citigroup

Hi, just a couple of questions. First… and I appreciate the explanation about Florida I guess I was surprised like everyone else it deteriorated so quickly. Besides pricing where are the levers that you can pull to fix this and do we enter a period of easier growth comps as we get into 2008 and I have a follow up

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, I think your easier growth comps is probably correct. What we are going through I mails from this year that never occurred before in Florida and so we, to get into what I would call a steady state will probably going to be the second quarter of next year so from now through the end of the fourth quarter and end of the first quarter we are still going to be having a very difficult kind of market place now there are lots of opportunities to write new business don’t ever realize that Florida isn’t a growth state and Florida is a growth state and of course what happens is, is that we do have some great programs that are using to expand in Florida but the bottom line is that probably casualty is going to continue to go south in Florida cause it has not gone south as much as it has in other parts of the country and everyone is thinking well no hurricanes this year and so next year is… 12 months off and don’t worry about it till then. So, does that answer the question?

Keith Walsh - Citigroup

Yes, that’s helpful. And then I guess the second question I have, just looking at the $13.1 million year-to-date I guess $8.6 million in the quarter of books of business that you had sold I mean that’s by far and away the largest number I have seen in my model here going back several years you know what exactly is driving that are these under performing blocks of business

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, what happens when you have a market that the pricing is declining where you have people who have sold books of business or agencies to us. Sometimes they get a little enamored with not having to work to hard, and therefore, things start to deteriorate a little bit and it becomes apparent… they might be better for us to part. The other thing that we are always dealing is we are always looking for slices of business that are under performing. Now an example of that would be trucking business. Trucking business on the left is high hazard trucking for which we have none of at the movement. That is going to be max 15% to 20% margin and you know we’re not going to do 15% to 20% margin business so all of those kinds of things or conflicts going on within our organization so each of our profit centers because it is the income of the leader of that profit center depending on growing the profits and the margins of they are constantly looking for ways to A) write more business and B) make a higher margin on those lines that already riding and of course as we become more sophisticated across the company and countries about lines that are the most profitable we… our people are responding and so in this kind of market it’s a good time to take a look at all of those areas and in a softer market if you have any kind of slice of business that has been kind of over looked because you say, well its not doing quite so well. That all of a sudden focus is upon those slices and we’re making those decisions as we go forward.

Keith Walsh - Citigroup

Yes thank you.

Operator

We’ll go next to Chuck Hamilton at FTN Midwest

J. Hyatt Brown - Chairman and Chief Executive Officer

Okay Chuck.

Chuck Hamilton - Ftn Midwest

Good morning everyone. Two questions for you this morning. The first question I guess deals with supplemental commissions. I see that in second quarter ‘07 at the end of the quarter, a little bit more than 3.2 million in that quarter of the net commissions in this quarter, do you know how much was related to supplementals?

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

Yes Chuck. It was $1.5 million.

Chuck Hamilton - Ftn Midwest

1.5 and of course that’s included then in your growth calculation for organic revenue.

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

That is correct.

Chuck Hamilton - Ftn Midwest

Okay and I know you folks don’t look at this but maybe you got a sense of it is we take a look year over year to the quarter. We’re showing a 12% increase in other operating expenses. Do you have a sense of what percentage of that is organic expense growth that is striping off the affected bringing in the acquisitions and also the sales of these, excuse me, sales of these books of businesses as well.

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

Talking on the first part there is mostly expenses are coming in from the acquisition. Most of them are not normally at our same margin, but there’s no one particular line that’s really out of whack and as I kind of described, if you take out the book of business sale its about $1 million worth of costs that are in there, but it’s really just all over the board. Various costs. Its really they went up a little bit, but it’s mainly the salt or revenue that kind of showed the margins up and I’m not sure if I have understood the second part of your question.

Chuck Hamilton - Ftn Midwest

Right. I guess it’s just adjusting the expense growth to also include the fact that you’ve taken out expenses with sale books of business, the producer’s expenses.

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

Yes, but that doesn’t show up quite as quickly. You know because you’re only talking about one month of revenue expense so that’d be marginal.

Chuck Hamilton - Ftn Midwest

Right. I guess the last part of that would be with the gain on books, excuse me, gain on the sale of books of business $8.6 million. Do you have a sense how much that translates into revenues that will not appear in future periods that will annualize revenues that have foregone with that sale?

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

Yes, it’s about $4 million and $4.5 million worth of annualized revenues.

Chuck Hamilton - Ftn Midwest

Okay.

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

And the total gain of that was about $7.2 million.

Chuck Hamilton - Ftn Midwest

Okay.

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

A quarter. I think, Chuck, also to give you a little more light around the issue of acquisitions, and in many cases may be not most, but in many, we do have moving expenses. For instance, we acquired recently the JP Morgan personalized operation which is in a suburb of Wilmington, Delaware and in their I guess, data center, so we have to move immediately and move to a new location et cetera. That all, you know, is a move to the kind of expenses that are one time expenses, but we have to anyway. That happens in almost every… some of those types of expenses happen almost every acquisition.

Chuck Hamilton - Ftn Midwest

Okay. I was just trying to get to sense of it since we’re showing organic revenue growth wouldn’t it be great if we could see organic expense growth so that we can then monitor the ongoing expenses compared to the ongoing revenue stream?

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

Right.

Chuck Hamilton - Ftn Midwest

Thank you, gentlemen.

Operator

We’ll go next to Michael Grasher of Piper Jaffray.

Michael Grasher - Piper Jaffray

Hi, I guess Cory in his initial remarks mentioned the 15 years toughest environment. As you look at today’s marketplace, I mean this the most difficult environment that you can remember or do you see any difference in today’s market compared to say 1998-1999 time period?

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

Well if you look at just the market we have the Florida situation.

Michael Grasher - Piper Jaffray

Yes.

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

Then it’s about like 98-99 and we’ve also seen back in really ‘80 to ‘83 that’s before most you all were born so we won’t go into that, but yes we’ve seen this before.

Now the Florida situation is really an outgrowth the fact in two years we had very abnormal hurricane activity which forced the prices up very substantially and then no hurricane activity one year and hopefully none and then this year and so all of a sudden you have a big up and a big down and the big down instead of being a more, sort of like a pyramid going down on the other side of the pyramid. A level sort of reduction. It was a 50% reduction or 60% reduction overnight. So that is an issue that we just never had faced before.

Michael Grasher - Piper Jaffray

Understood, then in terms of the carriers themselves the underwriters, are they behaving any differently than across the country than what you would have expected?

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

I think generally speaking, I think that underwriters are probably a little better positioned today than in ‘98 and ‘99 to make underwriting decisions on pricing and one of the reasons is that I think the systems are a little more effective and efficient. The other thing though that makes this a difficult call is if you look at the large group of the risk bearers as reported in business insurance you will see command loss sequence ratio of about 90% to 92%. That never happened before but its because of Sarbanes Oxley, and there aren’t redundant reserves even though some of those reserves are being released into the income stream now which creates this very, very good command loss expense ratio. However, at a recent meeting of the Greenbuyer, I was very surprised to hear a couple of companies that are well-known companies and well run companies and regional in nature indicating that they thought that this year they would have recently closed to 100% combined. I was very surprised at that. Now the risk bearers are saying that because of Sarbanes Oxley, the turn is going to be a lot faster then in the past and I’m not convinced with that frankly.

Michael Grasher - Piper Jaffray

Interesting and then if you look at government intervention. Obviously this applies to Florida a great deal but across the country with California and I think you mentioned Arizona, New York being involved in workers’ comp as well. Aside from workers’ comp, has there been so much government intervention historically?

J. Hyatt Brown - Chairman and Chief Executive Officer

No, there is really not.

Michael Grasher - Piper Jaffray

Relative to today?

J. Hyatt Brown - Chairman and Chief Executive Officer

Yes, the market is working quite well. Really what happened is, is there is really less government intervention. As an example, a monopolistic state with Nevada up until about four or five years ago, they then took the state fund and made it into a non-profit and now it’s a profit making organization I believe and they are writing workers’ comp like crazy, and of course, they are using agent. Another monopolistic state West Virginia that had been monopolistic forever was losing their ears and hat and teacup in the fund. And so, they rolled off the fund, created a new company, I think the name which is Brickyard and it’s now being… is now… not for profit. In West Virginia, an agents and brokers are accessing that market, and next year anybody can come in. So, there is a movement towards having a competitive marketplace. When you have a crisis situation and you get people in political positions where they think they have to respond, because of the screaming and yelling of the populace, like we have in Florida, then all of a sudden, you are going to have a short-term Neanderthal approach. Now, has this happened before? It did, in the 60’s and 70’s. The same thing happened on automobile liability insurance, and there was a huge pike over whether or not we had no fault liability and the… what was then called the assigned risk plan for auto liability grew by leaps and bounds, and everybody was griping and complaining well. Over a period of time, the marketplace smoothed out and now the liability for private passenger is very, very competitive and has been for 10 years. So, you have these peaks and valleys, where you have a catastrophe exposure and the catastrophe exposure in the United States and as I see it is quake in California and it’s wind along of the coastal areas from Brownsville all the way to probably New York City, and of course, the most difficult and the scarcest catastrophe exposure is a cat for a level four hurricane coming into the bottom end of Manhattan. So, that’s… but that’s part of why the insurance companies are in the risk bearing business. They are in business to transfer risks and to take risks.

Michael Grasher - Piper Jaffray

Sure. And now, I wanted transfer over to Jim and just ask a question on the acquisitions. Given the market, has there been a surge in the pipeline due to the market, or has the pipeline remained stable in terms of opportunity? I mean it seems like this quarter and even you comments potentially reaching $100 million reflect… do reflect an increase in opportunity, can you speak a little bit more about this?

Jim W. Henderson - Vice Chairman and Chief Operating Officer

Yes, there does seem to be an increase surge in the activity. And if you… the product conversations with those who are selling, you can… you got demographics involved, you got markets involved. Demographics, the baby boomers that are looking at what do I do now, the family doesn’t want to take the business over… the people inside really can’t buy it. And so, this is one of those conditions that we feel like that is creating a lot more activity. So, we are pleased with the… we always have a certain amount of flow. There seems to be more than last year. We also are, in fact, looking at the more of deals and building our infrastructure to go visit and talk with more people, because I think one of the safest place we have for our shareholders is to continue to look at the small deals, they are very accretive. They really fit well. They blend well with our culture. So, we will continue to focus on that, not exclusivity away from margins. So, I think we were encouraged by the activity flow. The history… our… turning to history is about one-third organic and two-thirds by acquisitions, and we don't really see that long-term changing. Near-terms when organic is certainly a challenge by the market and by government, we are, frankly, very pleased with that. We have another option to go create growth.

Michael Grasher - Piper Jaffray

Okay. Thank you. And then just a final question or follow-up on that. How much of the smaller activity or acquisition-wise is being driven by the potential for change in change in capital gains.

Jim W. Henderson - Vice Chairman and Chief Operating Officer

Well, it definitely comes often in discussions with the sellers, when they are looking for 15% rate and allow the national press and Canada indicate that basically all that… that rate is unfair. So, there is a… it’s coming up in conversation and timing matters that… is it a component by self? No, but it certainly the factor that’s encouraging now versus later.

Michael Grasher - Piper Jaffray

Thanks again.

J. Hyatt Brown - Chairman and Chief Executive Officer

Thank You.

Operator

We will go next to Meyer Shields from Stifel Nicolaus.

Meyer Shields - -Stifel Nicolaus & Company

Thanks. Good morning. If we look at recent acquisition by folks by hilb and by hub, there has been a fair number of banks that have been divesting their insurance operations. Is that a trend or those are just a number of one off issues?

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, I think, it’s a trend. What’s happening is banks are starting to vomit up their insurance agency operations. And there are a couple of banks who are doing a very good job. But for the most parts, there is a substantial difference in culture, and there is always the Board of Directors being concerned about the specter of tide house evil. And if a bank ever gets nailed on time, credit is selling insurance the client’s action impact to that would be they will be saying more money than they make from insurance agency operation in a thousand years. So, all of that does have an impact, and of course, what’s happening right now is there are number of banks who are divesting that are… in the marketplace as we speak. And we have actually acquired the JP Morgan one as you know. We have acquired a small amount in Kentucky about a year ago or so. And we made an offer on another one in the Southeast and it was sold internally. And then, of course, HRH bought Bank of America, and then, there is a whole bunch of things going on. So, as time goes on, I think, we are going to continue to see more of that. I think, there is another situation that’s occurring where a bank is just bought another bank in the Southeast and apparently there is some of divesture concern. So, those are opportunities for us and they are opportunities for other people too.

Meyer Shields - -Stifel Nicolaus & Company

That’s very helpful. Switching gears a little bit. Have there been an issue with employee turnover? Is that getting worse over the past couple of years for you folks?

J. Hyatt Brown - Chairman and Chief Executive Officer

No. The one thing about having a market like, this it does separate the good people sometimes from the people that are not quite as good because you have to be on your toes. Every account have to be very, very carefully handled. And so, that’s not just at producer the level, it has to do with marking level, has to do with a customer service representative, is the whole team. And so, what we are constantly doing is one of the reason that we have… the kind of margins we have is that we try to have a very best people and try to give them additional training. Now, we have something called Brown & Brown University, which has been going now for about three years… four years. And it has been very beneficial and helping to upgrade our people and the retail P&C area and now we are ready to look to see how we ca do this in the brokerage or wholesaler area. As we go forward, the ability to run our model is very similar to the ability of a very well couched athletic team, take in look like a football team, where they have a fairly sophisticated game plan, offensive game plan, ours is really kind of like that and very good people can scroll up the touchdowns in their model, but they got to be willing to follow the model itself and to follow the leadership that has gone before them, that has shown the way. So, in the case of turnover, I don’t think we have greater turnover today than we normally have.

Meyer Shields - -Stifel Nicolaus & Company

And I guess one last question. In terms of the office leadership, are you comfortable with the people you have in force now?

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, we always have turnover and leadership, and that has to do with several reasons. We have 163 or 164 offices, and so the 163, 164… how many people are considering retiring, let’s say, in one or two years, or three years? Well, there are several. And so, we have to then go forward and find someone. They have to start bringing on someone who will take over their positions. And we have to help them grow that individual. And then, there are just people who all of a sudden one day, say, gosh, I am going to just going to walk out, go to the beach. So, we do have some turnover. But generally speaking, our people… our leadership capital, it’s the strongest today than it’s ever been.

Meyer Shields - -Stifel Nicolaus & Company

Thank you very much.

Operator

We’ll go next to Doug Mewhirter from Ferris, Baker Watts.

Douglas Mewhirter - Ferris, Baker Watts

Hi, good morning. I’ve two questions. The first is, obviously, a sort of retailers are very disappointing and also… Hyatt, you mentioned that FIU was also… was still very soft through for obviously reasons. But given the FIU’s within special programs, and correct me if I’m wrong, but special programs showed very positive overall organic growth. What seemed to be picking up the slack?

J. Hyatt Brown - Chairman and Chief Executive Officer

It’s a combination of one profitable financial that we talked about, and we had some nice growth in public entity.

Douglas Mewhirter - Ferris, Baker Watts

Okay. Thanks. And the second question. Because of the contingents commissions have seemed to be, I guess restructuring and the nature of them were restructuring. Do you think, Cory, that continuance maybe less front loaded, as they have in the past? And we have seen more quarters with unusually large amounts in the second, third, and fourth quarter as opposed to just getting it all in the first quarter?

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

The short answer is, no. And first of all, there is really only three maybe four carriers with Harford [ph] are the only one that I’m aware of that are restructuring. It is all parts of the previous settlement. I don’t see… I heard of any other insurance carriers of the other 900 that we deal with that they would go to the guarantee supplemental commission. So, that takes care of that. The rest of the contingents should fall in the normal period of time. Now, the reason why we had such a larger number of contingents in the third quarter, relates primarily to the wholesale or marketplace where a lot of those carriers have… June, 30th type year-end. And so, it would just… they had good year, this past year and so the contingents were up. And so, they are really overall being much of a change in the normal flow in those contingents commission.

J. Hyatt Brown - Chairman and Chief Executive Officer

Doug, I think I pull you back on that, there is another issue here and that is when insurance carriers are making lots of money, our contingent commissions go up as a percentage of our revenue. When prices start to rise as they do when losses amount for risk bearers generally our contingents are flat or down, but we grow the other hand of this spectrum which is the organic growth. So, it’s kind of balancing act.

Douglas Mewhirter - Ferris, Baker Watts

Okay. Thank you very much.

Operator

We go next to Matthew Heimermann with JP Morgan Sectors… Securities.

Keith Alexander - JP Morgan

Hi. This is actually Keith Alexander calling on Matt’s behalf.

J. Hyatt Brown - Chairman and Chief Executive Officer

Okay

Keith Alexander - JP Morgan

Just one follow-up question. I was wondering if you guys could discuss how changes in price and exposure have possibly led to any changes in compensation or commission ratios or how these three factors are moving on relative basis?

Jim W. Henderson - Vice Chairman and Chief Operating Officer

Well, first of all, relative to our commissions of the company commission of the same. However, we are getting some additional commissions from some companies and it’s kind of sporadic and its not across the country, but that’s probably going to become a little bit more prevalent as they continued to got the prices. So, that’s the top end and in terms of the way we paying people, there is no difference.

Keith Alexander - JP Morgan

Okay. Great. That’s all we had.

Operator

[Operator Instructions]. We go next to John Fox with [inaudible] Asset Management.

Unidentified Analyst

Hi, good morning. I have a question from Powell. If you had the dollar amount for FIU this quarter and last year?

J. Powell Brown - President

John, last year FIU had about $4.42 and then this year it was just little over $2 million. So, there was roughly $2.1 million draft in the third quarter.

Unidentified Analyst

Okay. Great. And then for Jim, I can’t remember any type of projection I mean about acquisitions before, but are you telling us to expect $100 million or does just the pipeline looks good and what’s the message here?

Jim W. Henderson - Vice Chairman and Chief Operating Officer

That’s up to run rate, John. And we never have… we never have forecast normally.

Unidentified Analyst

And so, that you are analyzing the current run rate.

Jim W. Henderson - Vice Chairman and Chief Operating Officer

Yes, the current run rate, that’s right.

Unidentified Analyst

Thank you.

Jim W. Henderson - Vice Chairman and Chief Operating Officer

They have never done until the one.

Operator

We will go next to Nick Fisken of Stephens Incorporate.

Nikolai Fisken - Stephens Inc

Hey, good morning everybody.

J. Hyatt Brown - Chairman and Chief Executive Officer

Hi, Nick, how are you?

Nikolai Fisken - Stephens Inc

Good. How much of Florida is casually?

J. Hyatt Brown - Chairman and Chief Executive Officer

I don’t know

Nikolai Fisken - Stephens Inc

Just kind of goal post, it if you can.

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, it will be a scientific wild guess, yes.

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

You got personal lines, you got marine, and so, let’s see employee benefit is about $200 million. Casualty, when you talk about Florida, only is that right, Nick?

Nikolai Fisken - Stephens Inc

Correct.

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

Maybe 40%, but that’s kind of a guess. I have to look at that.

Nikolai Fisken - Stephens Inc

Okay. And Cory, what’s your outlook for a contingents for the fourth quarter?

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

Right now, it should be well less than $1 million, maybe $0.5 million from what we know right now

Nikolai Fisken - Stephens Inc

And then if you look at the four underwriters that are paying you these guarantied contingent, do you know how much they paid you last year in the form of the regular weight contingent?

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

Yes, it was about the same amount. We was around $6 million in total contingent, and so, right now, on the run rate, right now, we are running at $6 million and $6.5 million. So, I think it’s almost a wash.

Nikolai Fisken - Stephens Inc

Okay. And then last question for Hyatt. If you look at ’08, you guys are pretty confident… you guys can hit that B part of the B40 goal, but I am wondering more on the 40%.

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, I will tell you, right now, we have never normalized earnings and so, for instance, whenever we had the numbers last year where we had $5.8 million payment to the folks in [inaudible], we did normalize those in our own thinking. So, this year including the Rock-Tenn sales, we are probably going to be 40% in terms of the margin and I think Wall Street has a falling a little below the B and so is it going to be $15 million below B I don’t know, but that’s what some of the Wall Street estimates are as I understand it. And what we are in the process of doing as a mater of fact is our leadership meetings start Wednesday and we are going to talk about the next intermediate goal and because of a rolling 12 sometime in the not to far distant future we are going to be at the B. So, we will declare a victory and then go to the next intermediate goal, and we don’t know exactly what that’s going to be. But I think you can probably figure it out by just thinking about it.

Nikolai Fisken - Stephens Inc

So, if I look at margins year-on-year, you are down about 80 bits just on the comp and other Op expense, is there any reason that should not continue?

J. Hyatt Brown - Chairman and Chief Executive Officer

Well, it depends it might continue it might not. And so if you look back at our history, of course, you cannot look at one quarter or maybe any six months and say, it’s up or down. We continuously except for the cases I am talking about pretax now and you are thinking EBITDA, that’s sort of cases where there was a change and the amortization from 20 to 15 years our pretax have gone up fairly evenly. And so, we think there is still upward mobility, and we are going to see if we can get there.

Nikolai Fisken - Stephens Inc

Okay. Thanks.

Jim W. Henderson - Vice Chairman and Chief Operating Officer

This is Jim. If you look at the acquisition activity and if that comes in and unless it matches obviously the current rate there is some impact on margins from the acquisitions, and they come in at a very higher rate, some of them are not going to come in at the longest that much to have Brown & Brown rate.

Nikolai Fisken - Stephens Inc

Okay, thank you.

Operator

If there are no further questions at this time, Mr. Brown, I would like to turn the conference back over to you for additional or closing remarks.

J. Hyatt Brown - Chairman and Chief Executive Officer

Okay. That’s all we have, and so, good luck everyone and we will see you in January.

Operator

This concludes today’s conference. We do appreciate you participation. You may now disconnect.

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