Feb 11, 2008
Executives
J. Hyatt Brown - Chairman and CEO Cory T.
Walker - Sr. VP, CFO, and Treasure J.
Powell Brown - President Jim W. Henderson - Vice Chairman and COO
Analysts
Keith Walsh - Citigroup Dan Johnson - Citadel Investments Dan Farrell - Fox-Pitt Kelton Matthew Heimermann - JP Morgan Nik Fisken - Stephens Inc. Kenneth Billingsley - Signal Hill Group Eli Fleminger - Stifel Nicolaus & Co.
Michael Grasher - Piper Jaffray
Operator
Good morning and welcome to the Brown & Brown Incorporated Earnings Conference Call. Today's call is being recorded.
Please note that certain information discussed during this call, including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance and that such payments are intended to fall within the Safe Harbor provisions of the 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 of 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 filings with the Securities and Exchange Commission. Listeners are cautioned that such forward-looking statements are not guarantees of future performance and those actual results and events may differ from those indicated in this call, such events and such differences… I apologize… may 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 very much, Katie and good morning everyone. The batting order this morning is Cory will go first, and he's here in the room with me.
Powell… I will second and Powell will go third, and he and Jim who will go fourth, are on the line. They are on the route this morning.
And then, I will take it back over after Jim for a little recap and then we will have questions. So, Cory, do you want to start off with the financials?
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
Thanks. All I can say is thank God the fourth quarter is over.
This is the first quarter that we have ever had where we had less net income than the previous year's comparable quarter. Our net income for the quarter was $33 million compared to $37.6 million in the fourth quarter of ’06.
Total revenues for the quarter increased only 1.2% to $217.2 million from the $214.7 million in the fourth quarter of ’06. The first line item on the income statement is commissions and fees that for the quarter increased 1.2% or $2.4 million of net commissions and fees.
Including our press release is our scheduled internal growth and when you exclude the profit-sharing contingency income to get to the total core commissions and fees, for the fourth quarter of ’07, that increase $3.9 million over the ’06 quarter. However, within that net growth number is $20 million of revenues from acquisitions.
So, the good news is that we finished the 2007 year with our third best year in terms of annualized revenues acquired in one year. The bad news is that the continued governmental interference in the Florida insurance marketplace accelerated the soft market environment for us, thereby creating the fourth straight quarter of negative internal growth in core commissions and fees and actually the worst of any of those four quarters.
The net loss of the $16.1 million of the core commissions and fees on the same-store sales basis reflects a negative 7.8% overall internal growth rate compare to just a 3% negative growth in… the very last quarter. This specific internal growth rate by business segment will be addressed by Hyatt and talk a little bit of the activities in each of those segments.
But moving on to our investment income. We earned $500,000 less in the 2007 fourth quarter compared to the 2006 quarter.
And this is primarily due to a $275,000 write-down on a small investment that we had in a private equity fund that we owned since 1999. We anticipate that this investment fund will liquidate in the next 12 months and will recover the remaining recorded value on our books of approximately $221,000.
Other income was $1.4 million for the quarter compared to $791,000 in the fourth quarter of ’06. Most of these gains, as you know, result from primarily sales of certain book-to-businesses in the normal course of operations.
Now looking at the expenses for the fourth quarter. While our total revenues grew by only 1.2%, total expenses grew 11.6%.
In general, growth of our expenses outpaced our revenue growth for two reasons. First, we had a great quarter of acquisitions and during the initial transition phase of new acquisitions, the cost structure of these acquisitions are not as efficient as our existing operations.
And therefore, add to our increased cost as a percentage of total revenue. And secondly, we have a negative internal growth rate of 7.8% that result in $16.1 million of commissions and fee revenue disappearing in one quarter, primarily due to rate environment, the fixed cost portion of our employee compensation and other operating expenses do not adjust in anyway.
And therefore, these costs as reflected as a percentage of total revenues go up. Our single largest expense line item is employee compensation and benefit.
As a percentage of total revenue, this line equal 50.7% of total revenue compare to 46.7% of revenues charged in the fourth quarter of ’06. Excluding the results of just standalone acquisitions, the comparable percentage of total revenues would be 50.2% as compared to 46.7% in the fourth quarter of last year.
Since only compensation to our commission producers and our profit center bonuses vary on a real time basis directly with its revenues and earnings, the remaining management professional and administrative salaries are relatively fixed cost and do not adjust overnight. As of the end of 2007, we had 5,047 full time equivalent employees, of which 5,008 were from new acquisitions during 2007.
Thus, when you compare to the 4,733 full time equivalent employees that we had at the end of 2006, we actually had a net reduction of about 194 employees. Our typical employee receives a 3.5% salary increase each year.
And this normal cost of living increase accounts for the majority of the increase ratio of compensation to total revenues. The remaining differential was due to miscellaneous other cost increases such as the slightly higher cost for the group insurance as well as 401(k) profit sharing contributions.
Other operating expenses for the fourth quarter of 2007 amounted to $35.0 million compared to $35.9 million in the fourth quarter of ’06. However, the 2006 amount included a $5.8 million payment to resolve the State of Florida Spitzer related investigation.
Excluding that from the prior year’s other operating expenses, we had $4.9 million of additional expenses in the 2007 quarter over 2006. Of that amount, $3.4 million related to just 2007 acquisitions that were standalone offices.
The remaining $1.5 million of additional cost relate partially the cost from fold-in acquisition and other miscellaneous cost increases, such as accounting and professional fee went up, we had more software license fees or bad debt expense tweaked up a little bit and we had a little bit more contributions. Again, similar to our fixed compensation cost, other operating expenses are for the most part fixed and are not able to adjust as rapidly as the insurance prices fell in the same period.
Looking at amortization and depreciation expense. Those increases obviously were just mainly due to the increase level of acquisitions.
On interest expense was slightly higher and similar as it was in the three previous quarters. This was due to the increased $25 million borrowing in December of 2006.
Also as a result of our increased acquisition activity in the second half of 2007, last week we borrowed an additional $25 million from the Prudential Capital Markets Group at a 5.37%, all in coupon rate for a seven year period. We currently have remaining $150 million available to us in this facility with Prudential, which we anticipate to continue to tap into during 2008 depending on the acquisition activity.
Our effective tax rate for the year was 38.7%, and 38.3% for the quarter. However, as we have previously reported, we have had an ongoing IRS examination for the past year.
And the good news is that there was actually no significant issues except that the IRS believe that we should accrue and pay taxes for the profit-sharing contingent commission as of December 31 of each year for which we don’t receive the monies until the following February, March, April, May, and later. The calculations to determine the profit-sharing contingent commission are solely in the hands of 150 to 200 different insurance carriers that we represent, and they are paying the contingent commissions.
The vast majority of those carriers due not supply us with their calculations until the following February through May period. Since these calculations are based on information specific to each of those carriers and there is no regional method to estimate those are now until the carriers make the calculation and inform their agency force.
The primary industry standard is to record these amounts for both book and tax purposes at the earliest time that they can determine by the agent, which is generally when the carrier sends us the calculations are long with their check. The IRS believes that if the insurance carriers are taking these payments as a tax expense in the accident year period somebody should be picking it up as income.
Since they were auditing our 2004 tax year their initial assessment of the potential interest and penalties through the current 2007 year could amount to $7 million. Additionally, as ridiculously as it seems, the IRS field agent performing the audit also wanted to classify each of our insurance agency contracts that had a profit-sharing contingency feature as a de-facto partnership agreement for which a K-1 should have been issued and therefore allowed the IRS to assess an additional penalty of over $2 million.
Since we historically receive 75% to 85% of these contingent… profit-sharing contingent commissions in the first quarter of following year and pay taxes on those earning beginning with the April 15th quarterly tax payment, this entire issue in a nutshell really centers on a 90 day advance payment of the related taxes. We waved the cost of fighting this issue through the tax court system versus the cost of the lost cash flow from the timing on the tax payment and we determine that it was more prudent to settle with the IRS.
We ultimately agreed to resolve this issue with the IRS for $1.1 million of the interest, and an agreement accrue at December 31 each year for tax purposes only similar a amount of profit-sharing contingent commissions that we had received in the first quarter of that year, so we are dealing with a known number. And then we would true that number up to the actual amount received by the end of the following March.
Now this agreement will result in us recording large current deferred income tax asset on the December 31st balance sheet, which you see on our balance sheet. There is a $17 million amount there.
That current deferred balance will basically go away as of the following March 31 balance sheet since the relating income will now have been recognized in our GAAP financial statement as of March 31. Moving on to the year-end numbers.
For the full year of 2007, we had total revenues of $959.7 million, up from 9.3% over 2006. Our pretax margin for the year was 32.3%, up 40 basis points from the 31.9% in ’06.
Our net income per share for 2007 was $1.35 versus $1.22 for ’06. However, as you know, we have had several unique one-time items that occurred during 2007.
So, let me just recap on a per share basis where you might want to consider our 2007 base line earnings to be. The first and second quarter… in the first and second quarter, we recognized $18.7 million gain on the sale of the Rock-Tenn stock.
This amounted to approximately $0.08 per share earnings. During the year, we also recognized gains of $13.7 million in sales of books of businesses, which amounted to approximately $0.06.
However, there is always going to be some sales of book of businesses here and there. So, from an ongoing basis, which is assumes that $0.05 of the $0.06 was outside the historical norm.
This would make the… take the 2007 earnings per share $1.35 less $0.08 and less the $0.05 item, more like $1.22 earnings per share looking into the 2008 year. So, with that rather lengthy financial report I'll just turn it over to Hyatt now.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. Thanks Cory.
Moving into the retailer. And first of all, Florida retail, with a negative 11.2 this quarter versus a negative 12.3 last quarter.
The downdraft in pricing does continue and I think as I mentioned previously, starting in July casualty prices, which had been somewhat flat, all of a sudden started to precipitously drop and they are continuing. The renewals are 20% to 25% down, almost regardless of loss ratios.
Workers’ compensation is down an average of 18% that’s the new credit plus there are some companies that are using additional schedule credits that we are not using those same schedule credits 90 days ago. So, it continuing to… and currently workers’ comp in Florida has been quite profitable.
Umbrella is not quite so soft, down maybe 10% to 12% to 15%. Some good news.
Some non-embedded markets, these are property including wind markets, are now taking accounts from the citizens win. Now, these generally are larger risks, $10 million or more that have previously A rated by citizens.
Of note and kind of an unusual note, we were told by one large national carrier… this is their larger accounts division and they are writing accounts. They are $300,000, $400,000 of premium and up and the office I think is responsible for maybe three or four states.
On January 1, they wrote no new accounts and they lost no accounts. Never before happened.
And this is reflective across almost every company across the United States is companies are telling their underwriters, don’t lose any renewal. Prices in the spinal of Florida.
Now, spinal Florida would be Lake Orlando, Leesburg, Ocala, Gainesville, et cetera. Those are dropping 5% to 10% faster than elsewhere meaning coastal.
So, if you had an average of 20% to 25%, you have got to add another 5% to 10% on packages. The citizens’ rights are stabilized, meaning there hasn’t been anything that’s happened there in the last six months or so.
And the Tri-County area the standard carriers still aren’t in the market yet. They are still hanging back.
Although, we are doing okay now with FIU which I think Powell will talk about. In the marine area, we do have a large volume of yachts and these are basically Caribbean yachts, and of course, then some are more I guess go to the mail in the summertime.
If the yacht is $1 million or thereabouts the prices are down 10%, if it’s $1 million to $15 million, it’s down 30% above $13 million. These are the Hull coverages then 35% to 40%.
Exposure units are down in construction risk. Homebuilders, these are the payrolls and fleets of vehicles et cetera.
Homebuilders around 50% to 60% to 70%. These are the exposure units on.
And in commercial there will be a quite a bit of business there. They are down maybe 10% to 20%.
The actual real serious capacity problem in Florida in terms of property is really not in the area of commercial, although, there are some problems. But the real problem is in homeowners and that capacity of constraint, and of course, we are continuing to build new homes and the value in those homes, cost of content and et cetera create huge exposures.
So, I would expect the current conditions will probably continue for the first maybe one two quarters of ’08 and I think there will be some equilibrium and that is just [Technical Difficulty] and there has been since no further governmental interference. Employee benefits in Florida are up 10% to 15 on average.
Again, people are not exactly taking increase. They are changing coverages and et cetera.
So, the price increases are actually lower than that. National retail, moving on from Florida was a negative 3% and 0.001%.
All areas are expensing down their rates with a few exceptions. Now one of the things in national retail depending on where you are, A, rates never went up as high and therefore they cannot go down as low and B, there are some places where we are having a boom as a result of oil and related sorts of things.
So little different situation. But to get a little specific in Georgia, South Carolina [Technical Difficulty] and reductions, across the Board on packages, coastal property is still going down 25% to 40%.
However, that’s going to kind of flat out a little bit. Workers’ comp [Technical Difficulty] in Virginia, Maryland and Atlantic, the middle market, 20% to 40% on dis-pack, auto was 10% to 20%.
Umbrellas are softer on tougher risk. If you are in Pennsylvania and New Jersey area, trade contractors is minus 10% to 15% on renewal.
Workers’ comp is down 20% to 25%. Social services is the more stable area, generally 5% to 12% down.
Frame condos, frame condos in that area… this is property now… are $0.085 rate on renewals and they were $0.12 to $0.13 and if it’s AAA, then it is $0.02 to $0.03, and these are… those are pretty rock bottom rates. Don’t think those can go much lower.
In New Jersey package is very soft, 20%, 30% lower. Construction umbrellas are flat to minus 10%.
Some New York City contractors are getting a little more competitive because there’s some new markets there, workers comp is very competitive. Upstate New York is a little different situation, packages are off an average of 15% to 20%, umbrellas are 10%.
The property rates are the same as we talked about New Jersey, $0.085 on frame and $0.02 and maybe a little less on some AAA. Again Upstate New York never went up as high and therefore is not going down as low.
The exposure units are down on some contractors. There’s no big changes though other than that, Indiana, Illinois was constant working.
Workers’ compensation in Wisconsin has kind of gone crazy. Schedule credits there are now being given up to 50%, never heard of that before.
The heavy contractors in the Chicago area, that’s a little bit more stable, maybe it has… maybe down 10%, maybe down 12%. Lighter contractors though, less exposure of 15% to 20%.
The regionals, the middle part of the United States is regional heaven and the regional are really, really, really aggressive in that area. Going down to Louisiana, Mississippi and over into Texas for a moment.
In Louisiana, larger property is the minus 30%. Again this is the all non-admitted stuff and if in fact there was an admitted market that had written a how to protect a risk like a AAA risk, those prices are flat, but it’s the… it’s the non-AAA stuff that is going down 30 or so percent.
Umbrellas are flat and down 10%. Marine is down 10% unless it is excess marine and that’s minus 20%.
The oil boom is going on and there’s lots of things happening, increases in exposure units and et cetera and markets now in Louisiana are taking business from citizens as the markets are taking business from citizens in Florida, which is good news. In Texas much softer than 90 days ago, tier one is still tied on win, tier one that’s a kind of a… I guess you will call it a little bit of a misnomer, it’s really if you look in the Houston area you will find that tier one is south of I-10 and anything that’s north of I-10 becomes very, very competitive and as markets are starting to reduce their prices in the tier one area, the packages are down 20% to 30%.
The economy is strong however and oil and tough lines is minus 10% to maybe minus 20%. Employee benefits in that area of Texas is a +2% to +5%, that’s the lowest pricing that we found.
In Western Retail, minus 8.3% was minus 5.9%. New Mexico and Colorado packages were 10% to 15% up to $100,000 in premium and above that they are 20% to 30%.
E&S, general liability that is in the E&S market, that’s a little flatter particularly on the tougher classes. Workers’ comp is minus 10%, umbrellas are flat to minus 10%.
Aviation, now that is a very, very soft area, the softness according to our people in 35 years. Four new markets, two of them are overseas, two of them are of course U.S.
based and the two that are U.S. based are really at each other’s throats.
And so whole prices on industrial used aircrafts and these are jets and aircraft that would be $6 million or $7 million in value all the way on up to $30 million or $40 million or $50 million and those whole rates are down 45% to 55% and the liability is down 30% to 40%. Looking at, however though so, but other than the aviation I would call Colorado, New Mexico a little more stable than some of the other areas.
California, Arizona, Nevada is till crazy, even Med-Mal in California is now going down 10% to 20%, although in California workers’ comp that we talked about is going down 25 has in the past, going down 25% to 30% or 40%. It’s now more in the 15% to 25% and there is a recommended rate increase as you know, but no one’s taking it.
So, I think by the end of the year there will be some changes, there, I will say one thing that the largest writer of workers’ comp in California has now increased her commissions to agents by 2% which is kind of interesting. Homebuilders, those exposure units on renewals are down, just crazy, 60%, 70% in California, Nevada, and in Arizona.
The umbrellas and particularly the more vanilla umbrellas are pretty stable because there is a $1000 per $1 million minimum and that has not been so far been violated and the last soft market I remember them getting down as low as $500 and $750. The… in Washington and that area, packages are… it’s a little more stable.
Packages down 10 to 20. Fish boats, marine, those kind of classes, those haul and P&I is up plus 20%, one of the few areas that are… that’s up.
The longshoreman harbor worker, workers’ comp is about flat. Probably as business is down 10% to 15%.
So, with that I’ll turn it over to Powell to talk about the other sectors. Powell?
J. Powell Brown - President
Thank you very much, Hyatt. In special programs, FIU revenue was down 28% in Q4.
things are not as erratic with the Citizens as has been in the past quarters. GL pricing and ex-wind business continue to be under great pressure.
American Specialty or Sports Entertainment broker and AFC also serves this facility. Rates in those two facilities around the country are down on average 10% to 20%, CalSurance the professional liability lines on accounts, under $150,000, or down 10% to 20% in account over 150 to 250 and above or down 35% or more.
Proctor Financial continues to perform very well and I would say the general rule on all programs, special and professional programs we have very good support from our risk bearing partners. And we're thus retaining a number of our accounts but they are at slightly reduced or very reduced prices relative to the services area as we noted in the Q3 call.
We are very, very pleased with USIS and NewQuest, but at the end of Q3 we lost a portion of one of the clients for, Soft services and they took it in-house, we didn’t lose the entire account. They took a portion of it, the majority of the business in-house and that affects us to the tune of roughly $400,000 a month.
That will continue on until September of this year. Relative to brokerage, in transactional properties specifically as you all remember the pricing went down substantially after June of last year, In Q4 in Florida properties down 30% to 60% and Florida’s got the significant downdraft.
Lots, of options for buyers, most notably citizens. But they have non-rated options and other rated options.
Outside of Florida as the general rule and transactional property, I would say is down 20% to 50% and the standard markets are really starting to stretch on classes of business as Hyatt alluded to about the frame of apartments. That’s typically a class of business that depending on where you are in the country, that’s not something that is the most desirable in an admitted market, although they are now starting to attack that in certain areas around the country and casualty on the East Coast is very soft.
Lots of standard market activity there on accounts over $100,000 in premium. Rates are down 30% to 50% as it relates to West Coast residential, under a $100,000 premiums would be down 30% in rate over $100,000 premiums down probably 40% plus in rate and as Hyatt had alluded to the exposure base, is down anywhere from 40% to 70%.
On the commercial side in the West rates are down typically about 30% plus and exposures are down probably down 10% plus. Seeing lots of standard market activity in California and other western states.
Which is the first in some of those classes of business in a while. In Binding Authority.
In Florida, the commercial Binding Authority, we're starting to see some more standard market intrusion in areas i.e. North Florida, Northeast Florida and Northwest Florida.
Rates are down for property, typically 20% to 30%. Casualty is down 5% to 20% and Personal Lines in Florida as Hyatt alluded to there is a capacity crunch but in our environment in Binding Authority, we are seeing citizens and other non-rated take out companies as the biggest competition there.
Outside of Florida the Binding Authority business is primarily casualty driven. Standard markets are very active; casualty business is down 5% to 25%.
In the fourth quarter of ’07 Citizen did not roll out as they had talked about the $2.5 million all perils policy and we are still waiting to hear additional information on that and Public Entity business, casualty, over a $100,000 accounts rates were down typically 15% to 25% and under a $100,000 premiums rates were down 10% to 15%. Professional rates are all down in the same range as those for casualty.
In Professional National Programs lawyers continue to do very well. The small accounts premiums are down 10% to 15% and over $30,000 premiums, the rates are down20% to 30%.
Dental, the professional on Dental continues to be flat and the packages are down 10% to 20% and in PIP, which is our shipping facility. In St.
Louis rates are flat, but their revenues can be impacted by economic swings going forward. So, that’s the rest of my report, Hyatt.
J. Hyatt Brown - Chairman and Chief Executive Officer
Thank you very much. Okay.
Jim would you like to talk about M&A activity.
Jim W. Henderson - Vice Chairman and Chief Operating Officer
Thank you, Hyatt and good morning everyone. First, I'd really like to report a bright spot in the most recent quarter and that is our merger and acquisition activity.
As an overview of this activity. I would like to review three different topics.
The first being our activity level. The second comments on the current M&A environment and lastly additional Brown & Brown resources that we have moved over to transaction capability.
First, as to activity. As announced in our press release the fourth quarter 2007 and first forty days of 2008 has been very busy and very successful period for acquisitions.
For the period we completed 20 transactions with $61.2 million in annualized revenues. $26.6 million or 44% of the acquisitions in this period was for retail employee benefit businesses.
This is a fast growing profitable segment of our business and we have as an overall corporate goal to increase the employee benefits revenues to 25% of our total revenue base. We currently have approximately $132 million in revenues in this product line or approximately 14%, 14.5% of our revenue base.
For calendar year 2007 we completed 26 transactions with $107 million in annualized revenues. Secondly, some comments on the current M&A environment.
We have recently experienced a moderate improvement in acquisition deal pricing and terms. With regard to the transaction activity for the industry.
There was a report by on e of the agency consultants and brokers. There was less agencies purchase by banks or by venture capital firms in 2007 versus 2006.
Indeed several banks have sold their agency operations in the past year. Brown & brown made two such acquisitions from banks.
We can also report an increase in the number of agencies that have expressed interest in selling their agencies. The soft market cycle, tougher economic conditions, reduced exposure units, perhaps a anticipated change in the tax laws are concerns expressed by agency owners.
The lack of an effective economic perpetuation plan remains the leading factor that drives agencies to sell. Given the current soft market conditions, we are exercising great caution in the pricing of agencies.
Our longstanding approach to pay for actual forward delivered earnings has been a technique that has served us well. Our preference in the current conditions is to have a minimum of a two preferable three year earned out period to resolve pricing our concerns.
Lastly, I'd like to make some comments on our acquisition team. We have really world-class individuals capability in this area.
The recent announcement regarding Tom Donegan is… but one structural improvement in our M&A resources. We have realigned other resources from internal audit, quality control and leadership development that will enable Brown & Brown to routinely complete an increasing number of transactions.
Organizationally the M&A resource teams will report directly to me and to Hyatt. Hyatt, with those comments, I’ll turn it back over to you for wrap up comments and perhaps the questions.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. Thanks Jim.
Good report. The outlook for ’08.
the bottom line is, is that property and casualty pricing is going to continue to go South. In the January 7, addition of national underwriters, there’s a very interesting graph.
The graph shows the soft market starting and hard markets. Starting from 1970 through 2008 estimated and in each one of the softest cycles of the market.
The first was the 1974 at the depth according to this graph in National Underwriter. At the depth, the property and casualty premiums for the industry grew approximately 6%.
In 1981 and 1982 the depths of the next soft market, the property and casualty premiums in the market and the entire industry grew 3% to 4.5%. Then in the protracted soft market, there were a couple of down blips.
1992 the entire industry grew about 2% and 1998 grew about 1% and the projection for this coming year is that there would be a negative growth in the entire industry. If that true, again, according to this article and it’s also sourcing AM Best Insurance information as to… if that’s true, it will be the first a negative premium growth since 1943.
So, all of that having been said, it just means that we have to go out and write a lot more new business, and of course, we do write more new business in the soft markets. Then we do in hard markets for obvious reasons.
We think the first three quarters of ‘08 are going to challenging for organic growth. There will be… we think some modern opportunity or modest opportunity maybe for change in Q4.
Our loss ratios for P&C carriers must increase 5% to 10% before rational pricing appears. And as you know, the first three quarters of this year I think the combined for the 20 or 30 largest companies that do reported business insurance or they are picked up like in business insurance show something like 90 to 92 combined.
So, there's a way to go there now. According to information, it one of the reasons for those low loss ratios are takedowns of all reserves and what we have is a very, very unusual set of circumstances.
Really for the last four or five years, frequency and severity have both been down. Nobody knows why.
Maybe it’s because we have great business conditions and therefore there is no malingering. But if that turns which generally if you wait a little while things will change, if that turns and the pricing is at an unreasonably low level then things will start to change.
Now, there is... I am sure someone is going to have a question about what do we think about contingent of profit-sharing commissions.
Obviously, we don’t really know. Take the truth.
But when the companies are making a lot of money, every year that occurs, we seem to do pretty well in the contingent area. So, we would expect to do pretty well this year.
Jim commented about our employee benefits. We had a large focus on that at our October Leadership Conference, as a matter of fact, the better part of a day.
And we feel that setting was 25% goal employee benefits revenues as a percent of total revenues is a very accomplishable. We have set no target date except we would like to get there as soon as possible.
So, the other very positive… it is true that the acquisition potential is little more robust than it has been in the last year or two. So, ’08 is going to be fun.
So, Katie, you want to open up for questions. Question and Answer
Operator
Absolutely. Thank you.
[Operator Instructions]. We will go to Keith Walsh with Citi.
Keith Walsh - Citigroup
Hey, good morning everybody.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hey, Keith.
Keith Walsh - Citigroup
First, I guess, I was just pretty surprised about the level margin deterioration you guys experienced. I know, Corey, you mentioned M&A is one of the reasons why.
You guys have had M&A in past. Just want to know or reconcile why this is so much more of an issue this time around?
And then also if you could maybe touch on employee comp cost, fixed versus variable component there. And then I have got a follow-up for Hyatt.
Are you guys seeing higher levels of competition from maybe a larger brokers searching for growth domestically? Thank you.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
Keith, let me start out by saying that we have always had acquisitions. And they have always… traditionally had a phase and period where they gradually become as efficient as our normal offices.
The main difference here I think is the fact that the internal growth and the elimination of $16.1 million in one quarter. If you look at our quarterly total revenues for $217 million of just standalone offices.
They accounted for about $16.996 million. So, right $17 million.
The compensation percentage… the compensation of that $17 million was roughly $9.670 million. And that’s a percentage of a 56.9 versus our Companywide average of 50.7.
And so that knocks it down to 50.2. Now, kind of trying to understand where that differential we have, is kind of what I was trying to allude to is that producer compensation who are on full commission, those compensation in profits center bonuses, those are much more variable costs.
In fact, for the whole year, with our revenues down, producer compensation drop by over $4 million which would be expected because it’s tied in more directly. But if you look at the major salaries of non-producers, which would be management, profit center leaders, administrative staff, the professional staff, and CSR's, we accounted for basically this year there was roughly $228 million of that versus $205 million last year.
So, there was a net increase in that side of it, of that $22 million. If you take out just the cost of all the acquisitions for the year that are standalone, they account for $19 million of that $22 million.
So, there is on net same-store sales, it does have a little bit a fold-in included in that amounts to about $3.2 million of additional cost. And that’s what I was referring to the fact that we just take that $200 million of base line cost outside the acquisition.
That would account to almost $7 million of salary increases of 3.5%. And so, that’s why I say that the majority of that increase is related to just the normal labor cost increases.
Now the percentage, through, it does go up when all of sudden you just drop that revenue. So, again, that stuff doesn't change over time… I mean overnight, but it does work itself out.
When you have got decentralized system like ours, each of those profits centers leaders are managing that on a daily basis, and over time they get that more inline. But we have had the kind of revenue drop that we had in one quarter.
So, that’s why I was trying to layout explain that margin, because I know it's easy just to look at percentage and automatically assume that every cost in organization is variable. And so, for every dollar you drop… you don't drop the other, but that’s not really the case.
If we are having the same conversation in four or five quarters, and the revenue drop isn’t a substantial, there is a concern, but I think right now, it’s almost purely a mathematical percentage when you look at just the margin number.
Jim W. Henderson - Vice Chairman and Chief Operating Officer
I think also Cory of the 51,00 people we have, about 5,500 are commission producers. Keith, also to answer your question about… is there more competition from national brokers?
No. The competition, you must understand that our average commission, this is the annualized commission on the lines of new accounts as they’re bound.
The average for the whole Company is between $12,000 and $12,500 in commissions that’s not premium. So, the premiums would roughly be about a 10% commission, so $120,000 premium.
The national brokers because of their cost structure really can’t get down below another $40,000 or $50,000 or $75000 in commissions although they may try to set up divisions that have a different cost structure, but our competition, truthfully is in that huge group of middle market insurance agents and brokers who are spread across the United states and don’t forget many of our offices are not located in Chicago and New York city and Los Angeles, most of our offices are located in middle and smaller towns and so the… being part of the fabric of the community is part of the way that we get our business. So, we just aren’t seeing any particular competition from national brokers at this time in that area.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
Hey Keith, this is Cory again. Let me finish just a couple of numbers so I can just get all the numbers out probably on that, those standalone acquisitions that I mentioned, that $17 million or their compensation was that $9.670 million number which was $56.9 million.
The other operating expenses relating to that revenue was $3.398 million or 20% total cost versus the 16.1% total. Let me give you the year-to-date numbers.
Now these are again just the standalone acquisitions, any of fold in or kind of just lumped in with our normal same store numbers but for the year, acquisitions on the stand alone were $62.183 million in terms of total revenues. Their compensation point benefit was $33.491 million which is a 53.9% factor and the other operating expenses were $11.092 million which was 17.8% factor and then of course they did have their proper proportionate share of amortization, depreciation, interest calculation, but those aren’t much of a concern, so just the I want you to have those numbers work them into your model, too if you choose to.
Keith Walsh - Citigroup
Thank you very much.
Operator
And we will go next to Dan Johnson with Citadel Investments.
Dan Johnson - Citadel Investments
Great. Thank you.
Cory, just a follow-up on what you just said there for a moment. You said the fold ins are inorganic?
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
No. If you look at the… if you look at the revenue numbers that I just gave you?
Dan Johnson - Citadel Investments
Yes.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
Those are simply the standalone acquisitions. If you look at our internal gross schedule.
That will take all acquisitions including fold-ins and so you can really mathematically just deduct those two and figure out how much revenues all the fold-ins represent
Dan Johnson - Citadel Investments
Got it. I was just making--?
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
I’m just not breaking out the expenses on the fold-ins because it does you a little bit. You have to make a lot more assumptions.
But I just like to pull out the raw numbers.
Dan Johnson - Citadel Investments
Okay. Great.
I was just making sure that fold-ins weren’t in the organic growth number.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
No. they’re not.
J. Hyatt Brown - Chairman and Chief Executive Officer
Dan, and one thing that I might just comment on that is that we don’t know but we understand at least from certain quarters, that in some of the people who are competitors larger and smaller. They’re going out and hiring producers away from other offices and violating non-compete and non-piracy's and counting that revenue as internal growth.
And the reason they do count that is because it is not being paid for except through legal expenses and they have to make settlements and all that sort of stuff. We don’t have to do that.
Dan Johnson - Citadel Investments
Understood. Okay.
My real question then was around on the comp line. I would have thought possibly with the challenges of the fourth quarter we would have seen some sort of incentive comp accrual reversal.
That would have helped the fourth quarter numbers. We've seen at other times folks have tough fourth quarters.
Was there any such comp reversal in the fourth quarter?
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
Well on an aggregate basis there was roughly $600,000 of bonuses that went away and part of… there is a normal process at the end of the year that we have certain formulas driven if they typically get 8% of the operating profit and then there are certain bonus penalties that are evoked. That if they don’t grow a certain percentage and during the year you do have certain changes for particular profit centers and so what happens is that we accrue for those during the year and then also in the fourth quarter where we might have had a change in the leadership at one office.
They kind of come back to where you… I went from a profitable office to this office and I'm making the changes and these are all problems that may have occurred under another leadership. So, I think, you aught to give it some dispensation on these penalties or I've got to have the bonus.
So the pure dollar amount down swoop is more of a variable by 8% operating profit. But at year-end we did have to come in and make some accommodations to certain offices and to give those bonuses because they are kind of under a new leadership and we don’t want to negatively penalize them for something that wasn’t under their control.
So, that does happen. So, that’s the reason why its not probably as great as you would have initially thought.
Dan Johnson - Citadel Investments
Great. Understood then.
Then I guess with the comments about really in the short-term employee counters isn't as variable as maybe we'd like which is good in the good times. The sort of margins that we saw in this quarter aren’t… you don’t heel that they were unrepresentative of what actually sort of happened.
In the quarter and what could happen until we get some more list from revenue?
Jim Henderson - Vice Chairman & Chief Operating Officer
I think so. I'm not sure if I follow the whole thing.
Dan Johnson - Citadel Investments
Well I guess my point is, I just want to make sure there wasn’t anything abnormal outside of some really modest items in the quarter.
Jim W. Henderson - Vice Chairman and Chief Operating Officer
There really is not. I mean and just from a magnitude standpoint you look at maybe just help clarify our of the total comp that we… in that total comp line, you have all salaries, you've got benefits included in that, you got training costs, you got a lot of things in there but as a general rule if you take basically all management and staff and professional fees, that amounted to that $200 million number that I was referring to earlier from a basically $228 million.
If you look at just pure producer commissions on a same year… we're basically $70 million. So, the $70 million is more variable.
On top of that you do have, commit you have salary producers who haven’t hit the 40-20 and that amounted to about $33 million. That’s the one line item that actually did go up, because we continue to hire producers and we've always talked that we reserve 1% of our revenue base to hire people that we don’t need primarily producers.
And a corporate for the year we hired. We spent some $1.3 million in addition, additionally over last year for producers that we are bringing in, in training.
So, that line item did go up. But hopefully between the $228 million and the $72 million and the $32 million, those Will give you some perception of the variable side of the compensation.
Payroll costs.
Dan Johnson - Citadel Investments
Yep. That’s Great.
Thanks very much for the additional help there.
Jim W. Henderson - Vice Chairman and Chief Operating Officer
Okay.
Operator
And we’ll go next to Dan Farrell with FPK.
Dan Farrell - Fox-Pitt Kelton
Hi, good morning.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi Dan.
Dan Farrell - Fox-Pitt Kelton
Could you just talk a little bit about organic growth again for next year’s expectations? You said that you thought the first three quarters of ‘08 would be challenging but you thought there might be some improvements we had in the fourth quarter.
Can you talk about what maybe drives that improvement? Is it just the, the comparisons get easier in either wholesale or Florida retail or is it along those lines?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, I think, you have to sort of look at it in pieces. The big down swoop in Florida started in July of this year and it occurred as a result of two things.
Number one, in addition to the property prices going down, casualty, which had been kind of flat, it was edging down, all of a sudden it fell off the cliff and so generally speaking when you have that kind of change of pricing the underwriters who have authorized a 30% reduction or 35% reduction on a package or on a casualty line. When it comes up for renewal they’ve got their files sitting in front of them and they are saying well it's been okay account but maybe we’ll see if we can't do 5% less or 10% less and that’s what I call meeting an equilibrium and so what I think what we hope and we've been surprised this year about the Florida marketplace where we're hoping is that we’ll find that pricing equilibrium.
Where prices won't be going down quite as much. Now the other piece is, if you look at the states in the United States that have been most impacted by the home building change in Florida, Arizona, Nevada, California.
And to a lesser extent some pieces of Texas. So, in addition to prices going down we are seeing exposure units trailing off and particularly in the home building area.
But it's not just in the home building area, if you think about the ’04 and ’05 hurricane years it was really into the beginning of ’07 before all the roofs and all the other repair jobs finally got completed. So, you put all that together and by the last quarter of this year, ’08 we think there’s going to be some modification.
The growth in Florida has been sort of a little flattish I'm talking about the population growth, et cetera, but over a period of time we've always had these ups and downs. So, there is no comebacks, that’s not any big deal.
So, that’s Florida. Now if you get into the P&C market outside of Florida then the national retail has been over a period of time kind of flat, down a little bit and maybe up a 0.01 of a point or what not and so if you look at National Retail for all of ’07 it was a minus 0.04% that’s the negative growth for National Retail.
So, if you look at some of the areas in National Retail again they haven’t gone up as far, they haven’t gone down as far, so they seem to be a little more fullish. The area where we're going to still have a substantial amount of downdraft would be in the West, which is really Arizona.
Nevada and California. We think that’s also going to get better but at the moment apparently loss ratios there are doggone good and to think that the largest workers comp carrier in California would increase commissions by 2% when prices have been going down 30% and 40% for the last three of four years.
That’s kind of far out. So, the rational pricing will creep back into this area.
In the meantime if you look at some of the other special programs. Looking at, for instance the dental program and the lawyer's program, you'll notice from Powell's remarks where we have programs where the premium not the commission but the premium for each of our risks is small and the average premium now I think, is around, for a dentist package, is around $2,500 or $2,800.
So, how many people are going to be going out after that, Not too doggone many. It’s just not economically feasible.
So, across the board we have a lot of other little niches that are not as adversely affected as some of these down swoops that you're hearing about. Having said all that this is a time.
Now I've only been in the insurance business for 48 years. I’ve never seen it like this before and if you think about the combination of having the most profitable years in the history of the property and casualty business and then having offshore competition that is coming onshore with lots of new capital.
It's a good time for consumers.
Dan Farrell - Fox-Pitt Kelton
That’s a very helpful detail. Thank you.
Just one follow-up on sort of margins and expenses. Can you talk a little bit about how long it might take you to sort of adjust that variable expense side.
Is it one, two quarters and then also can you just talk about your willingness. How much you’d be willing to adjust because there’s obviously a trade off and in cutting your expense versus investing in your business.
Is there a lower level of margin that you're willing to tolerate not necessarily like but tolerate in a softer environment to sort of keep the franchise strong?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, if you look the last time we had a real down swoop and in the topline we actually grew about 1.2% organically back in 1998 and 1989 in that we were 1.2 to 1.7. And margins came along pretty well at that time, there was some flattening, but we're still going along.
But again what we have in this case is pretty virulent change in a state where we have about a third of our business. That’s a bit unusual, Florida is a great place to be in business and the 18.5 million people we have today according to all the gurus who know, say that by 2020, that’s going to be about 25 million.
So, growth can overcome a lot of other potential problems. So, if you start looking at all of the variable factors the… we are not going to cut core cost of the people if they are producing and we have been pretty darn effective and efficient over a period of time by weighing and measuring people.
One of the things that we have spent more money on this year meaning ’07 than in the past is on bringing on new… Cory mentions producers. But we have also brought on… we've increased our staff of internal auditors from 19 to 28 and why is the reason for that?
Well, two reasons. That's a spawning ground, that’s a recruiting ground and those people move from that area into a training area for producer or they've moved into another area that might have nothing to do with accounting or it might have something to do with the program.
At the same time we have recruited more people out of college and that lead-time is longer. But as we're finding these people with the right kind of training and particularly with Brown & Brown University, they are doing exceptionally well.
So, we're not… I know that you are very concerned about the margins and no one is more margin centric than as yours truly and our margins over the next period of time will continue to be very, very high. Now will there be a dip or two?
Yes. Maybe so.
But our model absolutely works. Now when… if you take any business that has a substantial reduction in the topline and very intense competitive conditions.
There are going to be pressures on the margins and so if you look at our margins versus everybody else, I think you’ll find. We aren’t doing too damn bad.
Dan Farrell - Fox-Pitt Kelton
Great. Thanks a lot.
Operator
And we will have our next question from Matthew Heimermann with JP Morgan.
Matthew Heimermann - JP Morgan
Hi. Good morning everyone.
J. Hyatt Brown - Chairman and Chief Executive Officer
Excuse me. I didn’t get your name please.
Matthew Heimermann - JP Morgan
It’s Matt Heimermann with JP Morgan.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, Matt. How are you?
Matthew Heimermann - JP Morgan
I am doing well. Good morning.
I had a just a quick question. In the past you haven’t had a formal M&A group.
Most of the M&As been sourced and accomplished by a lot of the regional folks. Can you just talk how Jim’s group is going to interact with some of these folks?
J. Hyatt Brown - Chairman and Chief Executive Officer
Yes I can and it’s really a evolution. We still have all of our regionals and our profit center leaders who are constantly talking to people about the potential for M&A, but what is happening is we are finding more interest and part of the interest that has always been around has been interest that comes about as a result of consultants.
And, so they send us information and they have already got a client, so on and so forth. A lot of what we are seeing now is not through consultants.
These are people who are part of the fabric of the community of town A or city B and they don’t let anybody know they are interested in maybe and merging with anybody. And so those kind of M&A activities take a lot more personal kinds of touching and understanding and making sure that we understand them and they understand us and that they want to go forward and grow.
So, in order to do this and because there are more and more opportunities Jim has been exceptionally good in the past at handling some of those kinds of negotiations. An example of that would be the situation with the Hull acquisition and another had to do with the CalSurance acquisition, this is a matter of four years ago.
So, the idea is that what I am doing is I obviously am always involved in M&A and we do bring people to Daytona beach and we do bring them to our home have dinner and have a drink or two and see how the chemistry is. We are going to continue to do that and as I continue to morph over into being a Chairman, but not on the payroll, what my intent is assuming the board will approve that which they indicated they want me to do is I’ll be also involved, I’ll continue to be involved in M&A and also in recruitment of people that’s something I have always done and liked.
But back to the M&A specifically, we have over the years developed a matrix of characteristics that is starting to be very telling and so what we are doing today, not only is an expansion of the down and personal sort of thing, but it also is a methodology which we have not been using in the past until recently of taking the characteristics of each acquisition and putting them into a matrix of all of the other acquisitions that has similar characteristics and there is some things… there is some green flags and there are some red flags and there are some yellow flags and we list those and that has something to do with our decision making. It may also have something to do pricing and so the idea is on the one hand we do not want to become big company oriented where you have a team and the team is cool and suave and smart and they go out and make a deal and turn it over to someone else who wasn’t involved and that they are responsible, someone else was responsible for making it happen, we are not doing that.
In the case of where Jim or I or others are involved the person that also is involved in each and every other step of the way it’s the person to whom that M&A candidate would report to and that is generally regional. So, it is a situation where as relationships are expanded with people who really aren’t in the marketplace then we are always bringing in a regional who is going to be responsible for the P&L and the success of that office afterwards, that’s a longwinded… to tell you what we have been Matt through for the last year to develop a process that we feel is very objective and is measurable based on our past successes or in some cases not so successful on our M&A candidates.
Matthew Heimermann - JP Morgan
No. That’s very helpful.
Thank you for that perspective. I guess the one follow up I have is with respect to some these… given the examples you gave with Hull and CalSurance, I mean, is a lot of this… I guess what I am asking is… does this mean that perhaps when you are talking about these people who don’t want it out in the open out there, they are perhaps looking at doing something.
Do they tend to be larger agencies or brokerages?
J. Hyatt Brown - Chairman and Chief Executive Officer
No. But they tend to be all sizes but they tend to be more profitable.
Matthew Heimermann - JP Morgan
Okay.
J. Hyatt Brown - Chairman and Chief Executive Officer
And you see what… when someone comes to you and says we want to talk then the first question is why. And there is a lot of different reasons and that’s where the matrix comes in along with not just the reasons but the internal structure of this organization, and who’s in there and are they related and have they been with the agency and they left the agency and they came back to the agency.
Do they have certain slices of business that we find are less profitable, on and on and on. It’s a fairly complex process.
Matthew Heimermann - JP Morgan
That’s helpful. Thank you very much
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay.
Operator
And we will go next to Nik Fisken with Stephens.
Nik Fisken - Stephens Inc.
How are you buddy?
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, Nik. How are you?
Nik Fisken - Stephens Inc.
Doing great.
J. Hyatt Brown - Chairman and Chief Executive Officer
Good.
Nik Fisken - Stephens Inc.
So, as I calculated if I take out some one timer stuff, EBITDA margins fell from 40 to 39, ’06 to ’07 in the fourth quarter following 600 basis points and I guess where I am headed with this, if I listen to the call, there’s really no reason to believe ’08 won’t fall by that same magnitude, so call it 500 bits if you take out what happened in the fourth quarter.
J. Hyatt Brown - Chairman and Chief Executive Officer
Is that a question or is that an answer?
Nik Fisken - Stephens Inc.
You think it is going to fall by 500 basis points?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well you never know it’s possible but we don’t think so.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
But if you assume the same level negative internal growth that would be a possibility, but I think each one of our profit centers as they manage their individual offices they will continue to be tying down their expenses and maybe they are going to hire another person, maybe they get delayed. We have a great faith in our process and our leader and that’s what makes our Company so good, it’s our decentralized approach, but there won’t be any wholesale changes in our methodology and we just don’t believe we are going to have to cut people.
So, again, you can’t lose $16.1 million basically in one quarter due to rate and not have the margin impacted.
Nik Fisken - Stephens Inc.
And how much of contingents that are typically paid this year have got booked in the form of overrides in ’07?
J. Hyatt Brown - Chairman and Chief Executive Officer
About $6.5 million, that’s the guaranteed supplemental commissions, $6.5 million. One thing is a positive thing, does not have any good margins, particularly, as you know, we have a long-term incentive plan called the performance stock which is the 15 year deal.
It is a grant of stock and every time the stock goes up 20% then one-fifth of the number of shares that have been granted move into an award category and then there’s five years for the grant to get totally awarded. The last large group of grants was done in January of ’03 and so four fifths of those grants have tranched and or are awarded.
Those particular people and there’s I don’t know maybe 300 or 400, I am not sure exactly the number know that we are in the process now of weighing and measuring the results of the last five years because we are getting ready to reload people based on the future. In other words what you do for us in the last five years and then that’s the base on which the grant would be done this year, could be more, could be less or could be the same, so that will occur sometime in the next 30, 60 days and we have been talking to the board about it and what we are trying to do is make doggone sure that the people who are really making the boat move will be given substantial consideration for the new performance stock grant.
So, that’s a positive and our people view it as a positive also.
Nik Fisken - Stephens Inc.
And Cory was the $1.1 million IRS settlement paid in 4Q?
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
It was paid in 4Q and it is embedded in the tax… in the income tax line item.
Nik Fisken - Stephens Inc.
And are we seeing… what kind of new data points are we seeing in terms of further government intervention out of Florida?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, good question Nik. At the moment we don’t see any kind other than the situation where… and Powell mentioned this on his response.
They have been talking about having a $2.5 million layer… front layer for small businesses. This is property and that was supposed to come out in December, January and it hasn’t come out yet and to the extent that that might some impact, I just don’t know because I don’t know what the rates are that they are looking at.
The rates that they were looking at least initially were as most residual markets should be we are not highly competitive rate. So, we… so at the moment we don’t know of anything that is going to be a negative.
Nik Fisken - Stephens Inc.
It sounds like you are in a strong M&A pipeline that there is no change to your repurchase philosophy stuck in $19?
J. Hyatt Brown - Chairman and Chief Executive Officer
Good question. As long as we have opportunity to buy agencies where we can get the return we can get, it’s pretty hard to take and use money to buy stock back.
And one of the things that you got to recognize is even though we do produce a lot of free cash, we also have to put a lot of that free cash out, all of it plus some to make sure we are able to get the M&A people in that we really want, so I wouldn’t expect any change in that.
Nik Fisken - Stephens Inc.
Okay. Thanks.
Operator
And with the next question Kenneth Billingsley with Signal Hill.
Kenneth Billingsley - Signal Hill Group
Good morning. One of the questions I want to ask is on just general pricing trends.
I listened obviously to the comments about rather 15% to 20% down on particular lines and I believe the press release was saying 15% to 30% in general on a generic basis. The CIAB data that had come out, I am sure that large account business was down on average 12%, small accounts down about 8% and then on the individual lines nothing seemed to be down more than 12%.
Can you talk about the… what’s some of the differences you are seeing versus, what in general CIAB was reporting?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well it is very difficult to make a comparison. In the case of CIAB… excuse me… what you have there is a culmination of large and small brokers.
I don’t know what piece of that has to do with the largest brokerage or what piece of that has to do with accounts that are less than $50,000 in premium, but I can only tell you what we are seeing and so, what happens is this is that it is a little bit like if you look at the entrenched carriers and their next reports and I am sure starting to report now, they are talking about their rates being down by 7% or 8% or 10%, but what they are not telling you is that had they not lost accounts and they had gone down to the level that they had to stay to get the keeper’s accounts that would be a different percentage, and it is going to be interesting if that particular national company that I mentioned that said as of January 1 had no loss accounts and no new accounts, that means they follow down all of them, so what we are saying is if we are going to go out and get a new account away from somebody else we are going to have to be 20% to 30% to 40% below their expiring. Now in the case of our renewals every renewal is not down that much, because number one some of them have losses, some of them are changing the way they do business et cetera.
So, the renewals are not quite as competitively priced as the brand new accounts, so that’s the only thing that I can offer in terms of… I just came back from a meeting of about I guess 40 members of the council insurance agents and brokers and this is the board of directors and some other people and the numbers that I just heard from them in just casual conversation were the same as ours or even some cases more downslide, so I think it just depends on who you are talking to.
Kenneth Billingsley - Signal Hill Group
Okay. And this other question is Kenneth has been asked a few different times, I would like to ask you from a different direction and it is regarding the expenses in the quarter and essentially if we subtract the acquisition cost that came through in the increase in the less profitable margins from the new hires currently.
The margin still has been falling and at their lowest levels since they have been… since 2001. So, excluding the M&A business are you guys losing accounts in general and the reason I asked that is if the revenue is declining $16 million, quarter-over-quarter, looking forward into ’08 and ’09 does the headcount need to be the same or are you writing the same amount of accounts just at such lower prices that you still are going to need the bodies to ride that business and that means we are going to perpetually have lower margins, maybe for longer periods than just three quarters?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, number one the bottom line is that we do not believe that there is organically anything wrong with the model. Now, when you have been… to answer the first question where you asked about our losing more business, no.
We are losing about the same, this is retail now. We are losing about the same amount of business in retail in terms of dollars as a percent of our revenue that we had in the past.
There has not been much change there. Now if you look at some of our brokerage operations and I am talking about now… binding authority and transactional, we probably lost a little more there for the simple reason that business is moving from non-admitted to admitted paper and that’s always been that way up and down.
So, in the case of the brokerage area and other areas that are like that, yes we are looking at whatever needs to be done to maintain the margins that are acceptable to us, so over a period of time one of the things that becomes apparent is that some offices are more profitable than others and generally speaking has to do with two things. Number one, leader and number two it’s which is also the leader is the right leaders have the tendency to attract people who are more efficient, and we do have ways of measuring CSRs across our which is a very important part of our machine, customer service representatives.
These are the people that are inside the offices handle the details and in many cases handle most of the accounts. The same thing is with brokers and underwriters in our brokerage area and binding authority area.
So, there is some change and there has always been change going on because we are always trying to get people to be more productive and to recognize that there are certain slices of business that simply are not going to be marginally as profitable as we need to have and one of the things that you will find here is we had in our numbers this year about $13 million of sales of lots of businesses. A pretty good chunk of those came about because those were slices of business that we didn’t feel like we could get our margins.
And so, therefore we sold those books to the people and the people left and went to another agent or broker and so you would say what’s an example of that well one example is trucking business. Trucking business is… there are big, big premiums and one of the things that happens to trucking is that you just can't get more than a 20% or 25% margin.
Now that’s not true on some of the wholesale trucking but it is true on the retail trucking. So, where we can't get our margins on any slice of business we are not going to continue to be in that kind of business and all of our mergers and acquisitions in every case there’s always a way that they can get better and that’s one of the reasons that they are coming to us and the first quarter and generally the second quarter of any new M&A there are some expenses that clearly are anticipated but they are one time expenses.
Now that might have to do with true up of some sort of a compensation program or it might have something to do with the fact that after 30 and 60 days after the acquisition have occurred the people that are not strictly happy and so therefore there’s some severance pay, that sort of thing. So, that’s just the way life goes on and in terms of this discussion on margins.
We recognize more than any body else how important that is and the fact that we’ve had our first quarter in the history of our firm where, now since this is where we've been public because we didn’t keep quarterly data as carefully before that. The first quarter we ever had a quarter where we made less money in the previous quarter same quarter last year that’s pretty surprising to us.
It was in fact there was a lot of yanking and jerking and anxiety and so we've been looking at all of the factors that might influence the future and we found out that the models is the model and the model works and we just keep working it an the key is to get more good people.
Kenneth Billingsley - Signal Hill Group
And just following up on that, I mean you still have one of the best margins in the industry, especially the publicly traded guys. Well, is it just going to take a little bit longer to get to that B-40 now, that you'll get to the B before you get to the 40?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well actually if you take out… it’s a good question. If you take out the ken, if you take out the non-cash stock calls and you leave in the Rock-Tenn and stuff, actually our margin was 40.33%.
so, we know that there is stuff in there that is not recurring.
Cory T. Walker - Senior Vice President, Chief Financial Officer, and Treasure
That’s 40.03%.
J. Hyatt Brown - Chairman and Chief Executive Officer
Yes. 40.03 %.
So, the bottom line is that some time this year we will cross the B and not exactly sure when that will be on a rolling 12 and the 40 is going to take a little more time to get there. But we’ll get there.
Kenneth Billingsley - Signal Hill Group
Okay. thank you.
Operator
And we’ll go next to Eli Fleminger with Stifel Nicolaus.
Eli Fleminger - Stifel Nicolaus & Co.
Hi. My question has been answered.
Thank you.
Operator
And we’ll go next to Doug Mewhirter with Ferris, Baker, Watts.
Douglas Mewhirter - Ferris, Baker Watts
Hi there is a question for you there Hyatt or Jim or both. Generally have you kept the terms of your acquisitions the same in terms of the balance of stock in cash or is it fairly random as to when how much cash or stock to offer in a given acquisition?
J. Hyatt Brown - Chairman and Chief Executive Officer
Yes Doug. I cannot say.
I’m not sure. Jim had another… Jim are you there?
No, I think he had another meeting that was… he had to leave to go to. First of all we don’t use stock we basically quit using stock back in 2001.
So, it's all cash.
Douglas Mewhirter - Ferris, Baker Watts
That answers my question. Thanks.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay.
Operator
And we’ll go next to Michael Grasher with Piper Jaffray.
Michael Grasher - Piper Jaffray
Good morning. Thanks for taking my question.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi Mike.
Michael Grasher - Piper Jaffray
Hi. Just a follow-up with regard to some comments you were making earlier.
Certainly the market is soft, a lot of capital out there chasing risk as you touched on but how much does the overall macro environment weigh on your business and I understand your business is small account driven but if you look back historically. How would you weigh the impact of any economic slowdown?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, it won't have an impact on us. Talking about a recession?
Michael Grasher - Piper Jaffray
Sure.
J. Hyatt Brown - Chairman and Chief Executive Officer
It will have an impact on us. Generally speaking Florida has been kind of recession proof and the reason is that we have a lot of retired people and more and more retired people and there incomes are fixed and substantial.
So they spend and we're insure restaurants and we insure hotels and motels and we insure bus companies and we insure all kinds of entertainment facilities. So, that area has not been, the down swing hasn't had a lot to do with what’s happening in Florida.
There has been though in Florida Arizona, Nevada and California. There has been more home building in the last three or four years.
And I think that we're ever had in the past, so there's a little downslip there. Looking around the rest of the United States, I don’t find… upstate New York will be a place where yes we're having a recession, you’d think there would be a lot of negativism and there’s really not… in upstate New York what they really saying is, we never had the big upswing and we don’t have a big downswing.
But having said that, a recession which I'm not sure we're going to have one. But if we had one.
It’ll have some impact on us.
Michael Grasher - Piper Jaffray
Okay. and does that change your approach to M&A activity in terms of the terms and conditions?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, obviously, what we're always looking for is that the earn out must go two to three years and in certain cases people do not want that meaning that they want to have cash up front because they want to go to the farm. And if that's true and we do have that.
If that's true then it’s less, the cash upfront will be less, but the other thing is we've got to have a game plan that we know that we can get that margin and that profitability and in some cases in the last two or three years we found that, this is kind of interesting, people and this would be, people basically kind of East of the Mississippi, the owner or the agency has been working … has been living in Florida half time and working a quarter of the time and therefore the agency has been doing the numbers it has been doing because the people that are there and so when the owner sells then the impact is really not… there is not much impact, because he or she hasn't been involved particularly aggressively for several years. So… but if it's a situation where someone wants cash and they want to leave and there's not anybody and there is question about sustainability, then we just kind of walk away.
Michael Grasher - Piper Jaffray
Okay. Well, thank you and best of luck in ’08.
J. Hyatt Brown - Chairman and Chief Executive Officer
Thanks, Mike.
Operator
Thank you. And there was no additional questions in the queue.
I would like to turn the conference back over to Hyatt Brown.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. And thank you Katie and thank you all.
And we will look to talk to you… my guess, in April. Okay.
This is all. Goodbye.
Thank you.
Operator
Thank you. That does conclude our conference call today.
We appreciate your participation.