Oct 21, 2008
Executives
J. Hyatt Brown - Chairman and CEO Cory Walker - Sr.
VP, Treasurer and CFO J. Powell Brown - President Jim Henderson - Vice Chairman and COO
Analysts
Keith Walsh - Citigroup Michael Grasher - Piper Jaffray Nikolai Fisken - Stephens Inc. Mark Hughes - Suntrust Robinson Humphrey David Lewis - Raymond James Keith Alexander - JPMorgan
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 question 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 statements are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties that has been or will be identified from time-to-time in the company's reports filed with the Securities and Exchange Commission.
Additional discussion of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. Listeners are cautioned that any 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 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 very much Elizabeth. And we have Jim Henderson; and Cory Walker; and Powell; and myself.
And so, we're going to start off with Cory. It's all yours.
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
Thanks Hyatt. Well, an honor of Yogi Berra, its Déjà vu all over again, relatively to our third quarter earnings statement two respects.
The first; it's the same that you there... that you saw when it was inadvertently released a week ago.
And two; the net results are very similar to results of the second quarter. Our net income for the third quarter was $40.6 million, which was down 12.2% from last year's third quarter.
Correspondingly, our net income per share for the quarter was $0.29, down from $0.33 earned in the third quarter of 2007. From a revenue standpoint, commissions and fees for the quarter increased 8.1% to $243.8 million.
That is up from $225.4 million last year. As part of total commissions and fees in the third quarter of '08, we received $9.7 million of profit sharing contingent commissions and as compared with $8.9 million that we received in the third quarter last year.
We estimate that we will receive of an additional $1 million to $2 million of profit sharing contingent commissions in the fourth quarter. Now looking at the internal growth schedule, somewhere to the past six quarters, we had a negative internal growth rate.
However, this quarter we're slightly better at only a negative 5.1%. Our total core commissions and fees which exclude those profit sharing contingent commissions for the quarter increased 9.3% or $19.9 million of total new commissions and fees.
However, within that net number was $30.9 million of acquired revenues. That means that we had $11 million less commissions and fees on a same-store sales basis.
As the internal growth schedule indicates the vast majority of the negative internal growth dollars are from a broad based impact on our retail and wholesale operations. Hyatt, Jim and Powell will talk about the activities in each of these business segments in a minute.
Moving on to our investment income, it decreased by $2 million primarily due to lower interest rates and less investable funds due to our increased acquisition activities. For other income, we had approximately $2 million in the current quarter.
In the third quarter of last year, we had $8.6 million of other income, which was primarily due to gains on the sales of various books of businesses. This decrease of $6.6 million in the other income revenue accounts, it accounts for almost 80% of the $8.3 million of the total reduction in our pre-tax income of the current quarter when compared to last year's third quarter.
As it relates to our expenses in pre-tax margins, our pre-tax margin for the third quarter was 27.2% compared to last year's third quarter of 31.8%, a reduction of 4.6 percentage points. As we've mentioned on previous quarterly earnings conference calls, as long as we remain in the soft market cycle that creates the negative internal growth we'll probably continue to see some margin compression.
In the current quarter, employee compensations and benefits increased 2.9 percentage points to 49.5% of total revenues, or an increase of $11.7 million of total dollars. If you look at just employee compensation and benefit that relate to just new acquisitions that are standalone by themselves since October 1st, they account for actually $13.4 million of total employee compensation and benefit charges versus the net of $11.7 million.
So therefore, just the opposite on a same-store sales basis actually had a net reduction in employee compensation of about $1.7 million. Now that's compared to the revenue decrease on those same existing office is about $7.7 million of commissions and fees and about $16 million of total revenues, when you look at other income and that is the main reasons why the margin compression occurred on that line item.
Our non-cash stock-based compensation cost was $1.8 million in the third quarter of 2008, which is an increase of about $300,000 and that's due to adjusted performance stock plan grants that were issued in February and April this year. In the current quarter, other operating expenses increased 0.8 percentage points to 14.7% of total revenues or $3.5 million of actual dollars.
The other operating expense relate to adjusted new standalone acquisitions since last year accounted for $3.8 million of that total. Therefore, the offices on a comparable same-store sales basis had a net reduction of other operating expenses of about $300,000.
Again, the increase in the cost as a percentage of total revenue was mainly driven by the revenue reductions. Amortization, depreciation expense on a combined basis increased about $2.1 million and that's just due to the number of acquisitions that have occurred in the last 12 months.
Our interest expense is consistent with the expected quarterly expense of about $3.9 million. Our effective tax rate is running about 39.5%, which is slightly higher than the previous quarters because as a result of lower earnings but with the same effective amount of permanent tax differences.
Our third quarter... our nine months year-to-date numbers are very similar to the third quarter numbers and we will just end by saying that for the nine months ended '08, we earned $0.94 per share.
And that's about a 9.6% decrease from the $1.4 that we earned in the first nine months ended September 30, 2007 when you exclude last year's Rock-Tenn gain. Now from a balance sheet perspective, at September 30, 2008, we had $240.6 million of cash, which we conservatively report in the restricted cash line.
However, only a $139 million of these funds are in legally restricted premium trust accounts. Therefore, we have approximately $100 million of liquid cash.
In addition, we are fortunate to have two very strong vendors standing behind us and that is SunTrust and Prudential Capital Markets Group, where SunTrust, we currently have a $50 million revolving line of credit with an according feature for another $50 million. And, then Prudential Capital, we have $150 million credit facility that gives us access to seven-year and ten-year monies.
Finally, for the nine months ended September 30, 2008, $221.6 million of cash was used to pay for various acquisitions. And that includes any settlements of earn out provisions from prior year acquisition.
So with that financial overview, I will turn it back to Hyatt.
J. Hyatt Brown - Chairman and Chief Executive Officer
Thanks Cory, good report. Florida Retail last quarter was down in a minus 15.5, this quarter minus 9.3.
The spine in Florida, which is Lakeland, Orlando, Leesburg, Oklahoma [ph] or Jacksonville, which is a different part of Florida from an insurance standpoint, the admitted markets are now looking at good property. Existing property accounts is minus 10%, but there is more capacity.
The economy is down 5% to 30%, depending on whether you are in the contracting business or not and no existing risk bearer will let an account go if they get the last look. So, that means that there is not as much turnover in accounts as you might expect.
Thankfully, it's off 10% to 15% in terms of pricing. Tampa to Naples, this is where the economy is kind of really the softest in Florida, Naples to Sarasota is really the worst, over build in terms of homes.
So the citizens believe it or not has reduced their rates again. From frame and joists in maintaining condominiums by instituting an additional mitigation credit and this will vary from 5% to 25% and it varies with the region of the state.
There is some feeling of renewal flattening. First time we've seeing that, and that's forward-looking, looking at November and December renewals.
The casualty of prices are flattening a little bit down in that area of Florida. But the exposures are also down 20% to 30% particularly when you're looking at contractors.
Our largest contractor in that area of Florida, two years ago had 527 employees, now have 57 employees. The Tri-County area, which is Broward, Dade and Palm Beach County, there are still no movement by middle markets to write new property, not a better property maybe close to the bottom, currently 0% to 15%.
Condo values are going up because of the requirements to have current appraisals. And, apparently what has happened is that the values that have been used on many of the policies were lower than the actual values even though values may have reduced a little bit today.
So, therefore we are getting some increase there. The cash flow including auto is still down 10% to 20%.
And in the Tri-County area, property older than 1994, is going flat, that's different. So, in Florida, synopsis one no underwriter will lose an account that's true really countrywide, two, the economy is effecting casually exposures, three, workers comp is very soft.
Now, there is another 18% believe or not rate reduction starting January 1 of '09. There is a feeling of rate reduction...
of resistance to rate reduction and employee benefit is up 3% to 4% now prices are up more than that. But when you get through the downdraft in employment and the change in benefits is positive 3% to 4%.
National retail was a negative 6% to 8%, now is a negative 1%. Georgia, South Carolina same as last quarter, carriers are not meeting sales goals.
The economy is better than Florida but still down 5% to 15% exposures are also flattish except in the area of contractors. Georgia workers comp is flattish that's a change.
South Carolina workers comp is still staying the same, very competitive of 10% to 15% and in Virginia the renewals, prices maybe slowing, maybe 7% to 10% down. Exposure basis are down.
Marine rates minus 5% to 7% kind of a little more stable. Workers comp 5% to 7% not as competitive as 90 days ago.
Testifying your condo rates are flattish now to maybe 5% or 4% and the reason they're flattish it goes again they are lower $0.07 on a condo is about... that's rock bottom.
Workers comp is very competitive, social services flat on small accounts minus 5 on others, the market downdraft maybe slowing. Economy is soft, exposure is down 5% to 25%.
In New Jersey, there is a malice. If you take a circle around the New York City, there is kind of a dark cloud there and the reason is because of the financial meltdown.
And so exposure units on developers is down 20% to 40%, renewals are down 10%, new business is crazy. So anybody who wants to write an account away from someone else is going to have to be 20% to 35% of renewals...
prior renewal pricing. And some companies are starting to try to push back on rate reductions, not being very successful.
Connecticut renewals down to 10% to 15%. Renewals downdraft is slowing.
Workers comp very competitive, exposure units down 5% to 10%. Upstate New York renewals and it's been a little, there has been a little push back in upstate New York for a while.
The renewals now are down 0% to 5% and maybe 10% to 15% exposure units, other than contractors is kind of flattish to down a little bit. Workers comp is kind of a mess, primarily because the self insured funds are losing business in this kind of moving around, because of some change in this.
Looking into the oil patch, Oklahoma, Louisiana, Texas, Oklahoma renewals minus 5% to 15% but slowing, workers comp is very aggressive 25% plus deviations. As a result of energy, the energy patch.
Related exposure units to energy are all up. Sub-prime not a big deal in that area.
Louisiana renewals are flat a minus 3% or 4%, Citizens is flat, they are the largest writer, in the state. None admitted now better than Citizens, marine is stable.
Workers comp soft minus 10% to 15%. Lot's of consent to rate.
The economy is now being influenced by energy. Same thing in Houston, workers comp is very soft minus 15%, but property is now flat and the reason is Ike and it had an effect.
The economy is strong, again, energy, and then contractors, there maybe a little difference now in contractors in that area for the simple reason that there's going to be a lot of work available as a result of the hurricane. In the Indiana renewals workers comp down ten, casualty property down 10% to 15%.
Some push back, some push back on pricing, new business very competitive. Economy is down some but not, not vigorously down.
In Illinois, renewals are down 5% to maybe 8%. Workers comp is very competitive I understand, the economy is down there it's a little more downdraft in the areas of Illinois where we are than it is in the Indiana.
With constant renewals, workers comp is flattening, rates maybe flat up 4% that's different and there is supposed to be an increase in '09. Casualty minus 5% to 8%, property is flat.
There were some substantial hail loses in that area and that's tightened up the companies a little bit and the exposure units are flat to down 5%. In Minnesota workers comp is relatively flat.
They're supposed to be a 5% rate increase in '09; I'm not sure about that. Geo Leonardo [ph] minus 5% to 10%, the economy there, its okay flat to maybe slightly up except for construction and that's all 15% to 20%.
And, manufacturer is down to flat. Throughout west, still the most competitive part of the United States for retail was minus 12%, but its now minus 8.1%.
Las Vegas is kind of a wasteland in terms of what's going on there. The rates in the property cases are 5% to 10%.
The economy though is really bad, building is kind of going on to the boulevard and contractors are closing their doors. In Oregon and Washington renewals are minus 5% to 15%, but the downdraft has slowed.
The economy in Portland is flat, Seattle economy is slightly positive. California workers comp down 10% to 12% was 25% to 30%, 90 and 120 days ago.
Supposed to be a rate increase January 1, not probably going to happen, but it is changing. Rural West, in California and Mexico, Colorado there are flat renewals and particularly little bit up in agricultural areas.
Colorado, New Mexico renewals are 5% to 10% down and their economy is not too bad it's flat to down a little bit. One thing I would mention, we have our profit center at St.
Louise call key personnel insurance plan and what they do is they do cargo insurance for small and middle size and some larger business. It's B2B business-to-business and some B2C.
In the last five years, only five months in the last five years have we had down shipping and four of those five months that down shipping the same month previous year, for those five months were in '08 in January, it was off $0.04 to 1% these are the shipping amount of shipping. April minus 3.6%, July minus 2.7% and September minus 9.1%.
So conclusion there is some slowing in the pricing downdraft maybe. Number two, the economy is not good and varies with the area of the country.
And three, acquisition opportunities, okay on that. Powell?
J. Powell Brown - President
Thank you, Hyatt. Brokerage was down 17% this quarter and as you know a greater volatility typically than retail in the down part of the cycle and typically greater upside and its hardening part of the market.
Property, transactional property rates we're seeing down 10% to 25%. Casualty premiums are impacted, one by standard market pressure and that premiums over a $100,000 are down typically 0% to 20%.
Those premiums under a $100,000 in premium would be down 0% to 25%. Construction accounts across the country were typically seeing exposures units down 0% to 20% and on top of that they are looking for rate decreases of upwards of 20% as well.
Professional liability, typically accounts over $100,000 million and under a $100,000 million in premium are seeing reductions from 0% to 20%. Anything in the financial institutions, real estate or mortgage space seeing rate up typically 15% to 20% or more.
In the binding authority business in Florida, rates are down 0% to 10% with continued standard market intrusion. Personal lines in Florida, we continue to see the non-rated carriers and Citizens impacting that business.
National Binding Authority business is down 10% to 15% and the standard market continues to have an impact there. Professional National Program is up 4%, lawyers the rates are down 5% to 10% and dental typically flat.
In the other national programs with accounts of over $75,000 million in premium on an individual account, typically those are seeing rate decreases of 10% to 20%, but as you know many of the premiums in national programs are smaller than that. And special programs were up 9.2%, public entity the business rates are down in Q3, 15% to 20% and professional liability on public entities typically down 0% to 20%.
FIU this quarter was up, win rates continue to stabilize Citizens multi-peril policies continue to be all over the board and excellent business is very, very competitive. Proctor Financial was up again in Q3, that's our fourth placed bank coverage, and we continue to see opportunities there, in a segment of our business is somewhat counter cyclical.
In the services arena, finally, as you may remember, we had an account that took a portion of their business in-house a year ago, and that has run through the numbers, and all of the operations are in line with expectations. So with that'll turn back over to you Hyatt.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. Jim?
Jim Henderson - Vice Chairman and Chief Operating Officer
All right. Thank you, Hyatt and Powell.
For 2008, the third quarter continued a very active acquisition period for Brown & Brown. In the third quarter, we announced 11 transactions, just included a book of business for $22.1 million, and forward end loss revenues.
For the year, we... in our announcement, we indicated there was 44 transactions this includes a number of multiple entities within a given agency representing some 34 agencies, 34 agencies year-to-date, purchased for $99.6 million in forward revenues for the year 2008.
This compares to 26 transactions for all of 2007, and all of 2007 was a $104.6 million. The average size of the transaction for 2008 is about $3.2 million as compared to the $4 million plus in 2007.
This change in size is primarily a result of purchasing a greater number, fold-in opportunities in 2008 versus the prior year. Such fold-ins occur generally at a higher margin personally than the free standing locations, and is very attractive to us.
The agencies require capital and cash flow and Cory mentioned before that we are well stocked with powder to use to acquire if and when we need to. In addition, for 2008, as he mentioned there is approximately $175 million in free cash flow with the vast majority of this, that will be used for purchasing agencies forward.
At the margin level at which we purchased agencies, it requires $1.50 to $2 to purchase $8 of new annualized revenues. When we're talking to agencies to join us, there are several factors that tends to be leading to this increased activity.
The soft market as we described is certainly one of those. The question about the forward economy in terms of now or later for those agencies looking at selling at some point and there is continuation and perhaps reality of a change in the tax environment in terms of capital gains out there that may impact the net proceeds for the seller.
In addition of that there is the various publications on agency activity, any case that there is a reduction in acquisition activity for banks and by venture capital firms, in cases there is less buyers out there in the market than previous. To summarize the agency M&A environment, this is the best of times in a couple of sense.
Number one, we have an ample supply of motivated sellers. And number two, we are purchasing revenues at a lower point in insurance market cycle compared to higher rates.
We will continue to exercise our discipline approach. And as we have for now some 25 plus years we will stay in our core confidence.
With that I turn it back over to Hyatt.
J. Hyatt Brown - Chairman and Chief Executive Officer
Thank you very much Jim, good report. And Elizabeth will open up the floor to questions.
Question And Answer
Operator
[Operator Instructions]. And our first question comes from Keith Walsh of Citigroup.
Please go ahead.
Keith Walsh - Citigroup
Hi, good morning everybody.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, Keith.
Keith Walsh - Citigroup
I guess first question for Hyatt, in your pricing commentary, a lot of talk about flattening maybe just generally overall like what... how would you tie this all together, what's causing or we had a bottom here in the pricing cycle?
And then to follow-up on that, maybe any gains in pricing, is that going to be offset by slowing of exposures due to an economic slowdown? Then I have a follow up.
Thanks.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. Number one; don't forget sales people have a tendency to be optimist.
And so, when I'm hearing this pushback it's there, but, is it a momentary thing as a result of all the things that are being happening in the financial markets, or is it truly a change and we are not really sure at the moment. It seems like it's a change because a number of the companies are looking at higher combined ratio, some over a hundred particularly on an accident year basis.
So, that's that piece. It is definitely changed, that's the first thing.
Second thing is relative to the economy itself. That's a really difficult question to answer.
We are looking and we have been, don't forget, this downdraft in building didn't just start, last month, it's been going on, coming on now for six to eight months. So we've been having downdrafts on renewal pricing really probably since the first of the year, but it's got a little worst.
So what do I think about the economy, I think the economy is going to continue to be fairly difficult in Florida, Arizona, Nevada, and Southern California, elsewhere it seems to be different. And so, it's very difficult for us to try to say okay, if the flattening is truly flattening, but the downdraft in the economy is down 5% to 10%, what does that really mean?
And we have no way of prognosticating that. So my sense earlier is the economy is going to probably bottom out in this quarter meaning Q4.
And, then, next year is going to be kind of tough, but it maybe tough like for the whole year. And, if so, and if the rates are truly sort of bottoming, then you can draw your own conclusions.
Keith Walsh - Citigroup
Thank you very much. And, then just a follow-up, as for yourself or Powell.
Specifically on AIG, maybe talk about the impact they are having on pricing just by maybe reducing capacity as a different entity now. And how much of your placement is through AIG and how much of that do you think can move?
Thanks.
J. Hyatt Brown - Chairman and Chief Executive Officer
Well--
J. Powell Brown - President
First, Keith, this is Powell. I would tell you that we have not seen a reduction of capacity with AIG.
So, that's the first thing. And number two, AIG is doing everything in their power to retain their business in terms of...
they priced their accounts very competitively, typically. And in some parts of their business more than others, they have competitive advantages or defensible positions i.e.
in markets like the Lexington where they write a lot of primary property in coastal communities. So I think to answer your question, simply one, we have not seen a reduction in capacity at the present.
Two, their pricing continues to be as competitive as it has ever been if not more so. Three, we do write a large portion of our business, about 5% of our total written premiums are with the AIG companies and we continue to write business with them, new and renewal business, as we have before.
Keith Walsh - Citigroup
Great. Thank you very much.
Operator
[Operator Instructions]. Our next question comes from Michael Grasher of Piper Jaffrey.
Michael Grasher - Piper Jaffray
Good morning, gentlemen.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, Mike.
Michael Grasher - Piper Jaffray
Jim, I wanted to follow-up with you on a couple of things. Are the revenues at a lower level, could you explain that in a little bit more detail?
Jim Henderson - Vice Chairman and Chief Operating Officer
Well, as I mentioned, the average transaction size is lower, and so its not we're buying smaller agencies necessarily. For 2008, we had a greater number we had 14 fold-in opportunities.
So this would be...we already have an office in that community, and there is a perhaps a small local agency there. We are able to fold-in.
And there's typically our smaller, under about $2 million - $3 million, it's difficult for us to set up a new location, but we can fold-in either books of business or smaller agencies into an existing location and that's very attractive. So, we are not targeting or looking at anything different or any size characteristics, it's just the included more of these fold-ins in 2008 versus 2007.
Michael Grasher - Piper Jaffray
Okay. And then just to follow-up on that in terms of the size component.
What is the... or is there sort of a qualifier I guess on one end and then what would be considered sort of too large for you to take a look at?
Jim Henderson - Vice Chairman and Chief Operating Officer
Well, on a free stand location today, we really need about $2 million to $3 million on the low side as to a new free standing location to have enough revenue for the resources to get our model. On the upside, there is really not I mean, we have looked at a number of opportunities and some of those are very evident.
There's been traded ownership the last few years. But in those is one where the price becomes so competitive where the note is accretive o the standpoint of our shareholders that, does that really command that we take our resources and go purchase a large chunk of revenue that frankly doesn't deliver the earnings as compared to doing in a 25 - 30 smaller transactions compared to that larger one.
So it really have to do with the sustainability, the quality of earnings not as the size but we're not... the whole transaction a couple of years ago was about a $64 million transaction and funded very well.
So it has to do with sustainability, risk the larger the risk and generally the larger as the pricing is more competitive on the larger deals.
Michael Grasher - Piper Jaffray
And do you find the pricing as it... the larger deals.
Okay, so it's more competitive at that point. But, the standpoint of retention does that...
is the pricing impaired more because of the retention factor or the larger the deal size?
Jim Henderson - Vice Chairman and Chief Operating Officer
No, I think it's just the competitive you have more players willing to go after a larger deal, with that. And so--
Michael Grasher - Piper Jaffray
With now regard for uncertainty?
Jim Henderson - Vice Chairman and Chief Operating Officer
Well, I would as I... certainly, they are trying to evaluate as we are too.
But, if you look at the transactions that's been announced this past year by others you will find in there that their purchase value compared to trailing earnings was very, very aggressive. Meaning the multiples were still probably north of 8 to 9 times.
And that pricing model really just doesn't fit for us.
Michael Grasher - Piper Jaffray
Okay. Fair enough.
And, then to Hyatt just wanted to follow-up with your comments around, workers comp in California, if you could expand on that. I think you were hinting at perhaps there would not be a rate increase?
J. Hyatt Brown - Chairman and Chief Executive Officer
Yes. That is what I am hearing.
What I'm saying is there is no question about the fact that downdraft on renewals in terms of pricing has slowed. We've actually even seen on I think two accounts where the renewal price has been the same, which that's not happened for four or five years.
But there is a recommendation for rate increase. We don't see it as of January 1st we don't see it being adopted.
Michael Grasher - Piper Jaffray
Interesting. Okay.
Operator
And our next question comes from Nik Fisken from Stephens Incorporated. Please go ahead.
Nikolai Fisken - Stephens Inc.
Hi, good morning, everybody.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, Nick.
J. Powell Brown - President
Good morning.
Nikolai Fisken - Stephens Inc.
I don't know who wants to tackle this one, but if I look at the last several quarters, you guys have been down, year-on-year on earnings per share. And I wonder just kind of, have you guys walked through how confident you are that those year-on-year decreases are behind us?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, I think I can answer that question. We don't know just like you don't know and the bottom-line is the game plan is the game plan.
We continue to emphasize growth and margins. We're not going to satisfy; we're not going to sacrifice margins for buying something that doesn't produce margins pretty quickly going forward.
The economy now though Nik, is the joker in the deck. That is the piece that has occurred during the last year.
That has been sort of a surprise. So, we are no less optimistic about the future today than we've ever been.
However, what we know is, is that the economy is the joker in the deck and for the next year going into '09, it's going to be difficult. Now having said that, its also a positive for us and the positive is that A; we are under leveraged.
B; we have a substantial amount of cash flow. And C; we've got the people who can make it happen and we are saying an increase of people saying well, maybe we have had all to join up and the advantage of doing the smaller deals is that we have understanding on day one after the acquisition of exactly how it's going to be operated and what the changes should going to be and etcetera, etcetera.
In other words, an understood game plan with the seller as opposed to a much larger operation where you can't really get your arms around all the various locations and because of the fact that the size and generally because it's being hawked by, some investment people. We can't get inside it like we do with the most of our acquisitions.
So, we're kind of positive about the future, to the contract not withstanding, that we're running into a headwind that is fairly strong from the economy and when that turns around, then things are going to be good.
Nikolai Fisken - Stephens Inc.
Thank you. And then Jim, on the M&A pipeline, are...
is the pipeline slowing at all or is it still as full as ever?
Jim Henderson - Vice Chairman and Chief Operating Officer
No, it's not, Nik. It's been very active.
I think I don't I know you hear this from so many different people there, but if you look at our transaction account, its up. We've seen no reduction in that.
Hyatt touched on the fact that there is probably more people that is calling and say look, this is the time. The fact that we can't acquire in that under $3 million - $4 million revenue size agency out there is an extremely important advantage to us, because if that area is the greatest count, as you all know, there's still some 20,000 plus of those agencies out there.
Many of which really don't have a long-term game plan as to how do they perpetuate, and we become their best option. So we're going to continue to feed off that opportunity.
With that, we're very bullish on that, summarizing Hyatt's comments, if we... a $150 million transaction revenue versus let's say $50 million that represent $150 million, the latter meaning 50 transactions is a much less risky play than the one big one.
So it doesn't mean we wouldn't do it, but I'll tell you what in this market, we'll take the ones these tootsies [ph] generate earnings and go forward.
Nikolai Fisken - Stephens Inc.
Great, thank you.
Operator
And our next question comes from Mark Hughes of Suntrust. Please go ahead.
Mark Hughes - Suntrust Robinson Humphrey
Thank you very much. Could you give me a snapshot maybe of employee retention in light of kind of the volatility with the stock, particularly thinking of companies or brokers you might have added to this table two or three years ago, how should we look at retention?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well retention is about like it's always been, although it's probably a little stickier today. One of the reasons it's stickier today is everybody is kind of concerned about the future, and they look around and see all of the companies that have been taken private.
And of course then the employment has been slashed in a very bloody fashion. And then you look at all financial services businesses that have gone broke.
Brown & Brown looks pretty damn good, and so frankly, retention is not a problem. One other things we are finding is, we are having an increased number of people coming to us looking to move from another place for various reasons and we are looking at some pretty good people.
We have to be very careful, because people bring to us a culture and where they come to us from a field culture that's not a good thing. And, so we have to be careful, but lots of good people out there and we are going to take advantages of some of that.
Mark Hughes - Suntrust Robinson Humphrey
How should we think about the organic growth in the fourth quarter, you've got an easier comp, maybe flattening market, still chop the economy? What should, we think about?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, we are still thinking about it. That's the answer.
Mark Hughes - Suntrust Robinson Humphrey
And then finally, outlook now for further contingent earn out payments for acquisitions you have done in prior quarters, what's the kind of the remaining balance?
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. Cory?
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
If every acquisition were to max out. We still have about $224 million.
For instance in the fourth quarter there is $41 million that could be earned, but I can tell you that's not going to be earned. So, there would not be much payout in the fourth quarter.
For '09, we probably have somewhere around $63 million. But, I bet you $16 million to $18 million of that clearly is...
would not be earned because of the downdraft in the market. And then, going out to '10, '11, '12, those earn outs just really getting started but every quarter in the queue will have schedule.
So kind of roughly just top off my head we're probably in the $30 million range in '10 and maybe around the $80 million in '11 and '12 will be about $4 million. So there is some rough numbers of this earn out potentials.
Mark Hughes - Suntrust Robinson Humphrey
Thank you.
Operator
And your next question comes from David Lewis of Raymond James. Please go ahead.
David Lewis - Raymond James
Good morning, gentleman.
J. Hyatt Brown - Chairman and Chief Executive Officer
Hi, David.
David Lewis - Raymond James
Some of these questions have already been asked but I will go at it a little bit different angle start with you Jim, first of all with the bank problems out there. Is there any discussion that any of the major banks that have brokerage operations would look at a divestiture?
Jim Henderson - Vice Chairman and Chief Operating Officer
Well, as I think there is a... in the case of Wachovia before Wells came in as you are probably aware that the Wachovia's interest operations on the market.
We have purchased last year well '08 and '07, two different bank on agencies nothing large. We have another who we're talking to and there is rumors out there of others.
So I think that could very well be an opportunity. We have seen issues inside these agencies.
I mean, the bank on agencies about how they connect it to the bank, perhaps they've not really as well as a planned. So I think that's, that will be an opportunity going forward.
We have contacted several, indicate that we have an answer for them if they choose to sell those properties and we like to look at them. So it will be an opportunity.
David Lewis - Raymond James
Jim in the Wachovia situation, does that mean that given Wells being the new acquirer, they're going to take that off the market or what have you heard?
Jim Henderson - Vice Chairman and Chief Operating Officer
Yes they have, we understand they have taken it off the market.
David Lewis - Raymond James
Okay. And then also on the M&A side, is there an acceleration in activity and talks before the potential changing of the guards and a likely capital gains raise as we go into '09?
Jim Henderson - Vice Chairman and Chief Operating Officer
Yes, there hasn't as a matter of fact, we're getting calls and saying look we... can you free up and do something before one - one or certainly in the first quarter of next year, because of the election, and some pending changes almost seems now that the lot of prediction is that...
we'll have the next year, the change in the capital gains rate. So it is very much on the minds of a lot of sellers as to how do we go ahead and if we're going to do this, now's the time to do it.
So I think we'll... we're going to have a very continued active I think end of the year, and the next year as well.
David Lewis - Raymond James
That's helpful. Hyatt and Powell, AIG, I understand the professional liability underwriters, or at least some underwriting groups have moved to Berkeley and Ace and have brought a lot of business over I know, Powell you indicated your continuing to write, more continuing to write with AIG.
I guess my concern is that you are going to see more underwriting teams pull out. I know that wouldn't necessarily affect you, but clearly they're going to go good solid competitors that would have strong balance sheets, but don't you get a sense that AIG is probably going to ultimately loose 20% to 40% of their business over the next 24 months?
J. Powell Brown - President
Well David, that would be speculation on our part, we would say that if people do leave, and I know that there are certain groups that are leaving that will obviously impact their business. It's something that they are obviously very sensitive to, and we, as an agency, have to do what's in the best interest of our clients.
And so we're bringing them options and an option maybe AIG, where it may also be one of those other carriers that you've named. But we haven't speculated on how it will impact their business.
There are a lot of people out there, not only in the investment community, but in the insurance marketplace, who are speculating on what their ultimate in the game will be and if in fact they will have to sell only their core insurance operations. We are not speculating on that, but many people out there as you know, are saying in order to payback the loan you are going to probably have to sell some of the core operations if not all of them.
David Lewis - Raymond James
Yes, and I agree with that. When you talk to risk manager, a business owner and they are kind of looking at keeping the risk within AIG my guess is the longer the tale the more cautious are going to be versus the shorter tales kind of what I'm hearing out there is that your sense as well?
J. Powell Brown - President
I think that's a very fair statement. David and as I said earlier some of their business they have built a bunker around it.
And so, for example, as you know, they are the lead carrier on lot of Directors, Masters liability on large financial institutions. Well, their second option, meaning from a buyer standpoint might be 30% or 40% higher in premium.
So, that risk manager and our buyer is weighing one what they think is the long-term viability of this company. And two, their ability to pay in the near to short-term in the event of a loss.
David Lewis - Raymond James
Terrific. All right, shifting gears, kind of overall pricing environment, if we look at I guess the question is our insurance executive is going to become a little more cautious with their capital one looking at the AIG situation.
But more importantly their investment portfolios, I mean, is that a part of the reason that we're going to probably see pricing at least stabilized to some degree as we go into '09, any thoughts there?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, this is Hyatt. We don't know that those prices are going to stabilize David.
We obviously would like to see it stabilize. But we'll believe it when we see it.
But I can't tell you that the insurance companies executives that we talk to are getting antsy. And are they antsy enough to really put up a front and then execute, I don't know.
But when you put together everything that's happening, don't forget in an economic downturn, one of the things that happens which doesn't appear right up front but it starts to appear quickly is you have more workers comp clients. And the reason is because people get laid off and just before they get laid off they have a back entry or something.
So there is going to be an increase in loss ratios and the one line of insurance I know you get it from my remarks that is the most competitive, countrywide is workers compensation. So once that line starts to turn, then a lots of things happen.
David Lewis - Raymond James
The unsafe things as we've seen some workers comp companies and disability company say they don't think their claims are economically censored this would be the first time in my career?
J. Hyatt Brown - Chairman and Chief Executive Officer
Yes, me too.
David Lewis - Raymond James
Cory, a couple of number of questions for you my guess is if we can look at the flattish down pricing environment that's going to imply that we're going to see some further margin pressure in 2009 that's one. Two really thoughts on the contingent commission outlook for '09?
And three, maybe give us current run-rate for '09 amortization and separately depreciation? Thanks.
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
Well the margins if the rate decreases continue the same level in the 5 to 6 yes there will be as you get flatter to even close to flatter or it maybe just down a little bit, then I think the margins don't get compressed as much. So leave it at that.
On the contingents, if the loss ratios are going up, then that basically translates into less contingents into the future. And then third, the run-rates on amortization because the acquisition activity has gone up, it will the current quarter...
your current quarter is the best indicator of that going forward. So, I leave at that and the next quarter we'll kind of give an update of what our budget process kind of reflects.
David Lewis - Raymond James
Cory, what were those fourth quarter run-rates again for amortization and depreciation?
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
It would be very comparable to third quarter here.
David Lewis - Raymond James
Okay. So 2009 contingents, given the soft pricing and deteriorating profitability, assuming no future acquisitions obviously, so would we look at contingents probably down 10%?
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
It's anybody's guess. I think we're going to be down because of the loss ratios, but--
David Lewis - Raymond James
And that would--
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
We don't have a budget for contingents, because you just as told it's very difficult to project it.
David Lewis - Raymond James
Yes, but that's fine not unreasonable starting point, right?
J. Hyatt Brown - Chairman and Chief Executive Officer
If you are comfortable with it, I am comfortable with it.
David Lewis - Raymond James
Thanks very much.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay David.
J. Powell Brown - President
We can have only one more question because we have an 08:30 meeting that we've to go to.
Operator
Our last question will come from Keith Alexander of JPMorgan.
Keith Alexander - JPMorgan
I'll make it easy on you guys. All my questions have been answered.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay. All right, we take one more question then if that's through.
Operator
We have Scott Holeniac [ph] from RBC Capital Markets.
J. Hyatt Brown - Chairman and Chief Executive Officer
Okay, Scott. You're on.
Unidentified Analyst
Okay. Good morning.
Just wondering if you've seen a change at all in the sellers expectations, I guess over the past couple of months, and what kind of impact that's having on pricing and also deal multiples, any impact at all there, or its just pricing pretty much the same as it was a quarter or two ago, or is it sliding down noticeably?
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
We have noticed that there is some sliding down in the pricing. We've tried to be a factor in leading that and there's probably a couple of deals that we've prolonged then because we've gone out there with a multiple, that we view to stay with or reducing it based upon expectation.
So I think the... a few of the brokers out there this and the thought in the transaction business for agencies their indication as they have seen, some retrenchment of pricing, and we have experienced that as well.
Unidentified Analyst
So that just in the last month or two, or is?
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
No I think it's probably, maybe last quarter to six months at most.
Unidentified Analyst
Okay. And in the program business is up nicely.
Just wondering if you could elaborate on that, what kind of lines and territories you are seeing the growth there?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, the major growth, Scott, as Powell, continues to be Proctor leads the clubhouse and if you look, Q1, Q2 and Q3, they had, there the area that's grown the most because as you know, that bank forced place cover, which is counter cyclical. So that and FIU has not only flattened, but it's gone up slightly.
So those are the two areas lied of the back where you are seeing some of that.
Unidentified Analyst
Okay. And, then finally, the Florida takeout companies buying more policies from Citizens, can you talk about the commission differential there?
Are you getting a higher participation rate in that business and just what kind of impact in general are you seeing or do you expect to see from this? I would assume there will be more of these coming?
J. Hyatt Brown - Chairman and Chief Executive Officer
Well, first of all, as you probably know in order to form a peg out company, you have to have $5 million through an investment group. And so, it's not that significant relative to the financial stability of an A rated insurance company.
They are not rated, and we don't do business with carriers that are unrated typically. And they do not have support of the Ford Insurance Guarantee Association.
So there are policies being taken out by Citizens to take out companies and in the event of an insolvency of one of those carriers where they have pushed policies into a take out company. There is not an obligation on behalf of the agent because of the insolvency of that carrier.
Having said that, when Citizens pushes personal lined accounts into one of those take out companies, we will do business with them otherwise we don't have assurances from the State of Florida based upon their financial stability or solvency going forward. So the premium or the commission I'm sorry is typically in line with the E&S marketplace.
But that's a long one to answer is saying we don't do a lot of business with take out companies because of what I just said.
Unidentified Analyst
Fair enough thanks a lot.
J. Hyatt Brown - Chairman and Chief Executive Officer
Thank you.
Cory Walker - Senior Vice President, Treasurer and Chief Financial Officer
Okay I think that does it, thank you very much. Thank you, Elizabeth.
Operator
Thank you. This concludes today's teleconference.
You may disconnect at any time. Thank you and have a great day.
.