Jul 21, 2009
Executives
J. Powell Brown - President Cory Walker - CFO, Sr.
VP and Treasurer Jim Henderson - Vice Chairman and COO
Analysts
Mark Hughes - SunTrust Bank Dan Johnson - Citadel Investment Group Keith Alexander - JP Morgan John Fox - Fenimore Asset Management, Inc. Nikolai D.
Fisken - Stephens Inc. Meyer Shields - Stifel Nicolaus & Company, Inc.
Steven Labbe - Langen McAlenney Beth Malone - Wunderlich Michael Grasher - Piper Jaffray
Operator
Good morning and welcome to the Brown & Brown, Inc. earnings conference call.
Today’s call is being recorded. Please note that certain information discussed during this call including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature and reflect your current views with respect to future events including financial performance.
Such statements are intended to fall within the Safe Harbor provisions of the Securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors including those risks and uncertainties.
A discussion of these and other factors affecting the company’s business and prospects are contained in the company’s filings with the Securities and Exchange Commission. With that said, I’ll now turn the call over to Mr.
Powell Brown, our President and Chief Executive Officer.
J. Powell Brown
Thank you David, and good morning everyone. Q2 was another interesting quarter.
The economy continues to have the biggest impact on our numbers and rates are under pressure all over and all around the country as we continue to watch Washington DC with great interest relative to health care reform. Today, Jim, Cory, and I are in Troy, Michigan at Proctor Financial for our quarterly board meeting and Jim will discuss Proctor’s success later in the call but now on to Cory.
Cory Walker
Thanks, Powell. Our net income for the second quarter was $40.7 million which was slightly up from the second quarter of last year where we earned $40.4 million and of course our earnings per share for both quarters was $0.29.
From a revenue standpoint, our commissions and fees for the quarter increased 2.4% or $5.8 million to $244.6 million. Now that’s up from the $238.8 million we earned last year in the second quarter.
Included in the press release is our internal growth schedule and in that schedule you’ll see that we had $6.8 million of profit sharing contingency commissions in the second quarter of ’09 and that’s up $1.4 million from what we earned in the second quarter of last year. For the rest of the year we estimate in the third quarter of ’09 that we’ll probably earn somewhere between $8 million to $9 million of profit sharing contingent commissions and it will probably only earn about $1 million in the fourth quarter.
Again, those are just current estimates. When you look at the internal growth schedule, our total core commissions and fees for the quarter increased 2.6% or $6 million of total commissions and fees income.
However, within that net number was $17 million of acquired revenue, so that means that we had $11 million of less commissions and fees on a same store sales basis and hence a negative 4.7% internal growth. As the schedule indicates, the vast majority of the negative growth is still broad based impact primarily from our retail and wholesale operations.
Now moving onto our investment income, it decreased by $1.4 million and that’s primarily due to substantially lower interest rates that we’re earning on our short term money market accounts. Our other income we had $1.3 million which is primarily gains from the sales of a few books of businesses that we had during the quarter.
Looking down at our expenses and our pre-tax margins to start with, our pre-tax profit margin for the second quarter of ’09 was 27.2%. Now that’s compared to prior year second quarter margin of 27.6% so we actually had a slight reduction of 40 basis points.
As we’ve mentioned on previously quarterly conference calls, as long as we remain in a soft cycle and a weak economy that creates this negative internal growth, our margins will continue to compress a little bit, but you’ll notice that this particular quarter, our margin compression is less than it has been in really any quarter of the last two years. In the current quarter our employee compensation and benefits decreased marginally 10 basis points to 49.8% of total revenues.
The total dollar increase in the total employee compensation and benefits was an aggregate of $2.1 million but within that number, $5.1 million was attributable just to the standalone acquisitions that we’ve done since last year, so when you pull that out and you look at just the other offices that were here last year including any fold in acquisitions they may have had, they had an aggregate reduction of employee compensation benefits of $3 million of which approximately $2 million actually came from employee compensation, commissions, and bonuses and another $1 million came from a positive adjustment to our self-funded medical plan. Our non-cash stock based compensation costs was $1.7 million in the second quarter of ’09 which is consistent with the estimated cost over the last few quarters.
Moving to our other operating expenses, they increased 30 basis points to 14.5% of total revenues in the second quarter of ’09 and the total dollar increase in other operating expenses was $1.2 million. However, again, $1.5 million of this aggregate total was attributable to the new standalone acquisitions since last year and therefore when you look at just the same store sales basis including those fold in acquisitions, those particular offices had a net reduction of their other operating expenses of about $300,000, the majority of which really is probably just lower T&E.
Amortization and depreciation expense on a combined basis increased approximately $1.1 million and that’s just due to the number of acquisitions we’ve had over the last 12 months. Interest expense has been consistent with the expected quarterly expense of about $3.6 million.
Additionally, our tax rate for the quarter was 39.3% which is really similar to prior year’s effective tax rate and no real changes there. On a six month basis, the trends are really the same.
We talked about first quarter last time and I just gave you the changes for this quarter, and so really just end with the fact that for the six month year-to-date we ended up with $0.63 earnings per share which is a 3.1% decrease from the $0.65 we earned for the six months in ’08. So with that overview, I’ll turn it back to Powell.
J. Powell Brown
Thank you Cory. Great report.
I’d like to talk about Florida retail now. It had negative 8.5% internal growth versus 11.6% negative in Q1 starting a little bit around the state.
In Jacksonville rates were flat to down 20%. Exposures down 5% to 25%.
Daytona Beach, property flat to down 10%, GL rates down 5% to 10% and auto liability down 10% to 25%. Exposures are typically down 10% to 20%.
In the construction area, job [widths] are bare with many contractors after September. Non-construction payrolls are down 10% to 20%.
Brevard, very similar to Daytona Beach. Ft.
Lauderdale and West Palm Beach in Southeast Florida, property rates are flat to down 5%. GL rates are 5% to 10% down.
Auto is down 5% to 15%. Exposures on all those lines are down 5% to 15%.
In construction, rates are flat but exposures are down 25% plus. Southwest Florida and Naples, the market continues to be very, very aggressive on new business.
Exposures are down slightly on renewal business. In the Tampa Bay area, exposures are down 10% plus.
Property is flat to down 10%. General liability rates are down 0% to 20%.
Payrolls on workers compensation is down 5% to 15%. Any type of residential builder obviously in Florida, exposures are down huge if they’re still in business.
In the Orlando area, commercial construction meaning general contractors, exposures are down 30% plus. Rates are flat.
Rates on non-construction GL and auto are flat to down 5%. In the center part of the state, general liability is flat to down 5% with exposures down 5% to 25%.
Up in the panhandle, rates are similar, flat to down 5% and exposures are down 10% plus. On a national retail basis, we were down 5.6% internal growth versus negative 5.8% in Q1.
Starting in the northeast, upstate New York, you’ll hear that most carriers are trying to get slight increases on their package business up 1% to 5%. That’s where they start.
That doesn’t mean that’s where it ends but that’s what they’re trying to get. In Rochester property GL, auto, and work comp is flat.
Exposures tend to be somewhat flat as well except in the construction area where exposures are down 10% to 20%. In Syracuse, property, GL, and auto also flat with exposures down a little bit more, 5% to 8% down and the commercial construction rates, GL, are up ever so slightly just a couple of percentage points.
Right outside New York City, Garden City area, property is down 0% to 5%. GL, auto, and work comp rates are flat to down 10%.
Exposures other than construction were down 0% to 20% but commercial construction is down at least 20% to 50%. In that construction in and around the city, you can have exposures up slightly to down 50 as I said and Garden City, but also rates could be down 10% or even a little more.
In New Jersey, Forum Park area, overall rates are down 8% to 10%. GL, auto, down typically 5%.
Work comp down at least 10%. Exposure units are flat except in construction which are down probably 10% plus.
Down on the coast of Jersey, Marmora area, property and general liability rates are down 0% to 10%. Automobile rates are typically flat.
Exposures are down 5% to 20% and GL, auto, and workers compensation. Contractors, everybody is converting to a paper general contractor until the work comes back.
Obviously on the automobile fleets we’re starting to see in this area people take lots of units off their schedules until their business comes back. In Bethlehem, Pennsylvania, rats are down 5% to 10%.
Every once in a while we’ll see one, a random one off go down 25% or 30% in terms of rates. Packages generally are typically down more than 10%.
Work comp is not as aggressive as it has been and for the first time in a while, quite some time, we’re seeing a large social service account in New York City with losses that no standard market will quote. That means it has to go ENS.
In the most recent past there’s been at least one or two standard markets that would pretty much quote any account. In Manassas, Virginia, property, GL, and auto rates are down.
They are either flat to down 10%. Exposure units are down 20% to 40% in all lines except contractors which could be down substantially more than that.
Coming down the coast south to Atlanta, property, GL, auto, and work comp rates are flat. Contractors, general liability, and auto liability rates are down 15% to 20%.
Exposures in those lines of business are down 5% to 10% except the construction which is down 25% to 40%. In Greenville, South Carolina, very competitive renewals.
General liability and auto rates are down 15% to 20% while exposures are down 5%. Work comp, not uncommon to see additional 10% plus scheduled credits put onto existing accounts.
New general liability and automobile rates are down 25% to 30% off of expiring. In the Midwest, in the Chicagoland area, construction exposures are down 10% to 20%.
GL and work comp rates are very soft. Auto is flattish.
Here in the Michigan area, rates are down 15% to 20% with exposures down 10% to 30%. Unemployment here is currently at 15.2% and depending on who participates or who’s counted in that unemployment number, it can go as high as 22.5%.
In the center part of the country, accounts over $100,000 in premiums, you can make the general statement, are down 20% plus. Accounts under $100,000 in premium are somewhat flat and accounts under $50,000, they’re looking for slight increases.
Exposures, contractors are down 25% to 40%. Manufacturers are down 10% to 15% and retail is 20% to 30% down.
The regional carriers are going great guns in Arkansas. That’s going to be a common theme you’ll hear about regional carriers around the country continuing to be very, very, very competitive.
In Louisiana, specifically Lafayette, Louisiana, Tier 1 property, that would be south of I-10, continues to firm up. Property north of I-10 continues to be otherwise very competitive.
GL and work comp are soft. Automobile rates are holding flat.
Exposure units in GL and work comp are down 10% to 30%. In the Houston, Texas area, property rates are flat in Tier 1 and Tier 2.
Away from the coast it continues to be very competitive. GL and comp are very competitive, down 5% to 10%, maybe even 15%.
Automobile rates are flat. Exposure units there are typically down 20% plus.
In western retail, we were down 14.8% internally in Q2 versus 15.9% in Q1. Denver, rates are down 5% to 10% in property, GL, auto, and work comp.
Exposure units are down 5% to 20%. Regional carriers continue to be very competitive in the Denver area.
In Las Vegas, property and auto are flat. General liability rates are down 0% to 15% and work comp more and more scheduled credits on the comp programs today.
Exposure units are typically down 20% to 40% except for construction where construction as we all know in Vegas is way down. It’s not uncommon to have half the vehicles taken off an automobile schedule and workers compensation, payroll is down 30% to 70%.
In Phoenix, property, general liability, and automobile rates are down 7% to 8% plus. Workers compensation rates are down 10% plus.
Exposures on other than construction are down 20% to 30% in the Phoenix area. Contractor exposures are down at least 50%.
In Southern California, in Orange, property and general liability rates are flat to down 20%. Automobile, on a clean automobile account, rates would be down 5% to 25%.
Work comp rates are up 5% to down 25% while exposure units in GL and work comp are down 15% to 30%. Automobile exposures seem to be flattish.
Contractors down 25% plus. In Santa Barbara, California, we’re seeing some mid-term negotiations on property renewals.
GL rates are flat and auto is down 5% to 10%. Exposure units are typically down 0% to 25%.
In Portland, Oregon, property is down 3% to 5%. General liability and auto liability rates are down 5% to 10% while exposures are down 10% to 20%.
Finally, Seattle property is up about 10% on tribal business. General liability and auto is flat to down.
Renewals across the board there are flat and the economy is beginning to slow down. From an employee benefit standpoint, when clients get done modifying programs, rates tend to go up between 5% and 15% nationally while exposures are down, either they’re flat to down 25%.
So with that I’d like to now turn it over to Jim Henderson.
Jim Henderson
Thank you Powell and good morning everyone. Greetings from Troy, Michigan.
We’re here today, as Powell mentioned, our board is arriving within the next hour plus Hyatt and all the board members are meeting here. It’s part of a continuing tradition we have of taking our board out to different profit centers and let them really see what happens at the ground level with respect to our operations.
I’d like to review with you the highlights of our non-retail of the divisions for programs, brokerage, and services, as well as giving up data on our M&A activity. The programs division continued stellar performance in the second quarter.
A very special thank you and recognition to Linda Downs and to Ken Masters, two of our senior leaders that heads up those divisions. We had positive organic growth in all programs of 9.7%.
It was 12.3% for the special programs and 2.1% for the professional. Special recognition certainly for Procter Financial.
They continued a great performance. Procter provides insurance and services for banks and principally for mortgage [force] place coverage.
Their increase in revenue is a result of new business they’ve written as well as increased exposure units on existing customers, resulting from the current mortgage environment. The other programs I’d like to recognize as well as far as growth.
FIU, our condominium facility in Florida, had organic revenue increase in the first six months of the year and the second quarter. We do have some good news and some less good news there.
The good news is we are looking at some rate increases in Florida, able to write on to those increases that’s been announced by Citizens that is a competitive writer. Therefore we do get the advantage of writing those rates up with Citizens.
We are looking however that arranging capacity principally in the tri-county area of Florida is a tough play currently. We’re not looking at an increase perhaps even a reduction in capacity in the tri-county.
There is also increase for the re-insurance cost for coastal property as well for the year. Another program that produced organic growth was CalSurance.
Their [lancer] claims unit, they’re involved in providing professional products to securities dealers and agents and generating additional revenues both unfortunately on claims but also on the placement and pricing of the coverage. Our national dental plan also produced organic growth with new distribution partner and new sales.
Axiom Re which is our [facultated] facility on new sales and some rate improvement was able to generate growth. I’d like to offer special recognition to two of our public entity units.
Appex which is a placement facility for public entity business as well as our operation in Ephrata, Washington that handles placement of public entity trust business and management of that business in the State of Washington and had a great quarter and great six months. Sigma Underwriters is really part of the whole operation.
It’s an underwriting facility. Also in our brokerage operation, John Traver and his team did a great job in growing revenues of the first six months.
So in summing up for programs, we are very fortunate to have this type of business unit in our company. It is smaller ticket items and frankly has weathered better than the retail side in dealing with the economy and also with price changes.
For the next six months, quarter three and quarter four, we’re forecasting really moderate organic growth to flat in programs for the balance of the year. The next division is the brokerage unit.
Tony Strianese and Mike Reardon, the two senior leaders that heads up their respective units on binding authority and transactional, continue to do an outstanding job in probably an area of business that has the most headwind. Brokerage business in addition to the economy and pricing has a third headwind that is business that vacates E&S lines and moves over to the standard market.
That being said, there is a positive trend if you will in this organic challenge, the negative organic growth we have. For the quarter, it was 7.5% comparison to same quarter for 2008, that organic reduction was 13.9.
So if you will the reduction is lessening over time. It’s been some three years since we’ve had organic growth in brokerage.
This is a more cyclical, more volatile pricing area then retail and we’re pleased to see that we’re beginning to close that gap back towards perhaps either flat and certainly look forward to organic growth in this division. There’s a lot of great things though inside of these numbers in brokerage and that is that the cost containment if you will, the reduction in cost, and the improvements in margins with smaller revenues is a great feat for the leadership team there.
With respect to pricing, we are seeing rate improvement in coastal property, [emmon] property continues to be very, very competitive. Some of those competitive lines are continuing to be auto and low risk primary casualty.
We believe that the E&S companies are a bit more disciplined on pricing than the primary companies but in fact if the business vacates and goes over the primary market then we’re still losing revenue under that scenario. The economic impact is also felt obviously in the brokerage area.
Our submission activity in the brokerage operation actually has increased compared to the previous year and previous quarters. However, the submissions to binding is significantly down so we’re looking at a lot more risk to in fact write the risks that we’re writing.
Exposure units continue to erode in brokerage anywhere from flat to 30% and not just in contractors but in service industry, bars, taverns, restaurants as well and the standards market as I mentioned continues to be very aggressive in writing business away from the E&S markets. In the services division, Sam Boone and his leadership team continues their excellent performance and yielded a positive organic growth in the second quarter of 3.5%.
This team we believe will continue to deliver moderate organic growth on a forward basis. Now turning to talk about M&A activity, the closed deal activity for the first six months of 2009 was 7 deals and $17.6 million in revenue.
This is less than a very, very active period we had in 2008 and our historical six months numbers are about $40 million to $45 million. Although the closings are less than last year, the offerings and the sales interest remains brisk and encouraging to us.
We feel the most significant cause that we’ve experienced in the delays in closing is reality of the reduced pricing for the businesses caused by less revenues and earnings. If an agency loses perhaps maybe 10% of its revenues, in fact it may lose anywhere from 35% to 40% of its operating profit and therefore obviously affecting the price.
The sellers are very concerned about the tax environment. There were some proposed changes on capital gains.
This is causing interest as well and I think that the reality of pricing. They are what they are.
The deal count will return to more normal levels. We looked at some deals in 2009 that simply went back on the shelf.
The owners decided we want to see perhaps if rate improvement or the economy will result in better performance and a better price. I’m not sure if that’s going to happen soon enough for them and we feel that we’ll have a chance to probably look at those deals on a forward basis.
In the meantime we continue to accrete cash. We will hold it and use it for the really the best opportunities where we’re not taking an inordinate risk on purchasing an entity where in fact where the revenues may be falling.
So with those comments, I’ll turn it back to Powell for wrap up and then for Q&A.
J. Powell Brown
Thank you, Jim. A great report.
In conclusion, the economy continues to deteriorate in certain places around the country obviously. New business continues to be very, very competitive regardless of region.
Regional carriers are driving price decreases. Employee benefits reform is obviously front and center and we look for much of the same throughout the rest of 2009.
With that said, David, we’ll turn it back over to you for Q&A.
Operator
(Operator Instructions) Your first question comes from Mark Hughes - SunTrust Bank.
Mark Hughes – SunTrust Bank
Thank you very much. Following up on your final commentary there about regional carriers driving price decreases, could you give a sense of just an overall discipline of the carriers, including the national carriers?
What’s your sense of where we stand today at the start of the third quarter versus say six months ago?
J. Powell Brown
Mark, a couple quick comments. We as a group as you know, we’ve talked about write a lot of business with regional carriers, and we write a lot with national carriers as an observation, number one.
Number two, there is a bifurcation I think somewhat that is going on right now where carriers are very, very aggressive on new business and are trying to do everything they can to get rate or maintain rate on renewal business. That doesn’t mean it’s occurring, but that is what they’re trying to do.
In certain parts of the country we’re starting to hear of carriers that will say “No more. We can’t go any lower.”
That doesn’t mean there won’t be one carrier that can go lower but a group of carriers, so the incumbent and three or four or five carriers will all be bunched up around the same price rates for the said exposures and yet there will be one carrier that would drop it, whatever that is, in that particular part of the country, so is there a significant difference now to six months ago? I don’t think there’s probably that much difference in the ultimate outcome, but how you get to the ultimate outcome is more difficult in terms of negotiating that rate decrease or with the incumbent or with the new carrier because people are less apt to push it down on renewals.
That’s number one. Number two, one thing that we hear around the country from our team is that lots of people talk about, meaning outside of our business, a propose change in rates with carriers because some of the carriers did not have as good a year last year as you would hope they might, and therefore there would be upward pressure on those rates and yet we haven't seen anything to really indicate that other than coastal property.
Mark Hughes – SunTrust Bank
Thank you. How about if the acquisition pace continues to be pretty modest here, will you get a bit more aggressive on your investments or look more to buy back shares?
J. Powell Brown
No. Mark, as we said, we have not historically, we have not ever done a stock buy back and we haven’t really looked at that now, but obviously we’re looking to allocate our capital with good acquisitions and we believe that there will continue to be good acquisitions but there has been a slight lull and we think that will come around.
Operator
Your next question comes from Dan Johnson - Citadel.
Dan Johnson - Citadel Investment Group
You guys have done a great job of offsetting the environmental headwinds in retaining as much margin as possible. But I guess the question is if the environment, whether it’s units or rate per unit, isn’t about to turn around any time in the near term, what levers are left to pull to sort of offset future margin degradation?
J. Powell Brown
The obvious question really is the ability to write additional new business so obviously you want to do everything you can to retain your existing business with your good clients, meaning all of your clients, and do your very best in terms of writing new business. But relative to additional levers that we haven’t pulled or to think that we have some secret extra thing that we can draw on, there’s no secret extra thing.
That’s the beauty of a decentralized organization. Obviously those decisions are made at a local level as you know in our system and we try to make sure that we’re appropriately staffed at all times and so we can do what is in the best interest of our clients and to grow our business in a thoughtful manner at that local level.
Dan Johnson - Citadel Investment Group
I guess does that mean that your success to date so far with holding margins at least at a level they’ve been haven’t come from any bigger programs but just sort of individual levels at the local level and I guess really I go back to the question that do we have visibility that if we end up in an environment where it’s tough to grow organic in 2010 whether it’s for price or for units, whether or not we can still fight to hold margins flat. I guess that’s the more direct question.
J. Powell Brown
The first part of your question is yes, which is it is a local office by office review if you want to call it that and so those individual leaders obviously own their own businesses per se and they constantly and consistently review their needs from a staffing and investment standpoint and so obviously if in fact the rate and economic environment continued into 2010 then those decisions would continue to made at that local level and we believe that will continue to produce the results that we have seen in the past.
Dan Johnson - Citadel Investment Group
With carrier profitability under pressure easily over the next couple quarters, what should we be thinking about in terms of headwinds and tailwinds for the 2010 contingent?
J. Powell Brown
If you want to make a broad statement, Dan, typically when loss ratios go up as we know they have, meaning last year, and I’m not as familiar with first two months or two quarters of ’09, but when they go up, contingencies and profit sharing and GFCs typically go down. That’s a very broad statement because we can’t tell you how much they go down as a result of that but as a general rule, we would say that.
Conversely if profitability went with loss ratios going down, profitability going up substantially in carriers, you could make the same argument that profit sharing should go up but we can’t tell you how much it would go up. But to your question, it should go down but we don’t know how much.
Operator
Your next question comes from Keith Alexander – JP Morgan.
Keith Alexander - JP Morgan
I just wanted to follow up on that last question about expenses and ask directly, were there any changes to staffing or office levels in the last quarter?
Cory Walker
There was as I had mentioned that for the quarter, employee benefits and compensation went down a total of $3 million and so [inaudible] really did come from staff salary and commissioned producers and a little bit of bonuses but as Powell mentioned, we have no corporate dictate that said, “Okay, every office has to put people up against the wall and shoot every fifth one.” There’s nothing like that that we ever do.
It’s all done on a decentralized basis and generally where those cuts are, if somebody retires or leaves, generally the profit center leader as I’ve mentioned before in conference calls, generally pull their team together and say, “Look, we’ve got one less person. This is still not a real good environment.
Let’s see if we can’t handle all the business without replacing that person right now” and really the teams kind of come together and as Powell mentioned, that is right there the beauty of a decentralized organization and the fact that Brown & Brown has leaders in each one of those offices that are business people and run their own business and we have essentially 180 high quality leaders that make those decisions every day and they don’t have to look to the southeast to Daytona and bow at 4:00 in the afternoon and ask what to do. They do it.
That’s where the margin stability comes from.
Jim Henderson
I think a little cut on that is that to your question about margins, maybe go back to Dan’s question as well, is that our leaders, if they lose say $1 revenue, that immediately there is some producer costs that comes out of their cost side. Then there is a lot of execution dealing what about support staff, what about rent, what about other costs in terms of getting that margin back in line and one of the drivers there is in fact those offices are so impacted by their respective profitability and their margin driving their compensation that they are so much on board with you and with us and reshaping that margin.
The brokerage area, I’d say did that in spades this past year because they had a lot of revenue that disappeared last year, the first part of this year, and it took them really a number of months after that event to redefine many offices and some niches of businesses we’re in to vacate those that do not produce margins so that’s part of the remodeling that goes on to get those margins back in line which they do so well.
Keith Alexander - JP Morgan
Just following up on that, I was wondering if you could comment on customer count and how retention of clients is changing versus a year ago.
J. Powell Brown
What we have seen, we haven't seen any unusual retention changes barring the increased number of bankruptcies, and you can’t… you can’t ignore that. So depending on where you are in the country, if you are in Las Vegas as an example, you hear lots and lots about bankruptcies.
In Florida, depending on the class of the business that you write, some offices have more of that than others. So it really is a regional thing but we haven’t detected or seen anything that would be abnormal relative to retention of existing clients other than bankruptcies impacting that.
Operator
Your next question comes from John Fox with John Fox - Fenimore Asset Management.
John Fox - Fenimore Asset Management, Inc.
Do you have the FIU revenue?
J. Powell Brown
For the quarter, FIU’s revenue was almost $4.9 million. [inaudible] last year, same quarter.
John Fox - Fenimore Asset Management, Inc.
Right. Could you talk about canceled rewrites and do you see those running at the same pace, do you see them abating, and just talk about the impact of the economy and the canceled rewrites and what you’re seeing there.
Jim Henderson
That’s a very good question and there’s an up front hit that you take when you do a cancellation rewrite, so in a quarter that you have let’s say exposures disappear, half the premium, that inner half flows into your current quarter revenue stream and there is that up front hit. The impact of that with respect to looking at the trends on the negative organic is pretty difficult to measure.
I think as I mentioned in the past, I saw members particularly on a carrier as to how it hits there because it’s even more dramatic, so there is some up front when exposures are decreasing dramatically. There’s the returned premiums negative sitting on the top of in fact the reduced revenue base for the [inaudible] itself so it takes really maybe a couple quarters to really shake out what is the ongoing revenue base and decrease with respect to the customer base.
I’m not sure if that targets there but in a quarter, it can be pretty dramatic. You have to look probably more than one quarter or two quarters to judge what’s happening on the revenue shrinkage.
John Fox - Fenimore Asset Management, Inc.
Right. Obviously the reason for my question is that we’re now in the third quarter at least of a severe downturn in the economy and probably five or six quarters since it started so I’m wondering if people are parked in their trucks are letting their payroll heads go.
Does that cycle through at some point and we get more to an even comparison.
J. Powell Brown
I think we do but we haven’t gotten there yet John I don’t think. We keep hearing, do Jim and Cory and I hear significantly more about canceled rewrites?
I don’t think so. I think it would probably be a normal amount.
You only heard me say canceled rewrites I think in one area. I referred to that in Santa Barbara, California.
But relative to your point which I think is a very good one, we still hear about down on top of down on some of those but I don’t think it’s come through all the way in a 12 month cycle on a contractor or manufacturer. That contractor that had 10 vehicles last year might have 6 of them or 5 of them on the road today.
Does that mean next year they’re still going to have 5 or are they going to have 10? We don’t know yet because the work list or their job list right now in most parts of the country is not that good into the fourth quarter of this year.
So there’s kind of a wait and see on that.
John Fox - Fenimore Asset Management, Inc.
I guess my question is, if they just stayed at 5, you’d have better internal growth and during the period of time when they went from 10 to 5.
J. Powell Brown
Correct, but the question is, does 5 go to 2 or 3 or does it go back up and we just don’t know and a lot of those contractors are kind of wondering that same thing.
John Fox - Fenimore Asset Management, Inc.
I think Jim made a comment about E&S submissions are up but the number of policies that are binding is down. I’m just wondering if you could talk about what’s the reason for that.
Jim Henderson
I think because the pricing, everyone out there is still looking for reduced pricing and to make sure that any avenue is pursued. We are seeing the account coming in from the retail agent into our wholesale operation for this going up.
We’re not binding as much and I guess the number one reason would be is that a lot of that business is in fact still moving over to the standard market at reduced price and in fact improved coverages. So we just have to look at a lot more risk.
So there is still a very competitive markets out there that’s willing to compete with the E&S and standard markets willing to take on new risk that historically may have been pretty much pure E&S so if you take a bar and tavern with higher let’s say revenue receipts for liquor, it would be a classic E&S risk but today you can find a standard market that would write that class in certain areas.
John Fox - Fenimore Asset Management, Inc.
So the agent is shopping it, submitting it to E&S, he finds out the price is still higher in E&S, and he brings it back and writes it in the standard market, is that basically how it’s working?
Jim Henderson
That would be a very typical scenario.
Operator
Your next question comes from Nick Fisken with Stephens.
Nikolai D. Fisken - Stephens Inc.
If exposure units in 1Q was a 5 on a scale of 1 to 10, 10 being bad, what was 2Q?
J. Powell Brown
Can you repeat the question?
Nikolai D. Fisken - Stephens Inc.
I’m just trying to frame up exposure units sequentially. If 1Q for exposure units was a 5, on a scale of 1 to 10, 10 being bad, what was 2Q?
J. Powell Brown
I would say it’s probably 5 depending on the region, could be 6. There could be a trend to the negative in certain places, Nick.
There are places that we’ve talked about that didn’t really know about the economic slowdown until Q1. Those places might be certain places in central Texas, Portland, Seattle, Charlotte, things like that, and some of those places it’s starting to slow down a bit, so that’s compounding what was already down in other areas around the country and some of those other areas it may be down even more.
Nikolai D. Fisken - Stephens Inc.
We don’t get the easy comp until October/November, right?
Jim Henderson
It would be easier, yes. Really the fourth quarter of last year began the more significant downturn cycle.
Nikolai D. Fisken - Stephens Inc.
Powell, how would you answer that same question on pricing?
J. Powell Brown
You know Nick, it’s funny, I would tell you that in all of my calls this year for this time this year, there is a stability in certain instances and yet you have these one-off scenarios where you hear about dramatic decreases and so I don’t think that’s different than what we’ve been saying in prior quarters, but I think it’s just more pronounced in my mind because you kind of expect there to be some flattening across the board and yet you keep hearing about certain markets that continue to press down on rates. I don’t think it’s dramatically different, Nick, but there might be just sort of a feeling or an expectation in your mind that you think, “Boy, you’d think that there might be some flattening or even maybe slightly up in certain areas” but we’re not seeing that.
Jim Henderson
Nick, I think the E&S companies we were seeing, and this is a very general statement, perhaps more disciplined on their part than the primary writers. There’s still some reduction but not at the same aggressive level as with the primary writers.
Nikolai D. Fisken - Stephens Inc.
Are you seeing any traumatic changes from the underwriters in reaction to the exposure units falling off the cliff?
J. Powell Brown
I’ll tell you what people are trying to do, Nick, and trying and actually doing can be different. What they really want to do is they want to keep the premium flat somehow, someway, which as you know is not really happening.
So if your exposures are down 10, is there a way to get a slight lift in the rate to offset that, and the answer is we’re just not seeing much of that happen. It sounds good in their mind and the intent is there, but typically the rates come down or the rates stay flat and the exposures come down so their overall premiums is down.
Operator
Your next question comes from Meyer Shields -Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus & Company, Inc.
Jim, I guess I want to start with a quick question. I don’t know if I’m reading too much into the comment in the press release that talked about the current economic environment explaining part of the M&A slow down.
Is there anything else that’s a significant factor or is it just normal lumpiness?
Jim Henderson
I think normal lumpiness, it always is lumpy, but that’s really the only factor that there is a little bit of a pause and say, “Well, the capital gains, is it this year or is it next year?” so we’ve got a little bit more time.
That’s not true for everyone but there’s a certain sector where that is very material. But we’ve had several deals that we like them, we’d like to do it, we looked at the volatility of revenue in the last six months last year and going forward and we’re saying, “Look, we would like for you to take additional risk on the pricing.
You, the seller, to make this transaction work, because of the forecast” and they said, “No, we think we’ll just kind of go back and do our thing for a while and we’d like to talk to you later.” So if there’s any common theme out there or single theme that we have encountered really to give you some insight on that activity, there’s still a lot of people looking.
They’ve got to come up with a game plan. They don’t really have an out so we just have to be patient there and we have a theory you can never underpay for a bad deal and so sometimes in fact in reducing the price on something that is going to be threatening from being accretive or in fact it may be impaired at the end of the day, we simply want to avoid that if we can.
Meyer Shields - Stifel Nicolaus & Company, Inc.
Cory, the medical plan adjustment in the quarter, is that an account adjustment or is that a recurring cost save?
Cory Walker
That is just a periodic adjustment on the actuarial projections of the current plan and so our folks have to calculate that every quarter so generally it’s kind of flattish but we had a lot of offices at the end of last year get off an indemnified plan onto our self funded plan and so we didn’t know how all those numbers would shake out based on the premiums that were collected so based on the first four or five months, this was the adjustment that came out of it.
Meyer Shields - Stifel Nicolaus & Company, Inc.
For retail, I guess there was sequential improvement in organic growth. Is there any idea how much of that stems from the workers compensation peekaboo rate change?
J. Powell Brown
The answer is we don’t know but we don’t think really any.
Jim Henderson
It’s a good handle for it.
Cory Walker
Yes, that’s a great name though.
Operator
Your next question comes from Steven Labbe - Langen McAlenney.
Steven Labbe - Langen McAlenney
What is employee head count today?
J. Powell Brown
We ended the year at roughly 5400 people.
Steven Labbe - Langen McAlenney
Would you say it’s higher or lower than where you ended the year at?
Cory Walker
It’s slightly higher because we’ve had a couple of acquisitions.
Steven Labbe - Langen McAlenney
What percentage of your business is for health care right now and what are your thoughts on the potential positive and negative impacts on that business from the proposed health care reforms?
J. Powell Brown
Last year we did about $150 million of revenue as a group and obviously there are so many different plans that are floating out there. A lot of it would be purely speculative even but to take the kind of what’s the most positive scenario and what’s the probably the most negative scenario, we do believe that there’s going to be reform.
We just don’t know what that reform will totally encompass or include. The potentially most damaging thing would be to the brokerage business would be a national carrier.
A national carrier could, depending on how it’s set up, could dramatically impact the business that is written by the private insurance market. Will that be a part of this healthcare reform or not?
We don’t know and part of that would be dictated by could agents sell that program, would there be commissions paid on that program, and would they have actuarially sound rates? Those are all question marks.
Or would it be subsidized? But the things in terms of reform, there is discussion about modeling pieces and parts of national health care reform after the Massachusetts plan and the Massachusetts plan, as you know, everybody would have to have coverage so that would be increased potential participation on existing clients and once again, every day there’s discussion about different scenarios that present themselves so we don’t really know but we watch it very closely.
Steven Labbe - Langen McAlenney
A last quick one. Is Citizens raising rates for commercial policies in 2010?
Jim Henderson
Yes, some of the business in fact for condos and the like is under A rates but matter of fact they are conducting a study looking at the rates, the adequacy into increase those, so the answer is yes, they are looking at doing that. It’s not the automatic 10%.
This happened over primarily the individual single family dwellings where they have a 10% limitation on a per-policy base. They also had a 10% reduction limitation on those where in fact rates were redundant so we --
Steven Labbe - Langen McAlenney
Okay, so there’s nothing automatic like for homeowners in 2010. It’s something that they’re still looking at.
J. Powell Brown
No, no. For homeowners it is automatic.
Steven Labbe - Langen McAlenney
I’m saying unlike homeowners, there’s nothing specific for commercial.
J. Powell Brown
That’s correct.
Operator
Your next question comes from Beth Malone - Wunderlich.
Beth Malone – Wunderlich
Could you just give us an idea, you’ve been through other recessions. Do you think this one is materially different from other recessions you’ve experienced and how you’re dealing with it in your own market?
Jim Henderson
I guess when you’ve been through several of those, is that everything we read and is out there, this is the most dramatic we’ve had I guess in probably what, the 25 years going back to post World War II. But if you have this sitting on the tail end of a very severe pricing cycle for our industry as well so yes, it is a brand new ballgame and in our 70 year history, frankly up until this past year, we never had a negative organic growth in the company.
If you could take the economic issue out of play, in fact, we would have maintained that record even with a very, very severe pricing market so this is a brand new ballgame for everyone. The ability to remodel yourself dealing with economic downturn and terms of finding ways to grow and dealing with the cost is a new challenge and we’re very proud obviously of what we’re doing with that challenge.
Beth Malone – Wunderlich
Another question for Powell, back at the [Afa] conference earlier this year, you mentioned that A.M. Best was looking at stop rating a number of smaller property casualty companies in Florida and has that happened or has it had any impact on the market for you?
J. Powell Brown
What I think I said was A.M. Best and Demotech I believe were the two that came out and said that if in fact the Florida Hurricane Cap Fund question mark, meaning the collectability on the reinsurance was still in question, that several of those could be potentially downgraded.
We’re not aware of any carriers that have been downgraded as of yet; however, the last thing that I read was that there were 10 to 15 carries, that was something I read in I think Business Insurance with a national underwriter, that they thought were possible candidates for a downgrade if it was not specifically addressed to their liking but I’m not… Jim, are you aware?
Jim Henderson
I think no new news on that front.
Beth Malone – Wunderlich
One final question on acquisitions. This recession and the pressure it’s put on all kinds of businesses, does that… it sounds like it hasn’t really created a windfall of opportunities for you to pick up more brokers but could that be an outcome of this?
J. Powell Brown
We think it can. I think there will be the opportunity to look at deals and then certainly picking and choosing the best ones.
Yes, this will create… especially when in fact the seller realizes that this so-called recovery probably is not going to be fast enough to deal with their own life planning, when they want to retire, when they want to get out, when they want to sell, when the partners want to take over. So yes, I think we’re still very optimistic about opportunities that will come out of this.
That being said though, at what revenue base are we buying? So we’ve historically been conservative, we will continue to, but I think that activity will return probably to more historical levels.
Beth Malone – Wunderlich
Are you finding a lot of competition for these acquisitions among your competitors?
J. Powell Brown
No, I think as a matter of fact, we’ve never seen the current environment because the banks are for the most part except for a couple players, DB&T and maybe sometimes Wells, other banks are really not in the game of buying agencies as they were. The venture capital money, leverage money, is out of play so the USI and Hub and other deals, that money is going to be very difficult to come by today, tomorrow, to buy those deals.
So we are in the cat bird seat to look at I think the best opportunities with cash and with capital at a cost that we can continue to acquire so we feel… We have seen in fact the number of deals where the brokers who are representing the sellers are coming in and saying, look, Brown and Brown is moving towards setting a more realistic and old historical pricing on the deal, and you probably need to realize that and go ahead and address that when you’re talking to them or to others and certainly that’s one of our goals, is to get pricing back to historical levels that we know is accretive to our shareholders, so the competition is less.
Operator
I do show we have three more questions in the queue. Do you want to go ahead and take those, sir?
J. Powell Brown
Yes.
Operator
Your next question comes from Keith Alexander – JP Morgan.
Keith Alexander – JP Morgan
I just wanted to go quickly back to special programs and in particular your comments on light to moderate organic growth the rest of the year. Is that to say that the recent strength has been a bit of a one time trend or I’m just trying to get an idea of the sustainability there.
Jim Henderson
I think in Proctor specifically, we did have revenues in the first and second quarter, some also in 2008, that we’re cautious about forecasting the continued increase in their customer base and also the units of exposure on repossessed properties by banks. So at what point does that curve flatten with respect to their customers?
So Keith that’s what we’re really pointing at. The other program units are pretty much on course.
They’re probably more flat to moderate growth. A lot of the growth has come from Proctor from CalSurance, some from FIU.
So that’s why we want to send a signal out there that foregoing additional growth, continued additional growth at Proctor, the programs division may see moderate growth or flat.
Keith Alexander – JP Morgan
I just wanted to ask if you were seeing any change in the competitive environment form a broker perspective? Are peers changing their commission schemes or emphasizing different products or market expansion?
J. Powell Brown
Relative to… did you say our carriers changing their commissions, is that what you said?
Keith Alexander – JP Morgan
I’m sorry, are peers changing their commission scheme.
J. Powell Brown
You mean how they pay, the peers meaning our competitors, paying their producers differently?
Keith Alexander – JP Morgan
Yes. That and I just wanted to see if they were changing the amount of the commission they are receiving from the carriers.
The commission rate.
J. Powell Brown
So that they are taking less commission to be more competitive on the pricing?
Keith Alexander – JP Morgan
Yes.
J. Powell Brown
I’m not seeing that.
Cory Walker
Remember, Keith, as you know, the vast majority of our businesses is commission driven so ultimately when we see our competitors pricing, it’s an all end number, so if they’re reducing their commission or not, we very, very rarely know that, we just know ultimately what our prospects may be presented with, so don’t know that answer.
Jim Henderson
Keith, our commission allowance from carriers actually has increased some even in this reduced pricing market. So particularly in certain lines like work comp and others where the company sees a profit opportunity and they’re saying, “We’re willing to pay you more commission on this niche of business” and we are seeing that happening still today.
Operator
Your next question comes from Mark Hughes – SunTrust Bank.
Mark Hughes – SunTrust Bank
Procter, do you have the mix of prime versus sub-prime?
Jim Henderson
It’s about 20% sub-prime and about 80% non. It was characterized by a lot of the regional banks.
We do have a large customer in a division of the US Government, but for the most part, they look at the medium, not the jumbo banks, more the regional banks in terms of servicing their portfolio.
Mark Hughes – SunTrust Bank
Right, and then the Florida property, you described the coastal price increases inland a little more pressure. When you look at that in aggregate for your mix, what’s the trend or what’s the Florida property rate environment now?
J. Powell Brown
It would be net up if you combine those.
Operator
Your next question comes from Mike Grasher – Piper Jaffray.
Michael Grasher - Piper Jaffray
Just a follow up from an earlier conversation around the investments. Cory, what are the options out there in terms of the potential to move that yield a bit higher, particularly given the M&A environment seems to be in a backlog here and uncertainty around how much time that may unwind.
Cory Walker
Given the backdrop the fact that we never really know exactly when the next deal will close, we follow a policy of keeping all of our investments essentially 7 days or less and so we keep the vast majority of our money in primarily tax free money markets that are supplied by SunTrust or Wells Fargo and those are the two primary banking sweep operations that we have and we kind of rely on them to make sure that we’re in the best AAA category. So moving money outside of that for a longer term is something that we just...
I think is short sighted and we just have to kind of bear with the current yield because we’re just not going to put our cash or the client’s cash with exposure in there still a lot of uncertainty and even with the municipalities, we have to kind of watch what’s happening with those bonds currently too. So realistically, you won’t see us making any real movements to stretch out to get another 10 or 15 basis points unfortunately.
We just have to bear with the market right now. But as Jim mentioned, I think the deals will ultimately come because it’s a cottage industry and we have a lot of cash and we’re ready to do it.
Michael Grasher - Piper Jaffray
I agree with that, I just see the amount that you’ve accumulated and then when I consider the size of the deals that you typically engage in, it just seems to me that there might be some certain amount that you could actually wall off and go into a bit longer term.
J. Powell Brown
[Murray] prefers a mattress but we won’t’ let him keep it there.
Operator
I show we have no further questions.
J. Powell Brown
All right David. Thank you all very much.
Thanks everybody for attending today and we look forward to talking to you again next quarter. Have a great day.
Operator
That concludes today’s conference. We thank you for participating.