Feb 16, 2010
Executives
Powell Brown - President & Chief Executive Officer Cory Walker - Chief Financial Officer Jim Henderson - Chief Operating Director Tom Riley - Regional President
Analysts
Mike Grasher - Piper Jaffray Keith Walsh - Citi Mark Hughes - SunTrust Keith Alexander - JP Morgan Meyer Shields - Stifel Nicolaus Brett Huff - Stephens Scott Heleniak - RBC Capital Markets Sarah DeWitt - Barclays Capital
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 our current views with respect to future events including financial performance.
Such statements are intended to fall within the Safe Harbor provision 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 have 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. With that said, I would now like to turn the call over to Mr.
Powell Brown, our President and Chief Executive Officer.
Powell Brown
Thank you, Rachelle. Good morning everybody.
2009, marked a first time in our history that we’d not grown top and bottom line. Yet in light of this difficult operating environment, the Brown & Brown team continues to deliver for our clients and generated a 34.3% EBITDA margin.
As we said in the past, we have margin pressure in a negative internal growth environment. The insurance industry as a whole continues to post positive underwriting results for Q4 with standard carriers combined ratios in the 90s and with written premiums generally lower 4% to 8% Q4-over-Q4.
The risk barriers are seeing the impact of shrinking exposure units as we are, and finally you should be aware that our Q4 numbers reflect $4.2 million less in contingency revenue for FIU that was received in Q4 of ‘08. This was postponed into 2010 and subject to favorable loss experience.
We are potentially able to collect that in ‘10. Now, I’d like to turn it over to Cory for our financial report.
Cory Walker
Thanks Powell. After three quarters of slight improvements, the weak economy, the continued soft pricing, the soft M&A environment, and again the lack of similar profit sharing contingencies that we got from the fourth quarter last year, all caused the fourth quarter of this year to be the worst quarter for the entire year.
As most of you that routinely follow our company know, as our internal growth rate goes, whether it grows or shrinks, as long as we have negative internal growth as Powell was mentioning, we will have shrinkage of our margins as some of that commission revenues evaporate. With that said, our fourth quarter revenues did retreat more than any other quarter during the 2009 year and so our total revenues for the quarter did decrease 7.7%, and that represents $17.9 million of total loss revenues.
Commissions and fees, which is the main revenue line item, decreased 7.2% and that’s $16.6 million of that $17.9 million and within that, that’s where our profit-sharing contingent commissions reduced by $4.4 million of which $4 million as Powell mentioned was from FIU. So taking the remaining total core commissions and fees which exclude profit-sharing, contingent commissions decreased $12.1 million from the fourth quarter of last year, and within that net growth number is $6.8 million of acquired revenues.
So therefore, when you add those two back together, our total net loss of core commissions and fees on a same-store sales basis was $18.7 million, and that reflects a negative 8.3% internal growth rate. That number really breaks out $13 million, a total from the broad-based reduction in the three segments of our Retail Division Then secondly, $4.5 million of that came from our National Programs Division, of which that portion was really equally split between reductions at our FIU Proctor and public entity subsidiaries.
So the specific rate growth obviously is in the press release, and Powell and Jim will talk about each of the divisions more specifically in a minute. Moving to our investment income, we earned $700,000 less in the fourth quarter this year, compared to ‘08 and that’s exclusively due to substantially lower investment yields in 2009, even though we do have much higher average daily balances in our cash accounts.
We are currently making only 10 to 12 basis points on our overnight market accounts and really last month and early January we were only making one basis point as hard as that is to believe, but it’s substantially down. Other income was $700,000 for this quarter, compared to $1.3 million in the fourth quarter ‘08.
Most of the prior year’s fourth quarter gains and half of the 2009 fourth quarter gains resulted primarily from the sales of certain books of businesses and our normal course of operation. So moving down and looking at the expenses during the fourth quarter, our employee compensation and benefits increased 1.2 percentage points to 53.7% of total revenue.
Even though the actual net dollar cost dropped by $6.8 million, from the same quarter, the employee compensation benefits relating to just the new standalone acquisitions since the beginning of the fourth quarter was $1.9 million of new costs. Therefore on a somewhat comparable same-store sales basis, because that also includes any fold-in acquisitions, we had an aggregate net decrease in our employee compensation and benefit costs of approximately $8.7 million.
So you can see even though our profit center leaders do a great job of managing their costs and reducing employee benefit costs by $8.7 million, having $18.7 million of revenue evaporate due to the rate and the exposure units shows that our operating profit margins and pre-tax margins do compress. Moving on down, our non-cash stock-based compensation costs was $2.1 million in the fourth quarter, which is an increase of about $400,000 and that’s just due to new performance stock grants issued during the year.
Our other operating expenses increased 1.8 percentage points to 17% of the total revenues, and that represents about $1 million of increased costs. The other operating expenses relating just to the standalone acquisitions is about half of that, $0.5 million, and therefore on the comparable same-store basis we had approximately $0.5 million of additional net costs.
Almost all of our costs and line items showed a decrease from the prior year fourth quarters, like travel and entertainment expenses, supplies, occupancy costs; however, those savings were offset by a $1.4 million increase in our legal expenses. Our legal expense is higher due to the cost of aggressively defending legal proceedings against us, as well as aggressively pursuing legal actions against some third parties.
Our amortization and depreciation charges are really just a factor of our various acquisition levels. Our interest expense is slightly higher due to acquisition earn out liabilities we have, and then finally for the quarter, moving to our effective tax rate for the entire year of 2009, our effective tax rate was 39.9%.
We’d expected to run in effective tax rate around 39.3%, which we did for the first nine months, but due to the substantial drop in revenue in the fourth quarter, the rate did move up and the impact of having to true up the previous nine months amounted to about $1 million, and that did fall into the fourth quarter which drove up the rate to the 42.4%. The rate moved from our expected 39.3% to the 39.9% rate, mainly due to higher state tax rates, like Michigan which has an effective tax rate on a combined basis of roughly 41.3% and that’s where our Proctor subsidiary is, and when they have become a higher percentage of our total pretax income, the overall rate does go up.
So now just quickly moving just to the year-to-date numbers, I will just restate a little bit of what Powell said is that, for the year we did have total revenues of $967.9 million, and that’s down only 1% from 2008, and that represents about $9.7 million, and of that amount, $8.8 million loan was just from our profit sharing contingent commission. So in spite of a year that had a lot of different challenges that we mentioned, I think it’s very important that each of our leaders at our decentralized operations were still able to maintain and operate EBITDA margin of 34.3% and that was really only 1.1 percentage points down from last year.
So all-in-all, it was a good year relative to the difficult challenges that we did face. So with that, let me turn it back to Powell.
Powell Brown
Thank you, Cory. From a retail perspective, Florida retail internal growth was down $10.4 million versus $9.7 million.
GL and automobile rates are flat to down 15, work comp rates are down 6.8% on average for 2010. Since 2003 when reform was enacted, rates are down approximately 63% in Florida.
Exposures and payrolls are typically flat to down 15; the construction industry in Florida here as you know is still very slow. GL and auto rates are flat to down 15% and the exposure units, payrolls are down 5% to 40%.
Citizens Property Insurance Company, effective January 1, increased their rates; commercial residential rates are up on buildings over $10 million in value. They’re typically with the same terms and conditions up 20%, but most of those insured are changing their terms and conditions, meaning taking higher wind deductibles and AOP deductibles, so it usually levels out more about a 10% increase.
On buildings under $10 million it’s typically a flat 10% increase. Personal lines rates are also up, some more so than others in different areas of state, but roughly 10%.
What does that really mean? Well, some of that business that is currently with Citizens is moving towards the excess and the surplus lines market and specifically we’re starting to see more property in the Panhandle trying to migrate out of Citizens into the E&S market, and to a lesser degree in Southwest Florida.
We have not seen the pricing get close enough yet on the East Coast of Florida and more specifically southeast Florida. On a national retail basis, internal growth was negative 7.2% versus 3.3%, in the Southeast, excluding Florida.
GL and auto rates are flat to down 10%, and work comp rates are flat to down 5%, except in Louisiana, where rates are down 5% to 20%. Exposures are flat to down 10%.
Construction, GL and auto rates are typically flat down 15%, and payrolls are down 5% to 15%. I will note that accounts over $100,000 in premium anywhere in the country continue to attract lots and lots of attention, and regional carriers are very, very competitive in the Southeast on all sizes of accounts.
In the Northeast, property, general liability and automobile rates are flat to down 10%. Work comp rates are down 5% to up 5%, and exposures are typically flat to down 10%.
In the construction area, in the Northeast, rates are flat to down 10%, and exposures are flat to down 20%. I will note that accounts in and around the New York City area seem to be holding up better than other accounts in the Northeast United States.
In the Midwest, property general liability and auto rates are flat to down 15%. Work comp rates are flat to down 10%.
One note, Texas and Michigan are more competitive with rates on average down 15% to 25%, and exposures are typically down 10% to 40%. Construction, GL and automobile rates are down 5% to 10%, and exposures are down 10% to 15%.
Lots of capacity in the Midwest, and there are new regional carriers entering states, most notably as an example in Colorado, where they have two new regional carriers. They continue to drive pricing down in that state.
In western retail, internal growth was 14.1% negative versus 11.5%. Property, GL and auto rates are flat to down 15%, with exposures down 5% to 30%.
Work comp rates are either up 5% to down 10%, and exposures are down 10% to 25%. Construction continues to be slow, GL and automobile rates are down 5% to 15%, and exposures are down 5% to 50%.
There’s intense rate pressure in the Pacific Northwest, specifically the Seattle area and GL, auto and work comp rates are down 10% plus; a year ago they were flattish. In Southern California, automobile rates are down 15% to 20%.
We continue to see significant construction shrinkage in Arizona and Seattle, and in the Western states that we operate in, they seem to have a more difficult economic environment than the national average from an unemployment standpoint. Employee benefits, small group rates are increasing 5% to 15%, and insured are modifying plans to reduce the ultimate increases on large groups, those are groups over 50 insured lives.
Rates are up 5% to 15% on good loss experience. If they have poor loss experience, it’s substantially higher and covered lives in groups are typically down 5% to 40%.
That said I will now turn it over to Jim for your report.
Jim Henderson
Thank you Powell and good morning everyone. I would like to cover the non-retail divisions, wholesale brokerage services and programs, and also touch on the M&A activity.
Within the wholesale brokerages there was a positive surprise in the fourth quarter. The negative organic growth, the reduction of 3.1% for the fourth quarter was the best quarter in this division since the third quarter of 2007.
The negative organic challenge in 2009 was 6.2%, and this weighs very favorably compared to the 14.6% challenge we had in 2008, so definitely an improvement in this division. Special recognition to our two leaders there, Tony Strianese and Mike Reardon; these individuals in the face of 9.5% less revenue, they took out actually more expenses than that and improved their core margin in 2009 in this division by 1.1%.
I’d like to share with you a couple of comments from the different operating units within wholesale brokerage. The price reductions, they continue to happen.
The account’s under 50,000 in premium and the reductions are smaller. They’re generally in the zero to 5% range.
On the accounts over 50,000 premiums, we experienced really 10%, 15%, and 20% reduction in pricing there, and competition from the standard market. Exposure units continue to deteriorate 5% to 8%.
Interesting comments from a couple of business units, and that is payrolls for the last couple of quarters are more stable than the revenue base. So perhaps the amount of hiring or terminations there is shrinking, but not a lot of impact on the top line for our customers at this time.
Submission count is up, which is very positive, indicating a surge of market opportunity. The standard markets as mentioned are still very aggressive.
We think that the binding authority component of this business, which represents about two-third of revenues is a growth opportunity in 2010. There are some hungry carriers that certainly would like to have additional business in this area, and we’re talking to a number about additional authorities from them to grow that business.
Turning now to the service unit, this business unit continues to produce industry leading margins of 26.7% for the year. We were down slightly in the fourth quarter.
The fourth quarter is down slightly due to claims count, but for the year revenue was up 5.6% and a corresponding increase in pre-tax earnings by 4.4%. This month we did close on the acquisition of protocols.
This is a business unit similar to new Quest. They are a Medicare set aside provider to carriers.
It’s a growth opportunity with a high margin performer in this unit. Turning now to the professional programs, for the quarter the revenues were down 5.4%.
This is principally on price reductions and a couple of the business units for this quarter, but for the year we are very pleased to report a 2% growth in professional programs. This division, you may recall is comprised of small account, professional coverage for dental and lawyers, insurance agents, physicians, and the price pressures on this business unit.
Again under the 50,000 premium count, the price pressure is a little bit less, maybe 0%, 5%, 8%. Over 50,000, it’s probably double, that is where from 10%, 8%, to plus percent challenge is there, particularly on accounts with fewer no losses.
There is surprisingly slightly less exposure units with respect to a number of law firms and units comprising the premium formula. On a very positive note, we were able to initiate new sales growth in this division in 2009, and believe that can spill over into 2010.
Next is the special program unit. This is consists of some 16 business units.
We did have a negative organic growth for the quarter in this division of 11.4%. For the year though, this unit had an increase of 9% for the year, down for the quarter, but up for the year.
This had a lot to do with some fluctuation of revenues at Proctor financial that I’ll cover with you in a moment. Within this unit, that is a public entity unit.
They were down just under 5% for the year with sustainable earnings. The factor here was more pricing than the business units.
Certainly governments are not reducing as quickly as the general business economy, but the price competition is quite severe. The next unit of note; Florida and the coastal underwriters or condominium unit in South Florida.
We did have a tough quarter, primarily due to capacity concerns or issues and that is the ability to write total new exposure units to South Florida, and for the year 2009, we were down 2.4% within this unit. We are very pleased to report that Jeff Eisen and his leaders have been able to successfully negotiate new capacity for 2010, which will enable us to keep our existing customers and also actually grow this business unit for non-tricount exposures in South Florida for 2010.
A real plus for them and we are excited about that new capacity. We are able to achieve some price increases on condominiums in Florida and summed those as being imposed by citizens.
American Specialty is our entertainment and sports facility up in Indiana; they were down 9.1% for the year. Two factors, one certainly price competition and long tail casualty is very severe, the other and perhaps even more significant was the transition from one policy issuing company to another.
That transition is now complete. We’re going into 2010, the new carrier will offer our ability to issue new products there for this business unit and we feel like an opportunity to reverse the trend and provide some growth for American Specialty.
Now back to Proctor Financial and some additional guidance as to certainly the fluctuation of revenues for this business unit. Proctor is an insurance service provider for regional banks for their mortgage portfolios, and describing that mortgage portfolios, you think about all the defaults, the things going on there.
Actually that has generated earnings revenue opportunity for us, however, the volatility of the regional banks is one that has caused fluctuations and revenues and growth and earnings within Proctor that we wanted to provide additional color to you. Proctor does have the characteristics of having large accounts, therefore revenue can be lumpy.
Revenue tends to come on very slowly as we route in new account. We grow that account with respect to new exposures, unfortunately when we lose one, as we did last year as a result of takeover by the FDIC of a large account, the revenue disappears immediately.
That certainly impacted the fourth quarter and with respect to the first and second quarter of 2010, we would like to provide some guidance on this business unit. In the first quarter we could anticipate revenues as a result of this large account having been taken over, of a reduction of some $9 million to $10 million revenue for Proctor, and in the second quarter, it could be $6 million to $8 million.
Now, we feel this is a very conservative view of it. It’s based upon our existing customer base.
It doesn’t include a significant business or exposure unit growth or a significant change in the mortgage environment. So those factors certainly would help your model in looking at forward looking for 2010.
Lastly moving back to M&A, and getting into something, frankly on a very positive happening there, we are seeing some promising new activity. I think at least a stability of revenues from the standpoint that we can sit down and have a meaningful conversation with a prospect as to their expectations and their expectations of value.
Those conversations are going much better this year than last year. The early part of 2010 is encouraging from the three business units we have acquired.
Last year the industry was down some 40% in M&A activity. We think ‘10 certainly has more promise to it.
There’s a tax rate change sitting out there at the end of 2010. This is a promising discussion by potential sellers to do.
I do it now or do I pay more next year with respect to taxes. The other item Cory mentioned, the cash sitting on the sidelines; the idle cash which is idle, because of the earnings of that cash.
So we’ll look very hard to put that money to work in a very prudent manner. Lastly, also in the room is Tom Riley.
Tom and I have been friends for some 20 years. Tom followed me as CFO in 1989.
After a couple of years, he took over the South Florida offices, he grew that operation. He built his regions plus others to sum $200 million in acquisitions that he has touched and led.
As Powell mentioned in most prolific buyer of agencies and he lives in a jet, which is the story of many of us. So we’ve got a very, very experienced leader to step in and be involved in the M&A activity, and I think we’ll have every success with those efforts.
So with that Powell, I’ll turn it back over to you.
Powell Brown
Thank you, Jim. I’d like to conclude by mentioning several items, three particularly.
One, we have broken out Proctor Financial, because it’s an important part of our business, but it is countercyclical. The recent events in our economy have had a significant impact on that business.
The rest of our company is more of a mirror reflection of the broad, middle market economy. Two, Hyatt and Jim have developed a great group of operating leaders and those leaders continue to step up and take on more responsibility as Jim alluded to.
Tom Riley, who has been our most prolific acquirer of agencies in the past, now had acquisitions for our team and focus more of his time in that area in the future. Finally, we have 10 Regional President’s and Regional Executive Vice President’s who report to the CEO.
This development in terms of the Regional President and the Regional Executive Vice President structure has developed over the last 10 years. All of those individuals have reported to Jim Hyatt and/or myself during that period of time; now all 10 will report to me, with some taking on more responsibility as we alluded to with Tom Riley’s acquisitions.
So with that said, Rachelle I would like to turn it back to you to open it up for questions.
Operator
(Operator Instructions) Your first question comes from Mike Grasher - Piper Jaffray.
Mike Grasher - Piper Jaffray
Powell, I wanted to circle back with you just in terms of your analysis of the market and what you’ve been describing to us. It seems pretty out there and maybe nothing seems to be turning up.
Is there anywhere or either by line or geography that maybe indicates some light at the end of the tunnel?
Powell Brown
Mike, I would tell you that it continues to be very competitive in the economy out there and what we read and what we see is different and so, if you noticed in my comments, I talked about our business being a mirror reflection of the middle market economy and so we continue as Jim alluded to us as well. Some of our clients we are seeing are not having payroll shrinkages, but we are still seeing shrinkages in their revenue and sales, and so the areas that you don’t see much change would be property related businesses; however, it’s possible to have an evaluation of that property and it would be valued less than you had insured for, so you are seeing some values on property accounts come down too.
So I’d tell you that it’s pretty darn competitive everywhere. There are places in the country that a year ago we did not see the slowdown, and you have heard me say that before, in places like Seattle and Portland, where it has slowed down a bit, but it continues to be competitive.
Mike Grasher - Piper Jaffray
So maybe just less bad overall, certainly nothing to get too excited about.
Powell Brown
Yes, I think that’s a fair statement, but ‘09 there was a downdraft as you can tell.
Mike Grasher - Piper Jaffray
Cory, just a follow-up question, can you talk about the variable expenses or the other operating expenses? They are up about $6 million in ‘09 versus ‘08.
Are there areas here where you might expect to see some heightened expense awareness or management, or how should we be thinking about that for 2010?
Cory Walker
No, I think part of the decentralized system is that each one of our profit center leaders looks at each of their revenues and modify. So with that said, things that can be changed are already being changed and a lot of the savings that we do have is that if you take all the groups and put them in a line in terms of the highest margins to lowest margin, probably some of the greatest savings are coming from offices that may be below the average level.
So there’s no one area that will come up, it’s just unique charges that happen in a particular quarter. On this particular quarter it had to be a higher amount of legal expenses that just popped up, because of a couple of cases.
So I would expect us to be relatively consistent in terms of the percentage. Now as the percentage of total revenue is dependent upon, believe it or not, more so where the revenues grow or shrink at, but from an absolute dollar standpoint, I don’t think there really won’t be significant changes.
Jim Henderson
I think on the operating side, with respect to the cost, 2008, 2009 was the first time that I saw where budgets never lost, never left the desk of the leaders, and what that means is that you’re always looking for what is my new revenue base? What are the expenses that disappear because the commission goes?
Then what is the next phase I can do with respect to, let’s say rent. What about support staff?
What about other costs there? So that budget is a living document sitting on their desk to work with each and every quarter going forward.
Our people have really done that very, very well. We talked last quarter about the reduction in lease costs, that a goal of taking 25% of that out over the forward 12, 18 months and that we’re finding success, because of the issues in the real estate market.
So that micromanagement is down at a small P&L level and is bearing fruit.
Operator
Your next question comes from Keith Walsh - Citi.
Keith Walsh - Citi
A couple of questions on revenue for Powell and then I’ve got an M&A question to Jim. Just looking at I guess your three year of negative organic, and I thought we would have lapsed some of the negative by now and it seems to be actually getting worse.
Maybe if you can just talk first on the impact we’re seeing on rate versus exposure first of all in ‘09 relative to ’08; if one is having more of a pronounced impact than another? Then I’ve got a couple of follow-ups there.
Cory Walker
Keith, we would tell you that rate is maybe 25%, maybe 30% versus exposure unit shrinkage. You may have heard me say it; I would say its two-thirds to three quarters of the impact across the Board.
Keith Walsh - Citi
How has that been traditional?
Cory Walker
Yes traditionally if you think about it, I haven’t asked the question, is there a similar period of time excluding the economy in investor meetings and I would bring you back to the late ‘90s, when rates were going down somewhere between 4% and 7%. In the fourth quarter of ‘09, the average standard company rate went down 5.6%.
So in that period, if the economy is flat to up slightly, we believe we grow organically as we did in the late ‘90s, but then you put on top of that a downdraft, which we called the double whammy. It’s, you have one rate going down, but the more important impact is the shrinking exposure units.
We’re continuing to write a lot of new business, but it’s very difficult to fill in the whole of shrinking exposure units to then grow your business on top of that. So I would say two-thirds to three quarters exposure units, one-third to one quarter rate.
Keith Walsh - Citi
Just to follow-up on the exposure units, what are the inflection points we should be looking for? Is it really payroll related, new construction?
What are the really key metrics for you guys?
Cory Walker
Keith, it’s interesting. We have been looking over the last year for a leading economic indicator on which to peg our performance and we have not found one that truly reflects the performance of our business.
Some of us have talked about the fact, that is, we have a lagging component in our business or maybe the middle market may have a lagging component from an economic standpoint to the overall market. I don’t know, but we have not been able to find a leading economic indicator of any sort that has a direct correlation to our business yet.
Keith Walsh - Citi
Then the second piece of my question is, you touched on the competitive position by regional competitors. Maybe if you could talk a little bit about retention of your producers and your accounts by historical standards, maybe a little more color around the regional competitors that you mentioned earlier.
Tom Riley
One, we have not seen a significant deterioration of retention of number of accounts if you exclude bankruptcies. That’s a big if, but I’m saying if you exclude that, our retention level is more near historical norm, so that’s retaining the number of accounts, but accounts can shrink in size, because their sales and payrolls and things like that have shrunk, number one.
Number two, as it relates to producers, we basically allocate 1% of our revenues to recruiting and enhancing high quality people that are not in the current budget around our system each year. In doing so, we have continued to recruit high quality people, and try to enhance their abilities through Brown & Brown University, and we have been very fortunate to retain the producers in our system.
That does not mean that we haven’t had some producers’ leave, at which you have normally in any market cycle. We would tell you that we have been very pleased in retaining the high quality producers in our system, and recruiting new high quality people, who we think will be also very high quality producers in the future, but the regional component was regional insurance companies, which was what I was really referring to.
Keith Walsh - Citi
Last question for Jim, just on M&A, if I look through the first two months I guess, of the year or almost two months, about $10.5 million of acquired revs, I would extrapolate that out maybe a $60 million run rate for the year. Is that a fair run rate?
Do you think guys you can do better than that or is that a good trend we should think about?
Jim Henderson
Certainly, if you take the last four or five year average, that would be a very doable target. If you look at deployable cash, the opportunity there is we’ve never really put numbers out there in terms of forecasting acquisitions.
That kind of happens when they do. They’re also very lumpy with respect to the quarters that they come in, but is there an improvement in the environment, and we think that has to do with the ability to establish value on our part and the seller.
We are fortunate to be one of the players out there that has the resources to acquire at different size levels and if you look at some that really want to have more chunky acquisitions, our model we can acquire really from $2 million, $3 million, $4 million, and $5 million up and so that gives us I think an advantage to some others and frankly, what are very, very profitable agencies and opportunities too. So this year we hope to be very busy.
Operator
Your next question comes from Mark Hughes - SunTrust.
Mark Hughes - SunTrust
Any thoughts on the overall contingent outlook for Q1, I guess some of that FIU will show up in 2010, any other comments?
Powell Brown
The FIU Mark, we anticipate that at the end of the year and as it relates to profit sharing, once again it’s a guess. Profit sharing is a function; the performance of the book at the local office level not only from a loss ratio standpoint, but from a premium standpoint.
So if the premium shrinks and is profitable, the calculation would typically be lower. Having said that, if the premium grows and the losses grow, then if you can get lower to or if it grows and it’s more profitable, you can get more.
So we really don’t know from a standpoint of what the contingencies are going to look like; however, we’ve said in markets or in cycles where the loss ratios on average go down, the insurance companies typically will pay out more in contingencies. That is not indicative necessarily of each individual office, and having said that, when loss ratios go up, carriers typically payout less in contingencies.
So I know we have been kind of broad on that statement, but we really don’t know until they start coming in.
Mark Hughes - SunTrust
On the M&A front, I think it sounds like you’re able to come to better agreement in terms of valuation. Is that a tax issue?
Do you think people, they finally got to the point where they are lacking in clarity about when the soft market is going to end and so they are willing to come to the table?
Powell Brown
Yes, I think it’s more the market. So if they believe that market was going to suddenly jump up and revenues and earnings would increase, the tendency to probably remain in place wait for a better, brighter day, that doesn’t appear to be happening in a timeframe that many need.
So they are coming back and we had $12 million in revenue, we now have 10, that’s what might have happened, but let’s talk about what we have today. Let’s arrange an opportunity for us to grow this to a value that we can agree upon, and move forward.
So I think that’s probably the most significant change that we’ve seen.
Operator
Your next question comes from Keith Alexander - JP Morgan.
Keith Alexander - JP Morgan
I was just wondering, was there anything unusual in national? What would point to the acceleration of the decline in national in the quarter?
It seems like it was a little bit faster in recent trend.
Powell Brown
No, there’s not anything in particular that we’re pointing to Keith. I just think it’s an overall deterioration in the market.
I know that you said it’s up actually from 3.3 to 7.2, quarter-over-quarter, but I would attribute that personally to a combination of overall the economy pushing down somewhat and in some of the areas that we were more stable a year ago. They started to slowdown as well, but there’s not one thing that we point to.
Keith Alexander - JP Morgan
I’m going to ask a question that’s kind of been asked before, just in a different way. So where are we in terms of the organic declines?
Do you think that we’re going to see continued acceleration, stabilization or maybe a gradual improvement from here?
Powell Brown
Well, that’s hard to say Keith. I would tell you that the way I would probably answer that is, if you believe what you read and hear, that the economy and the economic outlook is flattish, and so how does that translate into our business, we don’t know yet.
So obviously you could make an argument, that successive years down when you hear exposure units down on top of down. How much further down can they go, and so we don’t know quite honestly.
So I think the question earlier from a standpoint of, we are trying to do everything we can to retain our clients and our clients are shrinking, and when that stabilizes and/or the growth starts, we will start to see it pretty shortly thereafter, but we don’t know Keith to answer your question.
Keith Alexander - JP Morgan
Then going back to the other operating expense, do you expect any of the legal expenses to carryover to 2010 or is that just a one-time item?
Cory Walker
Well, I think that 1.4 is more of a one-time item, because of the case over, but in any particular quarter they can jump up, but from a year-to-year basis, I would expect it to be stable, if not even down a little bit. That’s certainly what we hope, especially on that particular line item.
Keith Alexander - JP Morgan
On the tax rate, is there any additional portion of that that might carry over to 2010?
Cory Walker
Well, I think from an ongoing basis, I think you’ve got to model out a 39.8% to 39.9% effective tax rate on a go forward basis.
Keith Alexander - JP Morgan
Has your interest in repurchasing shares changed at all?
Cory Walker
We, as you know Keith, have not ever done that. We don’t like to use the term never or always, but it’s not been discussed with the board and we believe our cash has a lot of opportunities this year to invest in high quality agencies, but like I said, it’s something that we are not using the word never or always, but we really do believe that there’s a lot of acquisition opportunities for 2010 that we would invest our money in.
Operator
Your next question comes from Meyer Shields - Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus
Jim Henderson
No, it has not. I think the element in the case of a difference between the other public brokers and BRO are pretty obvious.
I think they are focused at opportunity, at culture, at value, at their people being able to stay on and go forward and do the things that they have done in the past to operate most like they have before, so that component is not there. The organic growth is one that has a lot to do with value for BRO shares that we want to get into our hands and we do that.
So to that extent, they are keenly tuned into that component, but it’s not one where they value that as that we’re unhappy talking to you because of that particular component. It’s never come up.
Meyer Shields - Stifel Nicolaus
Two small questions for Cory; one, when we look at FIU related contingents for 4Q 2010, am I right in assuming that all else being equal, we’d have $4 million postponed from 2009 and let’s say $4 million from 2010?
Jim Henderson
This is Jim. You are right, Meyer.
The rollover from ‘09 to ‘10 was a good news and bad news. The good news was that we negotiated in November and December an increase in the participants on the reinsurance treating for FIU and part of that was extending the ‘09 year into ‘10, which we couldn’t close out the ‘09 year and we couldn’t collect the contingent, but it does continue to build, to accrue very, very profitable years, which that has not disappeared, but we don’t bring closure to that year until ‘10.
So it doesn’t diminish the ‘10 opportunity to your point.
Meyer Shields - Stifel Nicolaus
Historically, I guess there’s been some seasonality with other operating expenses being lower in the first quarter than in other quarters and we did not see that in 2009. Should we expect it in 2010?
Jim Henderson
I guess I’m not sure what costs you are thinking of; seasonal costs, because I mean I don’t view us having too many expenses that are really seasonal related costs, but I think that if you look at the overall costs that we had for 2009, it changes on a monthly basis, and I think current level is what you ought to expect for ‘10.
Meyer Shields - Stifel Nicolaus
Would you expect that in every quarter in ‘10?
Jim Henderson
As a general rule; well excluding [Inaudible] which certainly affects the first quarter.
Cory Walker
It does affect the bonus amount. So that would fluctuate that side of it.
Operator
Your next question comes from Brett Huff - Stephens.
Brett Huff - Stephens
A couple of questions, Cory, I wanted to make sure when you were giving us the various comp and OpEx math, which was sort of same-store organic, and which was added by the M&A. I think you gave us the year or that a 4Q number and regardless, I was writing quickly, but couldn’t get it all.
Could you just highlight that math again for me for 4Q?
Cory Walker
Yes, those were fourth quarter numbers that I was giving and when I say that the way we do that is we really have just taken the standalone acquisitions that are new and we’re isolating the true costs there, and then just saying, okay that is X dollars and then separating that to the rest of the offices that were there in the same time last year. What that does include is that we do have any fold-ins.
Those numbers are kind of embedded in that existing office. So there are some increased costs there from our fold-in’s, but I’m saying they’re really like same store.
So you have to know that little imprecision methodology there, but you talk about the terms of the compensation or other expense line.
Brett Huff - Stephens
Could you do both for me?
Cory Walker
Yes, reviewing back on the compensation, what they’ve said, they were the net reduction of $6.8 million of raw dollars. If you take just the standalone acquisitions, they accounted for $1.9 million of compensation.
So, essentially you have to add those two numbers together, because the net was $6.8 million drop, but you’re carving out the $1.9 million. If you take just the offices that were there in the both years, they do have a little bit of fold-ins there, that those were actually reduced by a total of $8.7 million of costs that came out.
So is that you follow what those numbers, are. Then when we went to the other operating expenses, just for the quarter again, there is basically an increase in total expenses of about $1 million.
It went from roughly $35.359 million to $36.382 million; that’s right at about $1 million. Of that, the standalone acquisitions, they accounted for half $0.5 million of that.
So that means there’s another $0.5 million net increase on just the same stores, but when you look at all the various line items, like I said, T&E, and supplies, almost every line item was a decline, with the exception of legal and that’s where legal actually had a bump up of about $1.4 million. So that overshadowed and that’s how we ended up with $0.5 million up.
Brett Huff - Stephens
On the guidance for Proctor, the 1Q and 2Q, that’s a year-over-year number, the $9 million to $10 million hit, then the $6 million to $8 million hit, is that correct?
Cory Walker
That’s correct.
Brett Huff - Stephens
Can you talk a little bit more about Citizens? It sounds like you’re hopeful that the higher prices will benefit you all down in Florida a little bit and it sounds like on the margin in the condo pricing, that that’s happening.
Anymore color on how quickly that could benefit you or anything?
Cory Walker
Yes, let’s talk about the Citizens for a moment. I think in the last call, we wrote about $75 million of Citizens’ business in premium and so think about it roughly as 10% commission, roughly, so $7.5 million of revenue.
So what I think is going to happen is this; there’s going to be an inflection point depending on where you are in the state, at which business as I alluded to will pour out of Citizens into the E&S market. So for example, right now the Panhandle seems to be that area where the inflection point is the closest.
If you notice, the inflection point is not that close in Southeast Florida yet. So there would be a slight increase on accounts in Southeast Florida if the terms and the conditions stayed the same, that’s a big if.
So as I alluded to, those accounts that were over $10 million, in the value the rates that are coming out are typically up about 20%, but when they change the terms and conditions, they’re up about 10%. So the inflection point in Southeast Florida is still away at the E&S market, at least that their current appetite would start to depopulate accounts from Citizens.
Brett Huff - Stephens
Last question was on the lease issue, can you give us a quantification of the success in that so far, or is that more of a back half 2010 thing as you can negotiate leases off over the year?
Cory Walker
To answer your question, every scenario is different in every office. So it’s taking a while for it to work itself through the system, but I can’t tell you exactly when we’re going to start to see the major impact in terms of lease improvement, but we can say that we are working on it and we’re improving every quarter.
Again, if you look at excluding acquisitions, we actually had a net drop of occupancy costs of roughly $200,000 to $300,000 just through ’09. So part of that just came in during part of the year.
So you’ll see a little bit of better improvement in ‘10. So it’s going in the right direction.
Operator
Your next question comes from Scott Heleniak - RBC Capital Markets.
Scott Heleniak - RBC Capital Markets
You talked about acquisition multiples paid coming down a little bit. I was wonder, if you might be able to quantify that, how much specifically it came down?
Your acquisition strategy is that predicated on multiples coming down lower from where they are now or sort of just kind of leveling out at this level?
Jim Henderson
I think last answer first, we think they level out. The last if you go back two years, due to venture capital money, banks, others, the multiples had grown from $6, $6.5, to $7.5, $8 plus.
They are back into that $6, $6.5, some premiums are at $7, but for the most part they’re really back in that $6, $6.5 range. The multiple certainly is one component, but the other details about opportunity to grow it, about a workout forward numbers are really paying for what has been delivered and it becomes the major part of the play.
So yes, they are down, but that’s really not the predication to looking at the enthusiasm for ‘10 as one of individuals saying, “This is the time to do this. I need to go ahead and get something done this year.
I don’t want to work another five or eight years, and I don’t want to pay so much money to Uncle Sam.”
Scott Heleniak - RBC Capital Markets
Then the other question, the only one I have left. You talked at the beginning of the year increasing the producer hiring, you talked about increasing the budget.
I was just wondering if you could compare how active you actually were in hiring producers and kind of how you are weighing that now versus acquisitions, how you are looking at that for 2010?
Powell Brown
I think, Scott, we look at it in the same way, we’ve look at it in the past in terms of it’s an important part of growing our business and providing future leadership in the future in terms of sales leadership and some of those individuals will actually run offices, if they have the talent and they are so inclined. So we haven’t looked at it any differently.
As I said, we allocate roughly 1% of our revenues a year to help subsidize producers who are not already in budgets at local office levels and that is totally separate and distinct from our appetite in doing acquisitions. So our position on both has not changed.
We are actively looking to hire high quality people internally, and do high quality acquisitions.
Cory Walker
If you look at from a dollar standpoint, I mean, newer producers are basically on salary until they can be trained and validated and we run on average around $40 million, $43 million of annualized salary costs and that actually went up a little over $1 million on a run rate this past year compared to ‘08. So, almost every three out of four quarters it has increased.
So we continue to hire high quality people and train them.
Scott Heleniak - RBC Capital Markets
Are you seeing any changes in the talent available out, the talent pool compared to past several quarters? Is that about the same?
Cory Walker
I wouldn’t say Scott, its different quarter-over-quarter, but I would say that in the last year or maybe even the last 18 months, it has been substantially deeper in that pool than it has been in the past; meaning there’s just a lot of people that we’re seeing from industries that we probably would not have otherwise seen.
Operator
Your final question comes from Sarah DeWitt - Barclays Capital.
Sarah DeWitt - Barclays Capital
There seems to be a lot of moving pieces in the specialty programs business, in terms of your expectation for improvement in FIU next year, but further declines in Proctor. So, if I put all this together, what should this mean in terms of organic growth in this segment next year?
Jim Henderson
If you view the impact of Proctor, the numbers that are so compelling. They wanted to add the additional color and some of this business unit, particularly program area has been our better performers in 2008 and 2009 given the organic challenge we’ve had.
So are they going to be flat or positive, probably not, but we still believe that we have some opportunities there for improvement in the organic growth side within those various business units on factors that hit us in ‘09 with respect to a new trading partner, and a case of some new products out there really help to grow it. FIU certainly the capacity played to help, if you really replenish the revenue base back to their historic levels, which is in ‘08 and ’09, it has been lower than otherwise.
Operator
That will conclude the question-and-answer session. At this time, I will turn the call back over to Mr.
Brown for any additional or closing remarks.
Powell Brown
Thank you, Rachelle. Thank you all everybody, this morning and we’ll talk to you next quarter.
Thank you and have a great day.
Operator
That will conclude today’s conference. We thank you for your participation.