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Question and Answer SessionOperator Thank you, sir. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, to signal for a question or comment, please press the star key followed by the digit one. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Keith Walsh with Citi. Keith Walsh Citi Hey, good morning everybody. How are youPowell Brown Good morning. Keith Walsh Citi I guess first question for Powell and/or Cory just looking at your net cash position, it seems about $83 million. Looks to me the highest I've ever seen on your balance sheet. With your stock pulling back the way it has, you know, maybe at 7.5 times EBITDA, we can debate what that level is. I recall you guys typically saying you'll buy new deals at 6 to 7 times. Why not acquire yourselves at this point? Powell Brown Well, good morning Keith and thank you for the question. As you've heard me say before, I don't like the term 'never' or 'always' as it relates to a stock repurchase, and we have talked and will talk in the future about that with our Board. But up to this point, our Board has not thought it was in the best interest to do that. We think there continues to be a lot of good acquisition opportunities out there, but it's something that we obviously will talk to our Board about periodically and see what their interest is. Keith Walsh Citi Okay. And then just a broader question on the organic it seems thatand I understand the pressures you guys specifically feel based on your size and geography, and the many factors over the last several years. But we're heading into year five of consecutive organic declines; and Arthur Gallagher, which is probably the closest public comp in North America, have had two. So why should this stock continue to be viewed as the growth name in the group, and has the model fundamentally changed at this point? Powell Brown Well no, the model has not fundamentally changed. As you know, Keith, by way of background our seven biggest states in Brown & Brown in order of revenue concentration where it is being produced Florida, Michigan, New Jersey, California, New York, Pennsylvania, and Washington. Several of those states, as you know, are in deeper economic holes than others, and some have said that in Floridayou know, we've been asked on this call before, do you think that you have a diversification strategy away from Florida? And the answer is no, we haven't; but if you look at the number of our acquisitions, the majority of those have happened outside of Florida. That's background which you already knew. We have been impacted by what I would call the true middle market more so than it seems like others. And I don't know how others, be it the firm that you've used by name or others, count their internal growth, and I don't know if they're truly in the middle market that we're in or in the market segment, specifically the geographic segments, that we are in, or to the concentration that we are. However, I would tell you this we are very focused on doing what's in the best interest of our clients and writing lots of new business and retaining the existing business that we have. We have continued to see more clients and this is no excuse, it's an observation we have seen more clients acquired and go out of business than we have seen historically, and that has been over the last four to five year period. It's not something that has seemed to abate in the last year. Two we have not seen the economy improve like some might have indicated, and so we'll be interested to see how others grow their business. Are we happy with the way we're growing our business organically? No, we're not; and I take responsibility for that. However, we're doing everything in our power to grow our business, and we will continue to do that. Keith Walsh Citi Okay, thanks a lot. Operator Our next question comes from Mark Hughes with SunTrust. Mark Hughes SunTrust Thank you. Can you give me an idea of the organic growth trends in the benefits segment? Is it keeping pace with the broader company, a little bit better, a little worse? Powell Brown Well good morning, Mark. Basically what I would tell you is the benefits area has been dramatically impacted this is a broad statement by a reduction in headcount. And so you've heard me say today that exposure units are somewhat flat, which they have been; but they've been pulling back over the last several years in a number of industries, one. Two the other thing that we've seen across the board that we haven't talked as much, probably, about, but depending on where you are and what state, some carriers have gone from commission on small groups small group could be defined as under 50 or under 100 from commission to a per head per month. So the only way your commission goes up, it doesn't move anymore if they go to a per head per month because if you don't add people, your commission levels don't go up, number one. Number two we have in certain areas of the country, we'll have commission disclosure, additional commission disclosure or fee disclosure outside of the premium on the account Com 1-1. We don't think that's a problem. We don't have a problem disclosing that in the markets or any markets, for that matter, if desired by our customers. And so historically, prior to the slowdown in the economy, I would tell you that the organic growth there was good, and very good. I would tell you now I think it's more in line with the overall company. Mark Hughes SunTrust But you didn't really touch on health reform there. That hasn't been as much of an impact on your business? Powell Brown No, I think that health reform I went neutral there on that, as you noticed is because I think that it creates some challenges and some that we, unfortunately, can't tell you exactly how it's going to impact our business. That's one side of it. But conversely, it creates great opportunity for us because we are getting more clients because we're able to go out and talk to clients about how we see healthcare reform impacting their businesses and things that they can do going forward to try to anticipate the issues that they will face as a buyer of that insurance in the future. So there's kind of both sides of the equation, but no one don't let anybody tell you no one has a crystal ball on exactly what healthcare reform is going to do, and many people out there believe that there will be additional changes to the current law that's in place after the election next year, regardless of who the President is. Mark Hughes SunTrust Right. A follow-up special programs up this quarter, was down double digits last quarter. Any body language you can provide going forward? Starting in the fourth quarter, they should be back to a normal flat-upon-flat kind of comparison, and so they were only down this quarter a little less than $1 million. Just to kind of round out the year, they're pretty much on their budget, so we do expect if they hit their budget, they should be up in the fourth quarter also, so that will be a positive trend. And the rest of the programs would be going along their normal expectation, what we've seen recently. Mark Hughes SunTrust Thank you. Operator Our next question comes from Sarah Dewitt with Barclays Capital. Sarah Dewitt Barclays Capital Hi, good morning. Powell Brown Good morning. Cory Walker Hey, Sarah. Sarah Dewitt Barclays Capital Could you talk about your outlook for P&C prices, given that most insurers are announcing another pretty significant quarter of catastrophe losses? Are you seeing any improvement there, or do you expect to? Powell Brown Yeah, remember Sarah we, but more specifically I am the outlier on that, and so you're going to probably hear, I assume, that middle market rates with carriers are going up 1 to 3%. That's what I think you're going to probably hear in earnings season this quarter. What I would tell you is we still have $560 billion of surplus in the industry, and with that, the industry continues to be overcapitalized. And even though loss ratios on workers compensation and property losses in the United States, and all the things that you would say would seem to make sense where rates would go up, I still think those will be tempered. So will rates continue to go up slightly in areas? The answer is on renewals there are certain accounts that are stickingrate increases are sticking in the low single digits around the country. And so what that does is it creates a unique kind of churn in the market because if we don't bring that to our customer, somebody else will. And so we want to keep all of our existing customers and get new customers, so there will be certain clients that were priced very competitively before that will probably be able to sustain a rate increase. Many others will not. So when you hear that rate increase on a certain segment in a carrier, I would say that's true, but that's on the accounts that they renew. That's not on the new accounts that they write, and when we write that new business with them, it seems to be significantly lower than the same rates that they're renewing. Sarah Dewitt Barclays Capital Okay, great. And then on the retail organic growth, that's remained about negative 5%, even though it seems like there is somewhat less of a headwind from pricing and exposures. Can you talk about what's going on there and what are you seeing in terms of trends for new business and retentions? Powell Brown Sure. I would tell you, Sarah, that our new business trends and our renewal retention ratios are within the historic norms with an exception. As I alluded to earlier, we have seen more businesses acquired and go out of business in the last five years than we've ever seen, and so that's the only caveat to that statement. And so we're continuing to do what we believe that we do best, which is the middle market, P&C and employee benefits business. We continue to try do everything we can to renew our existing customers and write as much new business as possible. Sarah Dewitt Barclays Capital Great. Thanks for the answers. Operator Our next question comes from Mike Grasher with Piper Jaffray. Mike Grasher Piper Jaffray Thank you. Good morning, guys. Just a follow-up on that with competition being so intense, I guess, in the industry, have you had to take any steps to retain clients in any extraordinary way? And if we can, we can; if we can't, we can't. Unfortunately that customer would leave and go somewhere else, and hopefully we'll be able to regain that customer in the future. I would tell you that we continue to be very focused on driving new business and retaining business inside of our system, and we're always interested in thinking about new things if there is something that we can do to improve upon that. But we're very, very focused on retaining our existing customers where it makes sense, which we hope is all of our customers, and writing a lot of new business. Mike Grasher Piper Jaffray Okay, but would you suggest that your efforts in terms of trying to retain due to competition is any different than it has been in other previous quarters? Powell BrownI think that in the last four years, Mike, that I would say that we have run into more competitors that have said more unusual things that try to enable them to get in to see our customer, and that's just the way the market goes. But no, to answer your question I don't think there's something so dramatically different. It is a very competitive environment. Is it more competitive than past cycles? I don't know if I would say that, one way or the other. I think there's increased pressure on independent insurance agents because although our business has shrunk organically that you all are talking to us about, we know of numbers of independent agents who have shrunk dramatically and I mean dramatically and so therefore the pressure on them is even greater than ever before. So they're in a position to do some things that maybe they weren't heretofore going to do. You know, we've got to work through that. Mike Grasher Piper Jaffray All right, that's helpful. And then I wanted to just ask about investment yield and that. There certainly are a lot of alternative investment options out there in the marketplace. Have you explored or have you been looking at opportunities that maybe you could improve your yield at the same time, the product or the vehicle meets your liquidity needs here? Particularly given that rates are expected to be so low for some time to come. Cory Walker Mike, we have looked at tax-free mutual funds, the ultra-short and the short funds, and at this stage we're typically just more conservative because the majority of the cash is our clients', and so we continue to invest mainly inbasically just the standard money markets, and we're not making a lot 20, 30 basis points. Mike Grasher Piper Jaffray Okay. And then Cory, just to clarify you mentioned the contingents and spoke about no hurricanes in Florida. I think you said a million or more. Was thatthe million or more, is that the total contingency you're anticipating, or is it just out of Florida? Cory Walker No, that would bewe may get a fewI'm talking less than $100,000 of other contingents in others parts of the country, but the major contingencies in the fourth quarter will come from FIU. So if we don't haveif the wind doesn't blow, you can plan $1 million to $1.2 million, something of that nature, so it's going to be a relatively low number. And if the wind does blow, you can pretty much count less than probably 100,000. Mike Grasher Piper Jaffray Okay, thanks very much. Operator Our next question comes from Matthew Heimermann with JP Morgan. Please proceed, sir. Matthew Heimermann JP Morgan Hi, good morning everybody. I really only had one question today, which is justyou know, historically I think the Company's really incented people with a very long-term perspective of growth and building value through compounding growth over time, and I think that's been reflected in some of the pretty long vesting schedules for the stock. Powell Brown Good morning, Matt. To answer your question, one, as you know the primary wealth building vehicle historically at Brown & Brown has been the PSP or Performance Stock Plan, which is a grant, not an option. And when that grantwhen the stock price went up certain levels, then those grants were awarded, not vested. And so as you know, over the last 12 months with our stock price as it moved up earlier this year, we actually had two of those tranches awarded that doesn't mean vested awarded, and so there was actually value created for participants in those plans, number one. Number two we all know everybody on this call that the equity markets have been volatile and interesting, to say the least, so it is not one thing that is Brown & Brown specific. However, that doesn't address the question that you raised, which is this it is somethingdo I think a lot about it? The answer is yes, I think a lot about it because wealth creation is an important component of our system, and driving a reward system that will bind people to Brown & Brown and allow them to grow financially for themselves and their families. That said, as you know, we implemented a new program this year, a stock incentive plan, and that was and is something that we are very pleased about and think that that can work for a number of people. We also are notwe don't rule out anything relative to creative reward systems that drive the desired performance at Brown & Brown. And so the key is that we're all working really hard to address the question that a number of people prior to you have asked, which is how do we grow our business organically and how do we bind everybody together to be successful to kind of ride out this choppy economic environment into a positive organic growth environment. So that said, I think that under the circumstances, I think that morale in our company is good. Having said that, it's something that we talk a lot about how do we do what's in the best interest of our customers and retain the existing customers and write a lot of new customers, which in turn creates opportunities for all the people on our team and those that will come in the future. And as we grow our business organically, our stock price will take care of itself. Matthew Heimermann JP Morgan That's fair. And then just a follow-up on that you mentioned retention rates for business and new business were within historical norms. I guess just when you think about retention of people, could you give a little bit of color on that, how that's running? Obviously there was some turmoil over the last couple of years with some of the management changes, and there were some high profile folks who left. But under the surface, how are things trending there? Powell Brown Right. Well, the answer is I think that, too, continues in an historical norm. Remember, in a decentralized organization, leaders at individual offices make hiring and termination decisions, and so I always wonder when you read in the Wall Street Journal, it says XYZ Company is going to cut 10% of their workforce. I have no idea how they come up with that as opposed to saying, look, we assess the need to add teammates. We don't like this, but if there is a reduction in teammates at an individual local office level, that's the local office leader's decision. And we hire based on need and ability to grow that business, and so we have not seen a dramatic change in turnover, be it on a service team member level, on a producer team level, or profit center level; and so nothing, I would say, outside of the normal. Matthew Heimermann JP Morgan Right. Operator Our next question comes from Brett Huff with Stevens Inc. Brett Huff Stevens Inc. Good morning, Powell. Good morning, Cory. Powell Brown Morning, Brett. Brett Huff Stevens Inc. A couple questions on the compensation number, Cory, you talked a little bit about this and I think you said the driver of, I thought it was a pretty good number on a percentage of revenue lower than we modeled on just lower salaries and lower producer comp. Anything in there that was unusual or is that something that we shouldgiven that at least I thought it was less than we expected, is there anything that should make that go back up, or is there anything unusual in there this quarter? Cory Walker No, it's not. The only item that was probably a little bit stronger was on the producer compensation which is tied directly to the total revenue amount. So anytime you have negative internal growth, you're going to have a slightly lower producer comp because the total commissions have gone down. But other than that, we run our business on a local level, and the private center leaders in each one of our 170-plus offices make those decisions, and that is more sustainable because you'll never, ever see a memo ever come out of corporate headquarters saying, look, we've got to have this kind of reduction. That's all done at the local level and they know the levels of workload that they've got to deal with. So it's pretty sustainable, and that's the beauty about Brown & Brown, is when we do get a little bit of a headwind, that efficiency level at the local level is going to come through in fairly nice leverage on an earnings basis. So nothing unusual there. Brett Huff Stevens Inc. Okay, thanks. And then Powell, you were mentioning an interesting take on the trend that you've seen that has been out of the norm the last few years, which is some of your clients going out of business, particularly in the middle market. I guess the thought that I have, or the question I have is does it get worse or have you guys seen it trend in more recent months, given the increased economic worries or jitters? I don't know if you track it monthly or et cetera, but has it changed, gotten worse just recently? Powell Brown Brett, I can't give you empirical data on that, but my sense of it is it's more the same than significantly worse or better. I think it just kind of bumps along from a standpoint ofit's just something that has impacted, just like other businesses this is not unique to us, Brown & Brown. But I would tell you that there have been more customers sold and go out of business than we have seen historically in this period of time, and I don't know if there is anything that we seen in the near to intermediate term that would change that. I think that we're going to continue to see that, and I wish you or somebody else on the call could give us a little color around that, but I just think that it'sI think the economy is kind of bumpy, as we all know, and that might be an optimistic view for a while. It is a kind of a bumpy environment for the next 18 to 36 months, and I don't know what that really means because I don't know if anybody can say that. Brett Huff Stevens Inc. That's helpful. And then on the M&A trends, you talked a little bit about having a good pipeline. Given that at least there is somea little bit of rate optimism in pockets, although other folks have a more negative view, maybe, than we do. Have you seen any change in the conversations, tones, behavior of those folks that you are looking to acquire relative to information on rates coming out? Powell Brown Yeah I think, Brett, I would steer youI don't think that the discussion emanates or starts with a change in rates. I think what it does is it's a combination of a couple things one, the pending or potential changes in the tax code, whatever that means going forward, one. Two, I think there was a period of time where people believed that the economy was getting better, and then you combine that with a slight lift in rates and they might feel better about their ability to earn up into an additional amount in an earn-out type of scenario. I think, three I think some sellers are saying, look, as a smaller business relatively speaking, there's probably a benefit in light of all the bumps we're going through of being affiliated with a larger organization relative to market relationships and access to things that we may not heretofore have had. And so I think it's not so much a rate-driven thing. I think that's a part of a bigger discussion around why people are talking and may be more interested in selling today than they have been in the past. And as you've heard me say before, I don't believe it until it's done and signed, but we're talking with lots of people and we're always talking with lots of people. We're talking to lots of people but until they're done, I don't believe it. I alsobefore the call started, Cory and I were talking about it and when you really get right down to it, it seems like there's probably the same number of suitors out there; they just all have different names, except us and that other firm that was named earlier. It seems like everybody else has got a different name, and some of them have different backers, and those that have PE backing, that's short-term so they'll put something together and flip it in three to seven years. We're a long-term deal. We're trying to protect and grow our franchise, and our customers are the most important. And so that resonates with some sellers, Brett, as you know; and then there's some sellers that they're not as interested in that. Brett Huff Stevens Inc. That's helpful. And then last question on margins, I think Cory, this one's to you. Assuming that we have kind of the same kind of organic growth into '12 as we do today, assuming that stays the same, each quarter over the past many quarters ex-the M&A expense in both your expense line items, you guys have seen a quasi-same store sales declines. Sometimes they're bigger, sometimes they're smaller, but they're always there. How long can that kind of go on, or is that something you guys will just continue to get done given the decentralized nature of the businessCory WalkerBrett, I think you're right that it all is because of decentralization, and what it is is every office tries to be better today than they were yesterday. And so as we go along, especially with the decreased revenues, they find more and more efficiencies. So if you look at all of our offices and you put them from the highest operating margins down to the lowest, basically our operating margin is in the middle. So you've got half the offices that are below the average, and where our margin improvement comes from is essentially the lower half makes incremental improvements and the margins increase. So if you think about it in that context, the margins if you have high quality people like we have will always incrementally improve, as long as we don't have the big headwinds that we had last the four years where you can't outrun such loss of revenues. And as we get closer to flat revenue growth and not have the headwinds, our margins will continue to improve. So again, it emanates from having the strongest culture and the best people that that happens, and it always amazes me how we do get compared in terms of what our internal growth are and all these other firms saying that they have it, yet their margins don't increase. That, I just don't understand. That doesn't make sense. So to conclude, our margins generally will always improve in a normal market. Brett Huff Stevens Inc. Okay, that's what I needed. Thanks for your time today. Operator And we'll go next to Raymond Iardella with Macquarie. Raymond Iardella Macquarie Good morning, guys. Just a quick one, I guess, thinking about contingents going forward in 2012. I guess some of the primary insurance carriers have pre-released third quarter earnings, and a lot of the storms have been pretty prevalent in those releases. How do you guys think about 2012 contingents against that backdrop? Powell Brown Well Raymond, good morning. And so whether you take the tornadoes this past year or any other type of natural disaster, I think it's got to be zeroed in more on individual offices than something more broadly stated. However, I think it's fair to say that when losses go up, the expectation whether it be us or others of profit-sharing and contingencies goes down. Raymond Iardella Macquarie Okay. So I guess trying to drill inask the question a little bit differently. On the retail P&C side, do you guys focus more on casualty versus property, or can you kind of give us a sense of what that breakdown is? Powell Brown No, it's not so much a focus onit usually is going to be more driven by, one, geography and the individual office and the leadership at that office. So if you're in Florida, obviously, we havejust to give you an interesting statistic, $1.9 trillion worth of property values within one county of the coast. The second highest concentration like that in the United States that's susceptible to a hurricane is New York. So if you're in places like Florida or in Texas or Gulf Coast, you're going to have lots of property exposure. If you're in places like Chicago and Denver, they have property exposure but they don't have cat exposure, so the premiums for the property policies are significantly lower. So you may still write a lot of property, but the rate on that property is substantially less. So it depends on where you are. We don't track it on a break-out by saying, okay, property is 20% of our overall book, casualty is 44%, work comp is the following, blah blah blah. I can give you sort of an off-the-cuff estimate, but it's going to be more driven by where you are locally in the cat exposure. In California, it's going to be quake. But if you take quake out in California, their cat exposure is relatively limited except they're going to say things, like, brush fire exposure because they build nice homes right on the hills and they burn. So I know that didn't really answer your question, but it's going to be more driven by location and the individual office. Raymond Iardella Macquarie Okay. And I guess switching gears a little bit towards the capital discussion again, how do you guys think about the dividend? I know you guys have been growing it over the past few years, but how do you think about that going forward? Just going back to the comment earlier about your net cash position, is it something that you look at versus cash earnings versus just straight EPS, or is it EBITDA? What kind of metrics are you looking at when setting the dividend policy? Powell Brown Well, the answer is we're proud of the fact that we've increased our dividend for 18 consecutive years. We also, you know, are pretty conservative about our financial position, and so it's something that, barring something that we don't see, we'll talk to our Board about the idea of potentially increasing the dividend in the future. Historically, we have tried to keep the vast majority of our retained earnings in-house to reinvest in our business as opposed to payout exclusively in dividends or more from a percentage in dividends. But I would just tell you that it's something that we talk to the Board about once a year, and we'd like to continue the string of what we're doing, but we'll talk to them and we'll see how they feel about it. Raymond Iardella Macquarie Great, that's very helpful. Operator And we'll go next to Ken Billingsley with BGB Securities. Ken Billingsley BGB Securities Good morning. Powell Brown Good morning. Ken Billingsley BGB Securities Just a couple follow-up questions on some comments that you already made. One just regarding compensation costs, just wanted to follow up on a question there. Obviously on the organic side, the costs are going down but the margins go up, and I believe that's through acquisitions that you've made. If that's true, could you just talk about how long does it typically take to get some of these acquisitions in line, and what are some of the steps that you take considering that the number of acquisitions have gone down but the overall margins have gone up? Powell Brown Right. Well remember, Ken, our goal is to have an acquisition come in at a pro forma EBITA or operating profit of 25%; and so they have, obviously, an incentive to grow their actual ultimate payout based on an earn-out of growing their actual prospective operating profit dollars. And so typically what we try to do is get those teammates moreas quickly as possible to the Brown & Brown model, whether it be producer compensation or otherwise. But at the end of the day, they realize that if they move their margin from 25 to 28% over a several year period and they grow their business, they get the value of that in the multiplier. That's number one. Number two I would also want to say that when we talk about compensation and specifically growing our business and how it talks about margins and everything, we are very focused, as you know, on growing our business organically. And so we've gotten lots of feedback here on this call before and in investor conferences about our margin, and it's interesting because we got a little feedback on our internal growth, or shrinkage more specifically, and I just want to make sure that everybody understands that we are very focused on growing our business and we believe we can grow our business profitably. And so having said that, we're in very unusual times as it relates to what we're talking about, and so you're going to continue asking us about internal growth or shrinkage as long as we shrink organically. Powell Brown Right. I think that's a very good question, Ken. The answer is ultimately in a decentralized organization, that occurs with leadership. And so ultimately, when you have a high-quality leader in individual locations, he or she has to make that kind of difficult which is not easy a difficult call, which iswhat you've just addressed is a long-term strategy as opposed to a short-term game plan on a quarterly or an annual basis. And so we, the senior leadership, talk to our leaders eachevery senior leader has a number of direct operating reports about how we invest and recruit and retain high-quality people today and going into the future. That does not specifically mean just producers, although that is a very significant part of it. That's other teammates, being service teammates or account managers, or any of the other positions in our company because it's so important. So we're very focused on retaining high-quality people because we think there's a direct correlation between retention of those high-quality people and retention of our customers. Ken Billingsley BGB Securities The long-term incentive plan that you've had in place for a while, and then you have the stock incentive. Is that replacing the long-term incentive plan? Is the long-term incentive plan still in place just modified for the new people coming in, or is that across the board? Powell Brown Yeah, let me make surethe PSP plan started in 1996. This year, the beginning of this year, we implemented a modified stock incentive plan, so the PSP that is in place continues to run its course through award and vesting periods. And so for example, the current PSP that's still out there still has a period of time to go to potentially still tranche or have additional tranches, subject to the price of the stock performing as stated in those contracts. The SIP that was created this year has a component of growth on individual producers' books and the company's earnings per share growth, and so we move from the PSP towards the SIP. And so the PSP doesn't go away; we're just not doing new PSP plans, per se. Now we're doing new SIP plans. So those golden handcuffs are still there; and then the SIP now iswe're in the phase for the next five years of trying to hit these personal performance goals. And so most of those plans are focused on growing the revenues on the internal growth side of it on a personal performance criteria. Ken Billingsley BGB Securities And obviously, are you spending more time talking with them now since they're focused on the growth aspect, that long-term versus short-term goal, has that been modified at all in the perception of the individuals that are now looking at their bottom line results? Powell Brown Yeah, let me make sureand I don't know if you're as familiar with the PSP. That was a 15-year cliff vest. In the SIP component, you've got on itfor a producer, you've got a five-year window to grow your book, and then there's a payout over years six, seven and eight. The earnings per share growth component, which we all participate in, is a 10-year cliff. Ken Billingsley BGB Securities Okay. Powell Brown So that's a longwinded answer. Ken Billingsley BGB Securities It's shorter, but there's stillit's still staggered. Powell Brown It's a long-term component, yes. We're focused onremember, we're focused on having long-term binding of teammates together with wealth creation. Ken Billingsley BGB Securities Very good. I just wanted to verify, and I thought I may have misread this have you started to use your stock in some acquisitions more than you have in the past? Powell Brown No. Ken Billingsley BGB Securities You have not. Powell Brown How's that for a good answer? No. Ken Billingsley BGB Securities No, that's perfect. Last question was on workers comp in California, I believe you said that your rates depending on certain segments was essentially more on the down side, recommendation for flat. Are the rates that you're seeing coming through from comparison to the prior year, is it due to discounts being offered, getting that net rate down, or are you talking about the pure rate that's Powell Brown Yeah, no, no. Let's talk aboutin California, what you've got is you have suggested rates for carriers to use by the WCIRB, and then carriers can deviate from those rates. And basically what we're seeing is there are certain carriers there might be some outliers, by the way who are sort of leading the charge on the decrease in the rate. That's the ultimate rate when the discount is applied. Then there are other carriers that want to get increases, and so the question is do you find that carriers are willing to walk away from the premium or not? Some are, some are not. I think the important thing, though, is this you will hear and we always seem to get asked a lot of questions about California in comp, and California always seems to be an interesting topic on calls. But I found it interesting when I was getting information over the last couple of days for this call, that rates were beingthey were recommending neutral rates in '12. I found that hard to believe; however, inside of that, there might be some unusual lining, and I don't know the class codes that are impacted as well to say off the top of my head, but there are going to be certain class codes that are going to have rate increases, and certain that are going to be rate decreases. And so there may be some industries that are impacted more significantly than they actually even realize. Ken Billingsley BGB Securities Very good. Well, thank you for taking my questions. Powell Brown Yeah, thank you. Operator And we'll go next to Adam Klauber with William Blair. Adam Klauber William Blair Thanks. Good morning, everyone. You've done a great job on cost control, but it sounds like you're still fighting uphill contingents are going down, organic is going down. Is there any way the margin can go up if contingents are going down and organics are going down? Powell Brown Let's say that it's difficult to increase margins in that environment. Cory Walker But the overall positive sign is that when contingents start to go down, that means that loss ratios are going up and therefore there is upward pressure on pricing, and at the end of the day we'll take upward pricing over contingents any day of the week, or for the long term. Adam Klauber William Blair Okay, thanks Cory. That actually leads into my follow-up. It sounds like the pricing is very spotty up in some markets, down in some markets, and that's typical. But if we look today versus nine months ago, is the pressure from rates less than it was today than it was nine months ago? Powell Brown If you look at averages, then probably the answer to that is yes. The average rate decrease overall in the middle market is probably less today than it was, let's say, a year ago slightly. But remember, Adam, the biggest issue for us, and all of the information that I've given you, that's averages. They're kind of aggregating averages, which is kind of a little dangerous sometimes when you say that relative to exposure units, because exposure units are the single biggest driver in our business. If you go back into the early 90s, middle 90s, rates were down 3 to 9%, which is more than they're down primarily now; but the economy was growing. We're growing organically, so my point is exposure units far and away have a bigger impact on our business and any other commission-driven middle market business than anything else. Adam Klauber William Blair Great. Thank you very much. Operator And we'll go next to Meyer Shields with Stifel Nicolaus. Meyer Shields Stifel Nicolaus Thank you. Good morning everyone. I appreciate your patience. Two quick questions if I can let me start with Cory. You mentioned gains on books of business in the other income line. Cory Walker No, no, no. The number in the internal growth schedule does reflect any books that we've sold, and those whatever were sold in the last quarter the gain or loss had already occurred. So there is always going to be book sales. We typically don't have that much of it, but given the option ofdepending on the situation, we may opt to go on and sell the book as opposed to fighting it. So you're always going to have some of it. I wouldn't anticipate much, but in this past quarter it happened to be about $600,000 worth of gain in that line item, and that was up from last year's. That same quarter, there was essentially a $40,000 loss. So it comes and goes, but generally not that big in the scheme of things. Meyer Shields Stifel Nicolaus Okay, that's helpful. And second quarter, Powell, you mentioned earlier that you're seeing, I think in most regions, that the regional carriers are being more aggressive. And I don't know if I'm over-thinking this, but does that have any impact on the contingent commissions? In other words, do regionals pay more generously? Powell Brown No, I think that could be the case, Meyer, but I thinkwhat you've got with regionals typically, regardless of who they are, they usually havethey, one, seem to be more competitive in certain geographic areas. They have very good relationships with their agent distribution force. They do tend to haveand one of the reasons they have those very strong relationships, they do have good contingency and profit-sharing arrangements. Meyer Shields Stifel Nicolaus Right. Yeah, it's just a game of pushing it forward, I guess. Powell Brown That's right. Meyer Shields Stifel Nicolaus Okay, thanks so much. That covers me. Operator And we'll go next to Ron Bobman with Capital Returns. Ron Bobman Capital Returns Thanks. Powell, you're doing a good job on these calls, although I never thought your father ran these calls over an hour. Powell Brown Well it seems that a lot of people have interest today. So I have two questions what do you expect from Citizens over the next 12 months or so, that sort of timeline? And would you comment with what you see in the excess and surplus lines market? Thanks a lot, and best of luck, guys. Powell Brown Yeah, great. First Ron, I would say relative to Citizens in the State of Florida that's what you were referring to, correct? Ron Bobman Capital Returns Correct. Powell Brown Yeah, okay. That did not occur, and so I believe that we're sort of in a holding pattern right now with Citizens relative to the large accounts. I do believe that the fiscally prudent thing to do would be to continue to raise rates and make Citizens move back towards the market of last resort. That's what I think would make sense. I also believe that there are people in the legislature that feel that way. I don't know if that can occur. Our governor in the State of Florida, interestingly enough, as you know, spent $75 million of his own money in his election process and was elected, and unfortunately right now he's doing some very difficult things, and so his approval rating is very low. I don't know if he's going to want to take that fight on next year, but everybody that I know in the legislature that I've talked to about it knows and thinks that it makes sense and that there should be continued reviewing and revising of those rates. Long story short I do believe that ultimately they will lift, but I don't know if they will lift as quickly as they ought to, which is really about 10% a year, number one. Rob Bobman Capital Returns Will anything give cause to pull policies out Citizens into the private companies other than rate? Powell Brown Yeah, well here's basically the deal. You have two or three scenarios, and it leads to your second question on the E&S carriers. Let's just use southeast Florida, and when I say southeast Florida, I'm thinking Dade, Broward and Palm Beach County Boca Raton, kind of, and West Palm Beach south. Then the question is, you have all this surplus out there in the industry, and who wants to be aggressive and opportunistic that's the E&S term to write some of that business? And I believe that's the market that continues to evolve and change based on when losses occur, and they do it more quickly than the standard market. And so I think that rates will not go up as much as others believe in the E&S market in '12, barring a big storm. If we had another big storm, or had a big storm that had significant coastal damage, whether it be in Texas or Florida or elsewhere, I think that would impact it. But it doesn't seem like we're going to have one of those knock on wood this year, and if that's the case, I still think there will be single digit rate pressure on E&S markets next year; but nothing, I think, to the extent that some people first anticipated. Rob Bobman Capital Returns Those E&SI'm sorry, just a little bit of a follow-on because I was asking the E&S question separate and apart from the first. In the rest of the country, do your E&S comments parrot what you're talking about in Florida, or is there anything you want to add? Powell Brown Yeah, I would add this casualty continues to be very, very competitive, and I think that will continue. Professional liability is competitive, but many would say it seems like they're down on the bottom and maybe the rates have to go up. I don't think I believe that yet until we see it, and it might but it might be a period of time off. The property market is kind of an interesting dynamic, and as you know, there are three types of accounts typically over a period of time. You have those accounts that are always in the excess and surplus lines market, you have those accounts that are always in the standard market, and you have those accounts that typically they tilt towards the E&S market but they actually, in this type of market, start to move to the standard markets. And so when you have losses, whether they be tornadoes or hurricanes or other wind prone events, some of those accounts start to come back into the E&S market. And I believe we're seeing some of that around the country in areas not cat prone driven. And so I think the E&S market continues to do well. If you go back in history, and I might be slightly off on this, but you'll get my gist in 1980, I believe that the E&S market in the United States made up roughly 2% of total written premium. Today, I believe the number in the United States of E&S premiums is somewhere between 9 and 11%, and going up. And so I might be slightly off on the percentages, but the point is the E&S market has continued to grow as a percentage of total overall premium, and I think it will continue to do so because they are able to be not subject to rate and form constrictions, or restrictions. And so they'll customize products and, in their terminology, be entrepreneurial to address some of those needs wherever in the country, whether it be in a cat prone area or otherwise. Rob Bobman Capital Returns Thanks, Powell. Powell Brown Yes. Operator It appears there are no further questions at this time. Mr. Brown and Mr. Walker, I'd like to turn the conference back to you for additional or closing remarks. Powell Brown Yeah, thank you, Alan. I really appreciate it, everybody. I did want to make on clarification I made a comment earlier that we had done in 18 consecutive years increasing our dividend. It's actually 17. I forgot, one. Two I'd like to thank everybody for the questions and we look forward to talking to everybody next quarter. Have a great day. Thank you very much. Operator And that does conclude today's conference. Ladies and gentlemen, thank you for your participation. There's a sort of wild element to one's imagination,' he explains, referencing Daniel Defoe's A Journal Of The Plague Year published in 1722, three years after Robinson Crusoe in which a character walks away from the plague: he strides north because the sun won't be in his face and that's his only reason.
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