Good morning, and welcome to the Brown & Brown fourth quarter 2011 earnings release 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 performances. Such statements are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors, including those risks and uncertainties that 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'd now like to turn the call over to Mr. Powell Brown, our President and Chief Executive Officer. Please go ahead, sir.
Well, you're close. It's Hyatt Brown, and good morning, everyone. We have here in the room Cory Walker, our Chief Financial Officer. We have Scott Penny, Regional President and Chief Acquisition Officer, and Chris Walker, who is President of Arrowhead and a Regional Executive Vice President of Brown & Brown. We're actually calling you this morning from the New York Stock Exchange, where we had the opportunity to ring the bell this morning at 9:30 A.M. We're going to have to have a hard cutoff right around 9:00 A.M. so we can get up to the floor and to the rostrum. At the outset, I would like to say that we are sorry that Powell cannot be with us today.
He's on a temporary leave of absence for health reasons, as you know, and we look forward to him returning and being back in the saddle in a reasonable period of time. Having said that, I'll now turn over the call to Cory Walker.
Thanks, Hyatt. Our net income for the fourth quarter of 2011 was $36.5 million, that was a strong improvement over last year's fourth quarter net income of $32.1 million. Our earnings per share for the fourth quarter was $0.25, that was up 13.6% from the $0.22 we earned in the fourth quarter of last year. Excluding that ridiculous line item, change in estimated acquisition earnout payable, which was a credit to income for both the quarter and the year-to-date income statement. Adjusted earnings per share for the fourth quarter of 2011 was $0.24, that's still up 9.1% from an adjusted $0.22 in last year's fourth quarter. From a revenue standpoint, our commissions and fees for the quarter increased 5.4%, or $12.3 million to $241.4 million, that's up from the $229.1 million from last year.
As always, we have in our press release the internal growth table that shows the internal growth on core commissions and fees, which is excluding contingents as well as any small books of business sales, that kind of thing. On the fourth quarter of 2011, it shows that we received $4.8 million of profit-sharing contingent commissions, that's $1.4 million less than the $6.4 million that we received last year in the fourth quarter. The difference was mainly due to profit-sharing contingent commissions that were paid to FIU. FIU actually received more than what we had originally projected, but it was still down from last year because if you remember, in 2010, they had actually received an additional profit-sharing that was really kind of delayed from what normally would have been paid in 2009.
Additionally, we did receive about $400,000 more contingency income in our wholesale brokerage division. Looking at the internal growth schedule, we had a negative internal growth rate of only 0.6%. Our total core commissions and fees for the quarter increased 7.1%, or $15.6 million of new total commissions and fees. However, within that net number was $17 million of acquired revenues, that means we had $1.3 million less in commissions and fee revenues on a same-store sales basis, that's hence the 0.6% negative internal growth. As the internal growth schedule indicates, the vast majority of the negative growth was primarily from our retail division, Hyatt will talk about each of the business segments in a moment.
Before we move on to other financial numbers, I need to tell you that in the Form 10-K that we'll file for this year, the internal growth schedule that we put in the 10-K, that is the only table where we have historically broken out the three separate groups within the retail division, as well as the two separate groups within national programs. All the other segment information in the 10-K is all based on just our true divisional segment reporting of just retail, wholesale, programs, and services. Because of this semi kind of reporting conflict that the accounting profession perceives that could exist between that, on an ongoing basis, we are only going to report the internal growth on the pure segmental divisional basis.
Moving on, our investment income had a small increase of $29,000 from prior year's fourth quarter, that's mainly just as a result of increased levels of invested cash. Income increased $1.9 million, that was primarily due to the sales of a few books of businesses in the fourth quarter, as well as a $914,000 legal settlement that we won over some fees that were not paid to us. As it relates to our expenses and our pre-tax margin, our pre-tax margin for the fourth quarter of 2011 was 24.5%, and that's compared with our prior year's fourth quarter margin of 22.6%. That's an improvement of 1.9 percentage point. If you exclude that line item change in estimated acquisition earnout payable, our pre-tax margin for the fourth quarter of 2011 was 23.3%, and that's compared with our prior year fourth quarter margin of 22.3%.
That's a true improvement of one percentage point. As we've said before, as the headwinds of the economic and insurance rate downturns just slows a bit and it's not so strong, our margins will generally improve. Looking at employee compensation and benefits cost as a percentage of total revenue, it was 53%, that's a slight improvement of two basis points from the 53.2% cost factor in the fourth quarter of 2010. The total dollar increase on a net basis in the employee compensation benefits was approximately $7.1 million, of which $7.5 million was attributable to just the new standalone acquisitions since last year. When you exclude the impact of these standalone acquisitions, employee compensation benefits on a kind of a semi same-store sales basis actually decreased by $400,000.
That $400,000 was mainly the combination of decreases of about $3.3 million in management staff as well as producer compensation expense, a decrease of about a half a million dollars relating to our group health insurance. Those decreases were substantially offset by a $3.4 million increase in profit center bonuses as well as other staff bonuses. Our non-cash stock-based compensation cost was $2.9 million in the fourth quarter of 2011, which is consistent with our guidance previously, and the fact that we have increased costs to include relative to the new stock incentive plan, which we refer to as SIP. That came about in the first quarter of 2011. We issued new stock incentive plan grants this year to the management and staff of Arrowhead as of January of 2012.
We also granted additional SIP grants to new producers who now have productions in excess of $500,000 per year, as well as any new profit center leaders. Our total expense for the non-cash stock-based compensation looking into 2012 is expected to be around $14 million. In the current quarter, our other operating expenses decreased as a percentage of total revenues, 0.8 percentage points to 14.2% of total revenues. The total dollar net decrease in other operating expenses was only $5,000. Of which $2.2 million of this net aggregate total, it was attributable to just the new standalone acquisitions. On a comparable, again, same semi store sale basis, those offices had an aggregate reduction of other operating expenses of approximately $2.2 million. What makes that up is we had decreases of $1.2 million in our claims and settlement expense and the related reserves.
We had another $1.1 million decrease in general office rent expense and another $900,000 in insurance cost savings. Our amortization and depreciation expense on a combined basis was up slightly or about $600,000, which was against the comparable 2010 fourth quarter, and that's obviously due to just acquisition activities. Our interest expense is consistent with our expected quarterly expense of approximately $3.4 million. Our interest expense for 2012 will increase with the $200 million of additional debt that we took on in January of 2012 associated with the acquisition of Arrowhead. The $250 million of fixed coupon rate debt that was existing on 12/31 of 2011 has an effective rate of approximately 5.34%. Now with the additional $200 million of Arrowhead related debt, we've added a nice component of floating debt to our capital structure, and that will be at LIBOR plus 1%.
As long as the LIBOR stays at 1% or less, our total interest expense for 2012 should be somewhere $17 million-$17.5 million per year. Our change in estimated acquisition earnout payable was a credit during the quarter of $2.9 million versus just $600,000 in last year's fourth quarter. Thus, a net change of about $2.4 million or $0.01 per share. That credit occurred as a result of reducing the earnout liability as of the year-end, estimated that would be ultimately earned and paid to several acquisitions. We reduced the liability. Our effective tax rate for 2011 is approximately 39.4%, which is slightly higher than last year's effective tax rate, just marginally, which was 39.2%. The trends that we just talked about are pretty much the same for the year-end, and you've heard the previous three quarters' conference calls.
We won't get into the year-to-date numbers, just to say that the earnings per share for the year of 2011 was a solid $1.13, and that's a 0.9% increase from the $1.12 we earned in the year 2010. As you all start to build your models for our earnings for next year, let me just give you some basic projection on some numbers for 2012, and that is our depreciation expense looks like it'll be about $14.8 million for the year. Our amortization expense for 2012 should be around $62.5 million. Our interest expense, as I previously said, was about $17.3 million, $17.4 million. Our non-cash stock grant, as I previously said too, was about $14 million.
Our effective tax rate for 2012 will move up because of the acquisition of Arrowhead, and we will be somewhere in the range of 40%-41% on the effective tax rate. As you know that each year we do our budgets, and they are generated from the ground up from each one of our profit center leaders. As Hyatt will talk more about the specific rate and the economic issues. He'll talk a little bit about how choppy the first part of the year is. Just from a perspective of the first quarter, our first quarter earnings per share should be modestly close to what was the first quarter of 2011. With that, Hyatt, I'll turn it back to you.
Okay. Thanks, Cory. A very good report. We'll start off. I'm going to review retail, then wholesale programs, and then services. Looking first at Florida and retail. The northern Tier of Florida, which basically is Jacksonville to Pensacola, property rates new is flat to -5%. Renewal is flat to up 5% if it sticks. There's a lot of pushback, depending upon construction, depending upon location, et cetera. Citizens wind rates are the same, no change. Multi-peril. This is Citizens' multi-peril. It has a small effect on us, a little. It has to do with writing of insurance, including the other EC, fire and EC perils, in addition to wind on inferior construction. Those rates around the state are going up 15%-20%. Workers' compensation, there is an 8% rate increase. The exposures are flat unless it's construction.
Construction is still going south, maybe 2%-5%. Largest contractors flat to up just a little. GL and auto rates are zero to a +5 to a -5. It's kind of worming. The umbrellas, the first $2 million looks like maybe a 5% increase. One of the things that's starting to happen, and you'll probably hear me comment about this through my report, is that underwriting, believe it or not, is now starting to be in vogue again. Moving down to Central Florida, the I-4 corridor, which would be Daytona Beach, Orlando, Tampa, St. Petersburg, property new, -5% to -10%. Don't forget that the RMS 11 model has taken its greatest impact is in the central part of Florida, away from the coast, and companies are really adhering to that.
Having said that, there are some new entrants in the property area, and particularly in Central Florida. It's -5 to -10. Renewals would be 2%-5% if it sticks. Citizens wind, zero. Multi-peril, of course, is up. If you look at workers' comp, I mentioned the statewide, it's 8%. In Central Florida, we're seeing a slight increase in payrolls. That has to do really with Orange County, which is Orlando, and those are up maybe 1%-2%, maybe 3%. If you're an account that has poor losses in workers' comp particularly, you're going to get some rate increase. You're going to pay more. The acceptance on new accounts is tightening. GL and auto and umbrellas in Central Florida is really zero to -5. Employee benefits.
The employee benefits, and you'll hear me talk about this throughout the country, it's really very similar in terms of small groups and larger groups in terms of what's happening, except in Florida. Quite frankly, we have seen a couple, three, maybe three rate passes. I haven't seen a rate pass, I don't think, almost ever in as far as the accounts that I have been knowledgeable about. A rate pass is simply when the risk bearer says, "We're good to go. Same coverage, same benefits, no rate increase, 12 more months." That's very unusual. In the larger groups, smaller groups, we're seeing less than 50 lives. We're seeing up 5%. Of course, those are the ones that are still struggling, and they're worming around so that the cost doesn't go up or maybe goes down, and their exposure units are really flat to down maybe 5%.
In the larger groups, we are seeing flat rates pretty much-ish, flattish, and in some cases, down 5%. Personal lines. Seeing some rate pressure on that, particularly in the coastal areas and in Central Florida. Going into South Florida, property new, -5%, flat. Renewal is flattish. On new condos, and there are, believe it or not, some that are just coming online, we're now seeing non-admitted markets that will write wind on condos less than Citizens. That's very unusual. Citizens on wind only is bumping the rates about 12.5% on February 1st. In the A-rated business for Citizens, an A rate's where the property values are $10 million or more, not changing the rates, but looking very carefully at construction.
We're starting to see Citizens determine that the construction isn't exactly what they maybe thought it was originally, and therefore the cost is going up because of the change and the consideration on the construction. Workers' comp, as I mentioned, around the state is 8%. The economy in South Florida is flat, but it's getting a little better, in particularly Dade County. GL and auto, again, competitive, 0, this is new, to -5. Umbrellas, 0 to -5, unless they have a large auto fleet. If a larger auto fleet, that's putting some pressure on. In the real South Florida area, that's Dade County, bad loss ratios. Any account that last year had a bad loss ratio was probably renewed at flat or maybe even down some. That's changing, and particularly if it's auto. Bad loss ratio is going to pay more.
We are now seeing occasionally, just occasionally, where a renewal on a workers' comp account, there's only one company willing to offer. That's different. Let's move to Georgia, South Carolina, Virginia. Again, that's kind of a sweet spot for most companies. Property is new, is -5. Renewal, +2 to +5, if it sticks. GL and auto, new is down 15. Renewal is down maybe 0 to 2%. Exposure rates are kind of flattish, although there is some movement in auto fleets, meaning more vehicles. Workers' compensation, it varies, but there are some revisions in the calculation of the experience mods that are putting more losses into the calculation, which is forcing up some mods above where they would have been. Personal lines, particularly along the coastal areas in that area of the U.S., are moving up 5%-10%. Employee benefits, small.
It's 5%-12% up, again, in those smaller accounts there, flat to down in exposure units. The larger accounts is up 5 to 8, and the exposure units seem to be flat. Construction is still not doing well, unless it happens to be a particularly large contractor. Moving into the Northeast. Believe it or not, no one ever really thought about what would happen if a category 3 or 4 hurricane came up the Hudson River. Of course, if that occurred, and the Northeast quadrant, which is the killer quadrant, would cover Manhattan and Long Island and then cross over and hit Rhode Island and Connecticut, things would not be so good. Coastal property in those areas is now starting to be looked at very carefully with an eye towards the age, the construction, and therefore prices are going up a little bit.
If it's good property, again, it's still down 10%-15%. GL and auto is -1% to -10%. One of the things that is occurring is that risk bearers, insurance companies, are forcing higher values. In other words, they're looking at the actual insurance value of the property, and therefore appraisals are showing it to be greater than, in many cases, what it is being insured for, therefore, the cost is going up, therefore, the premium's going up. Again, the exposure units in the Northeast is flat to upish a little bit. Depending on where you are, the economy is getting a little better. Employee benefits is basically kind of the same as it is elsewhere, except it seems like that small accounts on renewal, less than 50, would be up 10%-12%. Again, they're not accepting those. It's being negotiated. Exposure seem to be flattish.
There are no rate passes that I've found in the Northeast, nor have I found that elsewhere in my discussions. One little comment is that we do write around the country a goodly amount of governmental business, and in certain areas, there are certain unusual things that are happening. For instance, in the New Jersey school districts, the employees now are having to pay part of the medical insurance. That's brand new law, and that may reduce the number of participants because of just not wanting to pay it or being insured with a spouse or. Out on Long Island, coastal Long Island, the companies are trying to push the values up. We're again seeing property, unless there's a coastal problem, is -10% to -15%. Auto, though, and GL, is about even, maybe off a little bit.
Workers' comp, now, bear in mind, any place, you're in New York, if it's GL and it's construction, it's going up crazy. In the standard market, if it's still in the standard market, it might be 15% to 35% to 50% because of the tremendous losses that are occurring. Again, this seems to be, in this area of New York, a little less pressure on the small employee benefits accounts, maybe 0% to up 5%, then the large would be 0% to up about 5% also. That's a little variation. Exposure units seem to be flat. Looking more into Connecticut and Massachusetts, rates are flattish. Exposure units are flattish. Auto, GL, workers' comp, employee benefits, about the same as we've talked about elsewhere. Of course, in Connecticut, I think the coastal concerns are more substantial than our people have a memory of the past.
Going across the top end of New York, again, believe it or not, real underwriting is starting to take effect, rates on property are 0%, this is new, 0% to -3%. GL and auto is 0% to -3%. New York construction, going crazy, up. Workers' comp, it's kind of all over the lot, but probably flat to maybe down just a little bit. The exposure units across Upstate New York are pretty flattish and doesn't seem to New York State, as you probably will remember, didn't go down much, and it hasn't come up much. Moving out to the Northwest, which would be Washington State and Oregon. Property is flat to up 2%. GL and auto is flat to down 2%. Workers' comp. Washington, as a monopolistic, so I'm talking about Oregon.
Oregon is a +2 in terms of rate. All the exposures out there seem to be flat. There seems to be a feeling that the economy in Washington State has probably bottomed out. That's not the feeling that I'm getting down in the Oregon area. Still a little soft. Going into Phoenix now, in Arizona, which is one of the most difficult areas. As you probably know, if you looked at the biggest down swoops in terms of our business, it's been Las Vegas, Phoenix, and Naples, Florida. Those happen to also be the places where there was this greatest bubble of new homes being built. When the bubble burst, it hasn't come back. Now, property rates there are flat. You got to understand where you're in. Non-cat areas, property rates are real low anyway.
Let's say you have a $0.06 or $0.07 property rate in Phoenix. If that was in Miami, it would be probably same construction, including wind, it'd probably be $0.50-$0.70. That's a substantial difference. If a $0.06 rate goes to a 10% increase, you don't get much. Those rates are not going up. The GL and auto, again, is 0% to -2%. Workers' comp now, the state fund is being privatized. It is competitive, as are private companies. That's down about 5%. Exposures in workers' comp seems to be flat to down. Less construction. It's down maybe 2%-5%. Again, small groups and large groups are about like they are elsewhere. Moving over into Orange County, or Orange, California, looking at what's happening there, this would be the Los Angeles basin.
The state fund, of course, is the biggest on workers' compensation. Property rates, kind of flat. Exposure, flat. GL and auto, there's some pressure there, 0%-7% if it sticks. Exposure units are moving just a little bit, maybe 2%-3%. Workers' compensation is crazy. It could be down 5%, it could be up 10%, it could be up 12%. Exposure units, again, flat. One of the things I might mention is that across the country, we are now starting to see more APs than RPs. An AP is additional premium on audit. An RP would be a return premium.
What that suggests to me is that when someone is renewing their workers' comp, as an example, or their GL, which would be based on sales, that they're maybe estimating a little lower than they think because they know they're not going to pay it on audit. Maybe business might be a little better than what it might suggest. Again, the small and large employee benefits in that area are about the same as they are countrywide. The economy is a little bit flattish. Let's move over to Las Vegas. Again, that's one of the worst-hit places as a result of the housing bubble. Workers' comp is flat. Payrolls are down still. We had a lot of construction accounts in Las Vegas. The only place, according to what I understand, that there's work going on is along the Strip.
If you're a contractor who's got some work along the Strip, you're going to be doing some business. Otherwise, not. It's rather interesting that there are a few, believe it or not, new home contractors who are starting to build homes. The reason they're building homes is that investors have and are snapping up so many of the foreclosed homes, and they're not on the market yet, that anybody who wants a new home is going to have to buy a new home from a small contractor. That's a positive, I believe. Now, that assumes they can get the financing. You move back into maybe more of the oil patch, Texas, Louisiana, Oklahoma. As we all know, Louisiana is a bifurcated state from a standpoint of property.
South of I-10 is, and I'll quote one of our people from out there, "The rates are squirrely, and the capacity is diminished." What that means is that you don't know where the rates are at the moment. There's this pressure to push them up, and if you have competition, they go down. GL and auto, however, seem to be pretty flat. Exposure units are pretty flat. Workers' comp is going up about 5%. Marine risk, of course, had dropped off some because now that a lot of the vessels are laid up, it's port risk only. Looking over into Texas. Texas, well, everything on Tier 1, and those are the counties that are along the coast, that's all in the wind pool. Get into Harris County, we'll focus on those for just a moment.
Harris County is a Tier 2, property rates there, RMS 11 having some impact, are up 5%-8%. Casualty is moving a little bit, 2%-3%. Workers' compensation is down 5%. Texas Mutual is a big bear in the woods out there. It's not unusual to see flat renewals or maybe down 5%. Now, the economy in that area seems to be moving up, maybe a +5% to +8%. Moving up into the Midwest a little, into Indiana, Michigan, et cetera. Property rates, again, are still 0% to -5%. Flat exposure units. GL and auto, 2%-5% on renewal, if you can get it. Lots of pressure back. Workers' comp is up just a little, 1%-3%. Exposures, believe it or not, seem to be 0% to +2%, except construction, and construction is just flat. Small group is about the same.
The people there think that basically, the economy maybe is starting to turn around a little bit. One thing that I thought might be of interest here, because we've been focusing a lot on property insurance. It is safe to say, you'll hear some of this when we talk about our wholesale operation. It's safe to say that cat property is under substantial pressure, non-cat property is still soft and warming. An example of what's happening in cat kinds of renewals, our Axiom reinsurance unit reports on January 1 renewals that accounts with loss activity were +10% to +25% on their cat reinsurance for property. Last year, the same account would be flat to down 10%. Accounts without loss activity this year, 5%-10% up. Last year, they would've been down 10% or more. That's a little background on reinsurance.
Let's move over to brokerage. Bear in mind, things are happening in the wholesale area. Gray risks are starting to move from standard back to non-standard. A gray risk is one of those that under normal conditions would be in the standard market, but because of competition, they moved into the standard market. Now because underwriting is starting to reoccur, they're being moved back, meaning non-renewed. Let's look at the Southeast for wholesale. The property is flat to up 5%. There's a lot of pressure to push up rates, and there are some rate increases that are coming along. There's one substantial exception, and that is anything of poor construction. Those people are going to pay some more, and it varies.
As we get into this over a period of time, this change that is apparently happening, we'll see some strange things in poor construction. Frame risk, those are going up. Submission activity is up. That, again, reflects the gray situation. There is a lot of capacity. Casualty, we've been talking about property. Casualty is down 5%-10%. Sometimes it can be flat. There's very little construction going on in the E&S area in the Southeast, other than a few artisans. Habitational property, those prices are being pushed 5%-10%. Marine is down 10%-15%. Looking out to Texas and middle part of the country, out in the West, Southwest, lots of things happening along the coastal area.
I think it's pretty fair to say that if you take Brownsville, Texas, all the way up to Baltimore in the E&S area, those are considered to be cat prone areas, and those prices are under a lot of pressure, but capacity is there. Again, wholesale and casualty is flat to down 10% or 15%, and the standard markets are still looking to write the good or even some of the gray casualty risk. Looking out into California, where we don't have cat areas, and I'm thinking about wind now, of course, you do have the quake, but other than that, the property is flat as opposed to what's going down. Casualty, there's a lot of pressure to push it down on renewal. It's a little bit of a mixed bag there, but it's certainly not robust in terms of any kind of price increase.
In the Northeast, the rates there are under pressure, particularly because of RMS 11 and particularly because all of a sudden, people figured out that New Jersey does have coastline, and there are people there, and there are properties there. Therefore, those prices probably are going to be moving up. There is plenty of capacity. If you have a fleet of properties and there have been some losses, those rates are going up. Rates in the casualty in the Northeast on wholesale are zero to maybe down 5% to up 5%. New York construction, now, if a New York contractor has to go from standard to non-standard, the non-standard increase on GL could be as much as 100%, so that's not so good. Our people think that the economy in the Northeast is starting to be a little bit up.
The contractors, other than N.Y., the rates are flat to down 3%. Professional E&O, those rates can vary from as much as 5%-10% up to that amount down. Much for brokerage. Let's move into programs. We write a lot of professional liability all over the country. That's other than Med Mal. These would be insurance agents, and life agents, and architects and engineers, and lawyers, and dentists, and et cetera. Those rates don't seem to be under upward pressure. As a matter of fact, in lawyers, particularly a little larger law firm, those prices are going down maybe 10%, 8%, 12%. A little bit of that happening in the dental area, but not that much. In Proctor, the rates seem to be maybe down about 5%. Exposures may be up about 2%.
In the case of something that I thought was rather interesting, as a harbinger of the economy, we follow the results of an operation that we have in St. Louis called PIP, Parcel Insurance Plan. Parcel Insurance Plan insures cargo risk for B2B, business to business, B2C, business to consumer, and C2C, consumer to consumer. The shipments, the packages, are limited to $25,000 in value. Can ship any tangible object other than money, chips, or unset gems. In both January and December, the shipments for PIP were flat. Prior to that, for five or six months, they had been edging up, so don't know what that means. I mentioned the fact that the dental and the lawyers are moving a little bit from here to there in terms of the pricing. Let's move into services. Workers' compensation.
That's a line that there is going to be more and more pressure on for several reasons. Number one, it has extremely long tails. For risk bearers, smaller risk bearers, who have been aggressive, who haven't limited their ultimate loss by reinsurance, those tails are serious. As you know, we're not in the risk-bearing business, nor are we going to get in the risk-bearing business. One of our TPAs, United Self-Insured Services, which does TPA work in Florida, Virginia, Georgia, North Carolina, South Carolina, Alabama, and a little in Kentucky, about 40% of that is in Florida. If you look at the little bit of segmentation, as an example, let's take tourism in those states. These are payrolls now, not prices. These are payrolls. That's up 2%-3%. Basically zero to down a couple of percent.
That I thought was kind of interesting. One other little bit of information that I might mention to you is that at a particular self-insurance fund that is the largest writer of roofing workers' comp in Florida, the payrolls today are almost one-third of what they were in 2007. That's a substantial difference. Public entities, we do have a goodly number of those, workers' comp payrolls. There's a small decline. Other lines, depending on where they are, seem to be flat. There are some reductions in some of the revenue bases from those public entities because smaller entities, cities, townships, et cetera, are starting to share services, which compresses a little bit the amount of premium developed. Sort of synopsize and to give you all an overview.
In my opinion, this is a very dangerous time for retail agents and brokers because there is pressure, more pressure from the nationals, a little less pressure from the regionals to push prices up. All of a sudden, the pressure, pressure, the moment you relax, someone will come in and eat your lunch with a 10% reduction in premium, and that's the same company that has just now told you they won't increase the price or they won't allow the price to be reduced. They're increasing it 2%-5%. Very, very dangerous time. So I would say, A, the push to increase rates is intensifying. B, I would say that the economy has bottomed out in most areas. I would also say that non-cat areas and product lines that are mostly vanilla are still very, very competitive.
Here's a bit of information that we've been looking at for a while, we have tried to look at a segmentation of our middle market P&C, and to some extent, this would apply also to employee benefits accounts. If you look at the accounts that we have that have $50,000 or more in commissions. Now, if it's property and casualty, that's probably a half a million dollars of premium, so you have some kind of context. Those accounts that have more than 50, they seem to be doing better. They're coming out of the recession and they're starting to move. The ones that are smaller, less than $50,000, they're still flat or shrinking and struggling, It's impacted in some places by geography and the type of business, government or quasi-government, et cetera.
By a little bit of comparison that I've shared, and I know Powell has shared in the past, if you look at our Top Gun report, which is a report on all of our new business in the system for retail. In 2010, the average annualized new business commission was $13,243. In 2011, the same average commission was about $11,691. These are on the smaller side. Now, one of the things that you must recognize is that the larger offices are writing our larger accounts, and the smaller offices might have an average of maybe $6,000 or $7,000 in average commission. Now, this is the annualized commission in the first year. Doesn't mean that's the total commission in the account because the first year we write X or 3 lines of coverage, the next year we write more than that.
Therefore, it starts to move up. We do have a substantial amount of our business that is less than $50,000. That also is a place that the regional companies really do like to hunt because the loss ratios over a long period of time have been really very good. Another bit of information to put into your pipes and smoke it. Next, a little bit of information that I was surprised. According to the Atlanta Federal Reserve District, I think this was in a speech of the president of the Atlanta Federal Reserve in, I think it was July, August, or September of this last year, maybe it's October. The Atlanta Federal Reserve District is Louisiana, Mississippi, Alabama, Florida, Georgia, and Tennessee.
That Federal Reserve District, every year since the Second World War, in a recession, has led the rest of the country out of the recession and number 1. This time we're last. I think there are maybe 12 Federal Reserve Districts, so we're running last. That has a tendency to reflect really Florida and Atlanta in many cases, but elsewhere in that area where there was a lot of home building. To synopsize, my last thing that I'd like to mention to you is that I've been to this picture show before. I was thinking this morning, how many times have I been to this picture show since 1959? I think five times. This one is different. This one is different.
I think that it is going to be more gradual, which is good for the consumer and good for the industry, as opposed to bombastic, as it sometimes has a tendency to be, which calls on all kinds of other specters. That's kind of a potpourri of information. David, I'll ask you to open it up for questions.
Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touchtone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, please press star one to ask a question, we'll take our first question from Ray Iardella with Macquarie.
I had a couple.
Ray.
Hey, how are you guys?
Good.
First question, I guess on Arrowhead, do you have the organic growth number for the fourth quarter?
I think what we might do is, we have both Scott and we have Chris here, who would like to answer that? Chris?
Sure. Good morning, Ray. Our growth rate overall, if we look at 2010 to 2011, was about 7.4%.
Okay, that's helpful. Then I guess, maybe talking about the book, what percentage of the book of business is renewed on 1/1?
Of the Arrowhead book?
Yes, of the Arrowhead book, sorry.
Well, really, it's dangerous to speak in generalities, obviously, about the book of business because we write so much different lines of business. We have work comp, we have our commercial property book, et cetera, so it's pretty well blended throughout the year. Certainly, the work comp book is a book that tends to fall on big anniversary dates. January is a big date, as you expect. July is a date that's big for work comp, et cetera. It's dangerous for me to say, but it's fairly well blended with it varies by which specific line of business we're talking about.
Okay, that's helpful. I guess I'm trying to get a sense of, since the transaction closed on the 9th of January, whether or not any 1/1 renewals would be included in first quarter results.
Well, they will be. On the January book, we did have to pro-rate the revenue in January on the 31 days, and the rest of it will be in the first quarter.
Okay, that's helpful. I guess next, just can you guys comment on contingents going forward in the year? I know it's difficult to project out, just give us a sense of where contingents might be going year-over-year.
Well, that's a good question, and it's kind of a guess. My sense, and we've talked a lot about this, is contingents probably will be down a little bit this year for the simple reason that loss ratios are going up. We're not going to know that until much later in the year because our contingents come in February, March, April, and then they come in in July, and then they come in some in the last quarter. My sense is that they're going to be down because of loss ratios. Also in the case of property, there has been a lot more property that's flowed into the non-standard, non-admitted market where we don't get contingents at the retail level. Now, how much is that reduction? I don't know.
Okay, thanks.
Okay.
Next, we have Adam Klauber with William Blair.
Hey, Adam, how are you?
Scott, good morning. Hyatt. Great. Thanks. Could you give us some detail on why specialty had such a good quarter compared to last quarter? Sorry, special programs.
You want to talk about that, Cory?
Yeah. On the professional program.
Special programs you said.
Did you say special or did you say professional?
Sorry, special programs.
Okay. On special programs. Well, of course, in special programs, we've got the professional lines and the special programs line. We had, obviously, Proctor, as I had previously said in the third quarter, that the first quarter was going to be the first quarter in eight quarters that they're really apples and apples comparison. They were actually up almost $1,000,000 by themselves. That is because they have been, as I previously said in other calls, they've been writing a lot of new accounts. They are doing very well. In addition to that, we did have our public entity group had done reasonably well. Then on top of that, we have a group called Acumen Re that does some reinsurance, and they had actually done well. Those three components.
Okay. That's helpful. With Western still lagging somewhat, is that more rate or exposure? What's holding that back?
I think several things. It's both, when you get into Western, you've got Las Vegas, you've got Phoenix, then you have the Southern California area. Those areas, we did have a substantial book of contractors out there, Adam. That's still not real strong. It will come back, but it's going to be a little longer. Also, it's very competitive. When I talked about Phoenix, Arizona, you got $0.06 property rates and the fact that workers' comp is now going down a little, it's a tough market, but it will slowly get better.
Okay. Also in your initial remarks, Cory, I think you said earnings in the first quarter would be up maybe just a little. We would think with Arrowhead that you'd see some pretty good progress right away. Is there any reason that's lagging in the first quarter?
Well, I think it's mainly not Arrowhead. They're coming in, but as Hyatt had mentioned, it's going to be very choppy, and I think that we do have still some challenges based on what we're seeing, just on our budget, and some of the retail side of the business. We'll just see how it shakes out.
Okay. Thanks a lot for the help.
Next we have Sarah DeWitt with Barclays Capital.
Hey, Sarah.
Hi, good morning. My first question is: Why do you expect first quarter 2012 EPS to be similar to 1Q 2011, given that organic growth has been improving and margins are expanding?
Well, again, Sarah, basically what Hy was saying is that we do think first quarter is choppy, and looking at what some of the fallout has still been last year, our basic budget is showing us, from earnings per share, more flattish. I think that once you get past the first quarter, we feel good about the whole year, but I just think the first quarter is going to be more like the first quarter last year for generally the retail division still.
Okay. Then second, given your comments that the push to increase rates is intensifying and the economy is bottoming out, to what extent do you think you could return to positive organic growth in 2012?
Well, it's a good question. We sure as heck are going to bust our backside to do that, but it ain't done till it's done, so when it's done, we'll announce it.
Okay, great. Thanks for the answers.
Next, we have Meyer Shields with Stifel Nicolaus.
Thanks. Good morning, all.
Hey, Meyer. How are you?
I'm doing well. Yourself?
Good.
Can you quantify the contingent commissions associated with Arrowhead?
The total amount?
Yes, please.
Last year, $105 million.
No, on the contingent.
Oh, contingent. I thought you said commission.
Oh, no, I'm sorry.
It was a little bit over $4 million.
Okay. I'm sorry, go ahead.
I'll comment on that, too. This is Chris Walker. We've gone to more of a predictive revenue model, we've taken some of the contingents out of it and taken standard commission up front instead. The number's about $4 million.
Okay. That's very helpful. Cory mentioned some stock grants that were given for, I guess, for Arrowhead and for some office leaders, and I was wondering if you could quantify the impact on 2012 diluted shares.
Right. We think that on that portion of it would be a little over $3 million hitting our books.
Okay. Is it going to change the diluted share count, or is it just the expense?
Wait a minute. Say that again.
Will that change the diluted share count?
No, not initially. Not until they're actually vested in it.
Okay. Got it. Thank you very much.
All right. Next, from Deutsche Bank, we have Yaron Kinar.
Good morning.
Hi.
Can we talk a little bit about the national retail? I understand that clearly there still are some headwinds. Then again, we are seeing exposures generally up in the U.S., and we are seeing rates slightly improving. Does that simply mean, going back to your comments earlier, that the book of business to national is much more small business-oriented than the rest of your book?
Well, it's all kinds of things, depending on where you are and the size of the office, et cetera. Here is the situation. Our business is much more vanilla-oriented than maybe some other businesses. We don't have a lot of marine business, as an example. That's a very specialized area. When you get in the vanilla area, and you get in businesses that are less than $50,000 in commissions, that's a happy hunting ground for regional companies. There are companies that are not publicly owned. They're privately owned, they're mutuals, and self-insured funds all over the United States. We represent many of those, and anybody that's competitive, we always try and represent them. I think there's more pressure on our book.
Plus the fact that we do have a pretty good slug of our business in the southeastern part of the United States, and that's also recovering less rapidly than it has in the past. All of that will ultimately fix itself, but we certainly don't want to have people getting a very robust, rosy, sanguine attitude when we know that over the next three and six months, there's going to be a lot of bloodshed. You see with a risk bearer, and you listen to the national risk bearers, if they renew 82%-85% of their business, they're kind of happy. Well, if we renew less than about 93% or 94% of our business, we're not very happy, and therefore, we got to do whatever we got to do to protect our customers, to protect our book of business.
I think we're in just a more competitive area.
Okay. Then maybe changing gears a little bit. Cory, I think you've mentioned that you don't take the change in estimated acquisition earnout payables as a number to take too seriously. It's certainly true for any one given quarter. If you look at the last two years, it does seem like there is a kind of a negative trend there. How much do you read into that in terms of the success of M&A, and how do you think of that going forward?
This is actually very important, and thanks for teeing up that question because I think it's important to understand. What this number is coming from is that every time we make an acquisition, there's an earn-out component to it. What we have to do is stand on the date of acquisition and look out three years and come up with a prediction of how much do we think we're going to pay them out on an earn-out. Is it zero? Could it be $5 million? We have to predict that, and we use a kind of a bell-shaped curve and have all these projections at it. The acquisition could do well. Anything over zero, they're doing well. What this line does, it simply measures how good of a predictor I am. Okay?
That's all it's measuring because we could say, okay, we don't think we're going to have any earn-out and book it at zero, and of course, any earn-out that they had would then go through the P&L. It is not a reflection at all at how well they're doing, because as long as they're doing better than zero, they're doing well. That's why I say, plus and minus is not even an indication of how well they're doing. It's only how well did you predict. That's why I think I keep using the word ridiculous, and it is. It is a capital transaction, and yet they're forcing us to put it in as a P&L as if it's some kind of earnings culmination process, and it's not.
That's why I warn you that's why we have it as a separate line item, so you can just ignore it. The fact is, most of our acquisitions have done well, and they all pretty much receive earn-out. It's just that sometimes we think they're going to do better than they actually have. It's clearly not an indication of whether they're doing well or not. Do you understand what I'm saying?
Yeah, I do. Thank you very much. Thanks for taking my questions.
Hey, David, we can only take one more question because it's 9:03 A.M. according to the New York Stock Exchange.
Okay. We'll take our last final question from Matthew Heimermann with JP Morgan.
Hey, Matthew.
Hi, good morning. Hi. Nice to hear your voice.
Yes, sir.
Well, actually just one question in the interest of time for Cory. You mentioned in the prepared remarks some of the benefits you've been seeing in terms of decreases in the underlying expense base because of staff attrition, other efforts on rents, things like that. I'd just be curious, if it feels like we're transitioning to an environment where economic prospects are a little better, potentially you could get a tailwind at some point from rates. Some of those actions, kind of belt-tightening actions you've taken over the last couple of years, is it possible we may see you actually fill some of those spaces that went unfilled for a while or things like that might change kind of the underlying push in expenses? I just want to get a sense of how to think about leverage vis-à-vis revenue, in other words.
No. Matthew, that's a good question. I think the point is that obviously the last three or four years have been incredibly difficult because of the evaporation of revenues. It forced every one of our branches to really analyze every aspect of their expenses, and they've become more efficient. Sometimes a person retired, and they decide not to replace that person right away. They got together as a team. A lot of times what happens is people just realize that they can be more efficient. The answer is that overall, we are significantly more efficient today than we've ever been. Will we actually start to replace when our revenues start to move up and the headwinds are behind or the wind's in our sails, so to speak?
They may end up hiring back an account executive or account manager down the road, but it's going to be a very gradual process. The point being is that we have a very good leverage built into our model, and the vast majority of the net increase that comes about simply because our clients' exposure units increase will fall to the bottom line 60%-70%. Now, it'll be a stepped approach, but it will be very gradual. I think you'll see even like in this situation where we still had negative growth, our margins increased. I think you've seen that demonstrated quarter after quarter in our model, and it will continue to be efficient. We will not lose that efficiency.
Yeah, I think Matthew, to sort of piggyback on that, we are more efficient today than we were two years ago, three years ago. We found that we can do things a little differently and still effectuate the same amount of renewal coverage, et cetera. We're kind of bullish about the future in that respect. Thanks for the question, and thank you all very much. Good day, and good luck. Thanks, David.
That does conclude today's conference, and we thank you for participating.