Good morning, and welcome to the Brown & Brown, Inc. earnings conference call. Today's call is being recorded. Please note that certain information discussed during this call, including answers given in responses to your questions, may relate to forward results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance. Such statements are intended to fall within the safe harbor 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, the 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 discussions of these and other factors affecting the company's business and prospects are contained in the company's filings with the Securities and Exchange Commission. With that said, I'll now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.
Thank you, Trish. Good morning, everyone. The market continues to be interesting. Some carriers are attempting to get rate on renewals. However, they're typically not holding. No carrier wants to lose an account. New business continues to be priced aggressively, therefore there's a gap between new business pricing and renewal business pricing. We've announced and completed acquisitions through today equal to $36.5 million. With that, I'd like to turn it over to Cory for our financial report.
Thanks, Powell. Our net income for the first quarter of 2011 was $46.3 million. That's up 4.9% over the first quarter of 2010. Correspondingly, our net income per share for the quarter was $0.32. That's up 3.2% from the $0.31 last year. From a revenue standpoint, commissions and fees for the quarter increased 4.3% to $261.5 million. That's up from the $250.7 million that we were in last year's first quarter. As we always have in our press release, we have our internal growth schedule that calculates the internal growth rate on our core commissions and fees, which excludes profit-sharing contingent commissions. This quarter, we received $28.9 million of profit-sharing contingent commissions, which represents a net decrease of approximately $3.3 million from the $32.2 million that we received in the first quarter of last year.
Of this $3.3 million net decrease, essentially, it could be attributable to Proctor Financial, which contingent commissions decreased by $3.8 million, and that was due primarily to the reduced premium volume that they wrote in the year 2010. Our best estimate of how much profit-sharing contingent commissions that we receive for the remaining part of 2011 is between $7 million-$10 million. Our best estimate of how that would fall would be $3 million-$4 million in the second quarter and $5 million-$6 million in the third quarter, and then whatever we receive in FIU's fourth quarter, which right now is estimated possibly to be $1 million if we don't have any hurricanes during this hurricane season. If you look at the internal growth schedule, we had a negative internal growth rate of -2.3%.
If you exclude the negative impact this quarter of Proctor Financial, our negative internal growth rate was only 1.1%, which is a sequential improvement from the fourth quarter 2010's internal growth rate of -2.7% without Proctor. For the first quarter of 2011, our core commissions and fees increased 6.6%, or $14.4 million of net additional commissions and fees. Within that net number was $19.4 million of acquired revenues. That means that we had $5 million less commissions and fee revenues on the same store sales basis. More than half of that net loss business in core commissions and fee was attributable to a $2.8 million reduction of core commissions and fees at Proctor Financial. Po Pwell will talk about the activities in each of these business segments in a minute. Our investment income decreased slightly by $100,000.
Our other income decreased by $716,000, that's due to a $1.3 million gain that we had in the first quarter of 2010 that was a result of sale of certain books of businesses that had no comparable amount in the current quarter. As it relates to our pre-tax margin, even though we had a negative internal growth rate, our pre-tax margin for 2011 first quarter was 29.2% compared to our pre-tax margin of 29.0% in the first quarter of 2010. Looking at the specific cost line items, our employee compensation benefits as a percentage of total revenues was 48.3%. That's a slight decrease from the 48.4% cost factor that we had in the first quarter of 2010. The total dollar increase on a net basis in employee compensation benefits was approximately $4.4 million, of which $5.7 million is attributable to new standalone acquisitions since last year.
If you exclude the impact of just these standalone acquisitions, we actually had about $1.3 million in less compensation. That's kind of on a semi same-store sales basis, excluding the acquisitions that were folded into existing operations. That $1.3 million decrease is primarily attributable to lower salaries and producer commissions, which really amounted to about $1.7 million. Our non-cash stock-based compensation cost was up on a net basis $800,000, which was due to the issuance of grants under our new stock incentive plan we refer to as SIP. During the quarter, we issued 2,345,000 shares of SIP shares, and that had a total market value of about $56.2 million. Just to digress slightly here, just to restate how this program works. As you know, the majority of the SIP grants went to the producers and our profit center leaders.
Everybody in the company, if they got a SIP grant, basically has half of the SIP grant in bucket number one, then the other half is in bucket number two. Bucket number one is based on a five-year measurement period on personal performance goals. For producers, it's growing their book a certain amount of money. If you're a profit center leader, it's a multi-part personal criteria of growing the internal growth rate on the revenues for your office, as well as growing your operating profit at your office a certain percentage over this five-year period. If on your personal performance goal, if you meet the criteria at the end of the five-year period, then that bucket vests in 1/3 in year 6, 1/3 in year 7, 1/3 in year 8.
The second bucket, which is based on the company's growth in their earnings per share, which is the same for everybody. That is the same measurement period over the five years, ending in the year-end of 2015. If we hit that goal, then that bucket will vest at the end of the 10th year, which is at the end of 2020. For expense purposes, on bucket number one is expensed equally over an eight-year period. The second bucket for everybody is amortized over a 10-year period. What we've started with to figure out this net increase of roughly $5 million of additional non-stock grant compensation is we're starting off with an estimate of about 80% success ratio of hitting these goals. As we go through years 2, 3, and 4, we will constantly monitor how well the performance is going.
Of course, that rough percentage may be adjusted, but we wanted to make sure we're conservative upfront on that. Moving on to our other expense line items, specifically other operating expenses. That decreased as a percentage of revenue by 60 basis points to 13.8% of total revenues. That represented a decrease of about $257,000 in the first quarter over last year's first quarter. However, if you just take the standalone acquisitions for the year, they accounted for about $1.9 million of new costs during the quarter. Therefore, when you exclude that from the net change, our existing offices basically decreased their expenses by approximately $2.1 million. The major change in that decrease was $1.9 million in lower legal expenses, as well as errors and omission insurance reserve balances.
We also had slight reductions in general cost savings in the areas of occupancy costs, postage, as well as our bad debt write-offs. Our amortization and depreciation in aggregate was up about $800,000 compared to last year's first quarter. That's primarily due to new acquisitions. Our interest expense was flat compared to the prior year, reflecting that the essentially flat levels of outstanding debt that's carried at fixed rates. Our change in estimated acquisition earnout payable for the first quarter of 2011 was a credit of $99,000. That's compared to a credit we had in the first quarter of last year of $696,000. Therefore, that's a reduction of $600,000 of "GAAP income." Our effective tax rate for 2010 is currently expected to run at approximately 39.6%.
In all, we ended up with net income of $46.3 million, and that reflects a 4.9% increase from last year's first quarter. With that financial overview, I'll turn it back over to Powell.
Thanks, Cory. Good report. In Florida retail, we're down 2.5% versus 2.9% in the fourth quarter. Property rates in Florida are typically flat to down 10%. Interestingly enough, we're seeing one national standard carrier lead with property on new business here in the state of Florida. Liability rates are down 5%-10%, and exposures are flat to down 10% as well. Auto rates are typically flat to down slightly. Work comp payrolls are flat to down 5%, periodically down 10%. We're starting to see some flattening in construction in certain types and certain areas. Regional carriers continue to be very aggressive in Florida. However, we're seeing price increases in homeowners of 5%-25% across the board. In national retail, it's down 3.3% versus down 3.5%. In the Southeast, excluding Florida, property rates are flattening.
RMS v11, which we'll talk about a little later, is impacting property in Tier 1 counties throughout the Southeast and Gulf Coast regions. GL rates are flat and auto rates are flat to down 10%. Usually, payrolls for workers' compensation are flat to down 10%. Construction payrolls, we're seeing some up slightly to down maybe 10%. In the Northeast, property rates are up 3% to down 5%. GL rates and auto rates are flat to down 5%. Work comp rates are flat to up slightly. Payrolls for non-construction are flat. In Upstate New York, one of our leaders remarked that this is as aggressive a market as he has ever seen in terms of pricing. In construction accounts, GL and auto rates are flat, and exposures typically are flat in the Northeast in construction. In New York City and surrounding areas, accounts are still under intense pressure.
Rates and payrolls are down typically on those accounts. In the Midwest, property is flat to down 10%. GL rates are down slightly to maybe 10%, with exposures flat. Auto rates are flat. Work comp rates are flat to up slightly, and payrolls are down 5% to up 5%. Construction rates are down on both auto and GL. In Western retail, we're down 3% versus down 10.4% in the fourth quarter. Property is flat to down 5%. GL rates are flat to down 5% as well, and exposures are typically flat to down 5% there. Auto rates are flat. Work comp continues to be volatile in the West and around the country, but very volatile in the West. Incumbent markets in the West on workers' compensation seem to be tougher on holding rate or getting more rate and are willing to walk away from accounts.
Markets are very aggressive still on new business. The construction area rates and exposures are typically flat to down at least 10% in the West. In employee benefits countrywide, small groups, that's under 50 lives, and large groups are regularly seeing rate increases initially of 5%- 15%, and their exposures are flat and typically to down slightly. With that rate pressure on employers, that usually leads to program changes, which result in minor increases, maybe 1%- 5% in rates ultimately after you have deductible changes in participation levels. In wholesale, we're up 1% versus flat in Q4. In brokerage property, we're starting to see flattening on coastal rates. RMS version 11 is attracting a lot of attention. The reason being is it's not increasing the PMLs on the coast as much as inland.
Inland PMLs are going up. As a result, several large cat writers are indicating rate increases on renewals in primary property layers. Many of those can be negotiated down to flat, but they're starting at 10%+ increases, typically in the primary property layers, two in particular cat writers. GL rates are flat to down 15%, and exposures are up slightly to down 5% or 10%. In brokerage professional lines, rates are still down 7%- 15%, and PLI markets are increasing rates in Florida, California, and Texas. Wage and hour coverage is becoming more limited in those states as well. Binding authority property rates are flat to up slightly. GL rates are flat to 10% reduction. Construction GL rates are flat to down 10%, and professional liability are flat to down 10%. Binding markets are going to look closely at the RMS level of RMS 11 version.
There's a lot of speculation in the binding authority markets right now. It's too early to tell the impact. Some markets are just trying to get their hands around what that does to their position in potentially buying additional reinsurance on renewal or what they need to do with their portfolios. In programs, professional programs down 3.1 versus down 5.7 in Q4. Dental rates are flat to down 5%. Lawyers' rates are typically down more than 5%, and larger groups are under more pressure than that. CalSurance continues to see rate pressure in their book. Special programs down 3.1 versus down one in Q4. Proctor's was seeing rates down 10% to 15%. FIU rates are typically flat-ish. The Citizens' A rates have been put on hold until after May.
That's the end of the legislative session here in Florida. Rates are expected, as we've said before, to go up 10% to 15%. In the services arena, we're down 30 basis points versus 80 basis points in Q4. From an acquisition standpoint, we've closed $21.7 million of annualized revenue year to date with the announcement of First Horizon, which is $14.8 million. That would be year to date closed and announced of $36.5 million. First Horizon is expected to close by the end of this month. We continue to see lots of activity in the acquisition space. Are pleased with the new acquisitions and teammates that have joined us year-to-date. In conclusion, we're seeing incremental improvement in the system, still a negative 1.1% internal growth on our non-cyclical businesses. We believe the economy remains fragile, particularly in the middle market.
I was in California last week. Regular unleaded gas is $4.40 a gallon. I think $5 a gallon gas puts enormous pressure on the U.S. recovery. Carriers continue to seek slight rate increases across the board. Don't want to ultimately hold the line and lose any business. There continues to be a pricing gap between new and renewal business. With that said, I'll turn it back over to you, Trish, for questions. There you go.
All right. Thank you. At this time, if you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch tone telephone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one, if you'd like to ask a question. We'll take our first question from Keith Walsh with Citi.
Hey, good morning, everybody. How are you?
Morning. Good.
First question. Just recently in the headlines, we've been seeing, at Citizens, some legislation coming in that seems like it's going to pass imminently, potentially shrinking Citizens as well as raising the cap on rates. Maybe if you can talk about that and the impact it would have on your business.
Right. Keith, what we've said in the past is, last year, we wrote approximately $65 million of business, that's premium, with Citizens. Typically, the commission level is about 10% on that book, so call it $6.5 million of revenue. We have said in the past that we believe that as Citizens raises rates and shrinks capacity, that the majority of that business will move over into E&S markets. That said, we still believe that, and the changes that we're seeing are being proposed. Our governor has talked about making Citizens back into what it was originally intended to be, which is the market of last resort. We do believe that it will ultimately emanate or move in that direction.
We have seen some rate, as you know, last year, rate increases in Citizens, and we anticipate some rate increases in the A rates come May or June or July. I would tell you that we just believe most of that business will move over into the E&S business as opposed to the entire book will float up 10% or 15% as do the rates. We think it's kind of a neutral relative to our revenue. We think it's a positive as Citizens of the state of Florida.
Okay, the second question, I guess in early March, two your former higher level M&A leaders at your company forming a private equity venture to compete directly, it seems, with you guys in the middle market in the state of Florida. Why, as a shareholder or recommending your stock, why shouldn't I be concerned about that when they have a good visibility into your current M&A pipeline? Thanks.
Sure. Well, we typically, Keith, don't talk about pending litigation. However, we all have agreements with restrictive covenants. Everyone, myself, Cory, and every other teammate across the country. We expect all our teammates, all the people on our team to abide by those. Having said that, there are a number of people that are in the acquisition and middle market acquisition space. Those two individuals have said that they're going to go out and try to acquire businesses. We haven't seen any of those yet. I would say that we would just expect everyone to abide by those covenants that they have.
Okay. Thanks a lot, guys.
Thank you. We'll take our next question from Mark Hughes with SunTrust.
Thank you very much. It sounded like Proctor rates were softer than what you're seeing more broadly. Anything in particular there? Any structural changes, legislative changes in the force place market?
No changes yet structurally. I would just tell you that, as you know, Mark, we've talked about some of their clients. One, it's an interesting space to be in when it has grown rapidly, and then they've seen some shrinkage with several clients, either one being acquired, two, not two, but they can either be acquired or taken over by the FDIC, or we lose them to competition. It's just a space which will continue to be very competitive. We think it's a wonderful business and a great group of teammates there. It has had a little bit different volatility than the rest of our business.
Okay. In the Western Retail, very sharp improvement sequentially. You described some specific factors, but was this a lot of improved performance of that group, or is the market just up more strongly in the West?
I'd just say that, obviously, in all of our segments of our business, we try to work really hard on our retention of our existing clients and writing a lot of new business. All of the teammates in the West had a really good quarter. The economy, as you know, in the West continues to be somewhat bumpy, as I alluded to earlier. When I was in California last week, I was in San Francisco and then in Orange County later in the week, and $4.40 gas is an eye-opener. Here in Florida, that same gallon of gas is about $3.70. We're very pleased with the performance out there. Incremental improvement this quarter.
Thank you.
Thank you. We'll take our next question from Adam Klauber with William Blair.
Good morning, everyone. Thanks. Cory, what do you expect the stock award expense to be this year and next year? Could you give us, I guess, some help on that?
Last year, we had $6.8 million, the incremental on the SIP right now, excluding any grants that we give for the rest of the year, is going to be roughly another $5 million. We're looking right at about $12 million a year right now.
Should it stabilize next year at that $12 million?
Right. It's an ongoing basis because it's a straight line amortization. Or amortization, just cost. The only thing that will increase that is if we give new grants. The new grants will be generally just grants of people who have new higher-level positions or new acquisition activity that comes in. Generally, we should be in the $12 million range for the rest of this year and on an ongoing basis.
Okay. On the wholesale, another relatively stable with a little growth in that segment. Are you seeing any retrenchment by the standard carriers in that market?
Well, in the standard market, most of the E&S business or wholesale business is excess and surplus lines, as you know. The standard market, no, as a broad statement, Adam. Having said that, I would tell you that the standard market across the board, there are certain carriers that are starting to try to drive rate, as I alluded to earlier, but they're not typically getting it on renewal.
Okay, that's not spilling over to the E&S market.
No. Typically, what I think, I'd want you to kind of think about, is there are certain carriers that have dominant positions in certain classes of business. I'm specifically thinking about lead riders on property lines of coverage and layered property. Some of those carriers are starting to talk about and trying to drive rate increases. Many of those put up large limits, meaning like a $25 million primary limit on a coastal property account. Some of those programs will have to be rewritten, where they might write a $5 million primary, and you'd have to try to fill in the $20 million ex of $5 million to see if you could get your renewal pricing back down towards flat.
We're hearing and starting to see rate pressure on primary cat property, but most of it's not sticking, but there's lots of flat renewals coming in cat and coastal areas, whereas in the past, you've heard me say that it's been down 10%, down 5%. That's what we're seeing.
Right. Is that linked to the RMS changes?
I think it's linked more to the RMS changes than it is to the Japan events. If you think about it, Japan, New Zealand, and Australia are pretty significant reinsurance loss events. The total losses that I'm aware of, about $10 billion in New Zealand, about $10 billion in Australia in the floods, the New Zealand quake, and the insured loss in Japan will probably be somewhere between $25 billion-$40 billion based upon what I've read and heard. There's been a lot of speculation on that putting pressure on property and inland marine reinsurance. People are talking about it, but we have not seen that yet. We believe that the RMS model puts more pressure on how people look at their portfolios than those events do.
Okay. Well, the potential changes at Citizens, will that help the FIU book of business?
Remember, it can possibly. You have really two competitors with FIU, broadly speaking. You have Citizens, and then you have the excess and surplus lines market. The E&S market, as we've talked about in the past, has typically been relatively close on rate, but their terms and conditions might be a little different, meaning they're wind deductible.
As I've sort of been talking about here, depending on what the cat property market does, if anything, and right now we think that that's going to continue to be sort of flat, and there's still a lot of capacity out there, the competitor would move more from Citizens towards the E&S market.
Okay. Well, thank you very much.
Thank you. We'll take our next question from Sarah DeWitt with Barclays Capital.
Hi, good morning.
Hey, Sarah.
First, on the wholesale business, could you elaborate on what drove the positive organic growth there? Was it more rate or exposure or a combination of both?
I would just tell you that they've done a great job of retaining their business and writing a lot of new business. I would say it's not so much a rate-driven event because we haven't seen a rate wave through that book yet. If in fact there will be some changes in the cat property market, which we haven't seen it stick yet. It's really higher retention on accounts, and a lot of new business.
Okay, great. Thanks. Just in terms of exposures on your overall business and in your discussions with clients, what are they budgeting for exposures for the rest of the year? Are they looking for another year of declines? What does that imply for-
Yeah.
-when organic growth could turn?
Sarah, I think it depends, first of all, on the region of the country and the class of business that they're in. However, broadly speaking, I would tell you when we speak to our clients, if you have a client, this is a hypothetical scenario, anywhere in the country, you have a manufacturer of, let's say, mattress manufacturer, and three years ago they did $14 million, and two years ago they did $12 million, and last year they did $10 million, and this year they already think they're going to do $12 million or $13 million. When we do our renewal, the likelihood of them estimating $12 million or $13 million is typically low. I think that they estimate flat, even maybe down slightly, to be conservative. If in fact their business grows, it will be picked up at audit.
I think it's hard to make a broad statement that is really telltale on what people are doing, whether it's here in Florida or in Seattle or in Syracuse, because it kind of varies across the board. The construction industry, as we've talked about, has had a tough go of it. I was in an office the other day where they told me they had three accounts on 41 that all went out of business, that were all construction accounts, yet those construction accounts that are continuing to do business seem to be doing a little bit better, some better than others, and depending on the region of the country that they're in. As a broad statement, I would say that our clients are estimating flat to down slightly, and if in fact they grow, it will be picked up at audit.
Okay, great. That's helpful. If I could just sneak in one more. Do you expect any further drag from Proctor Financial for the rest of the year?
Well, Sarah, as we had given some information on the 4th quarter, we still think that Proctor finished last year, excluding the contingents, which obviously have been down, as we've talked about. Last year, they were roughly $42 million. We think this year, for the year, they'll be down to about $37 million on a core basis. Essentially, in the June quarter, we think they may be down just slightly, maybe a $500,000 from what they had last year. The September quarter, because of some unique revenues they had then, we think they may be down as much as $2.7 million. That's the only kind of blip, and then possibly flat to slightly up in the 4th quarter. That's kind of the way it shakes out.
We're still estimating the same numbers, that they'll be somewhere around $37 million this year versus $42 million last year. Does that help?
Okay, great. Yes, thank you.
Thank you. We'll take our next question from Matthew Heimerman with JP Morgan.
Hi. Good morning, everybody.
Morning.
Good morning. A couple questions. First, just on Proctor, and following up on the comment you had in your opening remarks around contingent commissions, can you give us a sense of what contingent commissions would be down ex Proctor this year?
Let's see, Matt. Let's see. Last year, we had roughly $54 million-$55 million in total contingent commissions. On Proctor alone, they were $15 million. They were down roughly $3.8 million of contingent commissions. They did get a little bit of contingents in the third and fourth quarter, like $200,000, maybe $300,000. They probably won't get any more this year. That's going to be down. There's a couple other unusual contingents that we got last year. One group got a $3.5 million, and that will be down. Right now, our overall contingents, as I said, would probably be about $7 million-$10 million for the third through the fourth quarter, depending on what we get on FIU. We're at $28 million now. We'll probably finish between $36 million-$38 million for the year.
Did I hear you right? You said Proctor was $15 million last year?
Yes.
Okay.
This year it's $11 million.
Okay. All right.
That should pretty much wrap up what they'll get this year.
Okay. That's helpful. I guess, just back to the E&S market. Do you think what we're seeing in property markets, if in fact you do see a little bit of rate there, I guess real question is how material do you think that would be to your wholesale business overall? In other words, is property a big enough piece of that product portfolio that it would make a big difference to how you think about growth in that business?
I think in property, we do write a lot of business in coastal areas in our E&S business, both brokerage and binding authority. I think it would have a tendency to help catapult or push forward the internal growth in that division. Yes, I think it would be a positive from that standpoint. Yes.
That's helpful. Just on the employee benefits side, you talked about employers restructuring there to try to mitigate rate increases. Are you seeing much benefit there yet from payroll stabilization? I'd also be curious whether or not you're seeing employers potentially expand the other products, the voluntary products as well.
Right. We haven't seen a lot of payroll expansion. In those clients that are growing and are telling us that their top lines are going up at renewal, typically, they're expanding sales without expanding payroll to the same extent. That's number one. Number two, we have not seen a marked increase in additional benefits being offered yet. I think it's a client-by-client decision. I would also say that we've talked about in the past that there are markets that have decided to change the way we're compensated to national markets, specifically on large groups over 100 lives. You see carriers starting to look at things. For example, if you're paid on commissions, do they go to a per head, per month on smaller groups? Some have, some haven't.
There are some large group writers that have decided to go from a commission level to a fee, where we have to get the client to sign a fee disclosure where they will actually collect the money and remit monies to Brown & Brown, but it is separate on the bill. As a general statement, what I would say is, we continue to write a lot of new employee benefits business with the confusion and pain around healthcare reform. We also believe that there will be continued reform in that, in the sense that the current law that is in existence, we don't believe will be the ultimate final law that goes forward. I think there will be modifications. That does not mean that it will be repealed. That means it'll be modified. That's kind of what we're seeing in our employee benefits book.
Okay, that's helpful. When you said yet, in terms of additional benefits, at what point, I guess, when would you typically see that relative to an economic recovery?
Yeah. I think it's different with different employers, Matthew. What we're seeing is, you have employer-purchased coverages, and then you have voluntary benefits, where you have the individual decide to buy a coverage. What I think we're seeing more of today is, as the economy has kind of bumped and blipped along, you're seeing more voluntary benefits that are being offered, which means that's a cost shift in terms of managing costs from the employer to the employee, if the employee wants he or she to purchase those additional coverages. That said, I do think that as the economy does pick up, some employers will further review the employer-sponsored coverages and potentially offer more coverage or additional lines of coverage.
Okay. That's helpful. Thank you.
Thank you. As a reminder, that's star one if you'd like to ask a question. We'll go next to the line of Brett Huff with Stephens.
Good morning, Powell and Cory.
Hey, Brett.
Hey, Brett.
Two questions, a little bit bigger picture. Number one, as you guys have been doing more M&A, congrats on some of the larger dollars that you've been bringing in. I know you've been working hard on that. What does the margin look like? Has it been fairly typical? I know often that you guys go in, you feel like there's some margin improvement. Give us a sense of, are the margins of the oncoming business similar to yours, or is there a bigger chance to reduce some of that cost? Kind of give us a sense of that.
No, I think every acquisition is slightly different, Brett. As you've heard us talk about our goal and interest when we talk with acquisitions is to have a 25% pro forma operating profit out of the box.
There are certain transactions that we would consider for strategic or otherwise regions that might have slightly lower than that initially. We believe that they can achieve that and higher ultimately.
Some of those do come on at margins that are equal to or even higher than our averages. It's kind of a pretty broad statement, but I would rather address it in saying our goal is to have each one have a minimum of 25% pro forma operating profit. Some might be slightly lower. A number could be higher than that, but that's kind of what we see.
Okay. Second question on just the health of the middle market. You guys obviously have a good sense of it because you're talking to those folks every day. If you had to compare this quarter to last quarter or a couple quarters ago, obviously things haven't totally turned around, but in general, do you feel there are more signs of life? I hear a little bit more on exposure units being flat rather than down. Is that an accurate way to think about the middle market right now?
The way I would look at it, Brett, is severalfold. One, I think about October of last year, there was a change in consumer confidence. That does not mean the middle market economy is better. I think there's just been a change in the way people think about their businesses. From an investment standpoint, in the world everybody on this call lives in, I think that's evidenced by the 10-year T-bill moving from 2.24 to 3.47 in 45 days, which, to my knowledge, has never happened that quickly, ever in the history of America. I'm asked, "Well, why does that happen?" I would say, one of the things that could force that to happen is an expectation of an inflationary environment, and where would you have an inflationary environment and expanding economy? That's more an expectation of Wall Street and those in the money management business.
As it relates to the middle market and everybody out there, I think that people felt differently this holiday season in the way they bought gifts, not only for themselves, but for their families and for their friends. That's as evidenced by credit card balances around this holiday season versus past holiday seasons. Saying those two things, I would still say to you that I believe the middle market economy is very fragile. When you see, since 1945, every economic recovery has expanded at a rate GDP of 6% or more. Currently, we're in a 2.5%- 3%, or maybe 3.5% expansion, so it's flatter. I think if you could see the middle market GDP, it would be closer to flat to still down slightly. I kind of think it's bumping along.
I think people may feel a little better, Brett, about it, therefore they may be looking at their businesses differently, meaning i.e., to invest in their businesses. I don't think many people could have anticipated the unrest in the Middle East as a result of the internet and some of the things that have occurred in Northern Africa, nor can any of us have anticipated the changes, particularly in the Far East with Japan, and what that's done. You've got gas prices on a little uptick. You got some other things going on. I think they're just cautious. That's the way I would say that.
Okay. Last question. This is on the employee comp and then the other operating lines. As we go forward, I think organic growth will ultimately come back as a combination of things, how do you expect comp to grow? Will competition force you guys to change compensation, try and keep producers, et cetera? How should we think about leverage there? On other operating expenses, what other leverage points do we have there? What things do we need to start spending on right as organic growth starts to get more positive? Can we wait and put some of those expenses off and still realize some higher incremental margins there?
Right. Brett, on the first part of your question, we've always tried to craft a compensation system that would be very competitive to retain high-quality teammates now and in the future, meaning through all market cycles. That's obviously one of the reasons that we've crafted our new SIP plan that Cory talked about. It's something really important that we believe is a very valuable piece of what I would call a cornerstone for our operating model, which is wealth building, number one. Number two, as it relates to, are there any other levers or things that we can pull or not invest in or put off till? Remember, we have always invested or allocated 1% of our revenues to the hiring of new producers, which may not be currently in the budget in those local offices.
The purchasing or the investment power of that 1% has really doubled, if you think about it, because it's usually we pick up 50% of the cost, typically for a two-year period. At the local level, they've got to do the same thing. That's really like $20 million annually that we could invest and have continued to invest in new people throughout this economic downturn. We're not going to do something differently as the economy continues to pick up or when it picks up. We're going to just keep looking for more high-quality people. To get from roughly a billion to our next level, we're going to have to hire a lot of new teammates. Some of those will come through M&A. Some of those will come through just hiring from other industries.
There's not really a lever that we're saying, "Okay, we won't be pushing this," or, "We will push this, and it'll delay a cost." Our goal has always been, as you know, Brett, we operate pretty efficiently, and our goal is to grow our revenue line or our top line more quickly than our expense line, which in turn gives expansion on that margin.
Okay. Thanks for your answers. I appreciate it.
Thank you. We'll take our next question from Steve Laby with Langham Macklin & Kay.
Hi, good morning. I was curious as to why the movement of business from Citizens to private carriers would be revenue neutral. Are the commission rates in the E&S market less than 10%?
No, it's about 10% on average. The implication there, Steve, was if their rates go up 15%, let's just say, and they move to the market, the E&S market, which is just slightly above where they are right now, and in some instances equal to, then it would be revenue neutral. That was the implication.
I see. One other quick question. As a general statement, and maybe you don't measure this, but did changes in commissions or fees on healthcare benefits business hurt organic growth for you this quarter?
Well, we did not comment on that, but as a broad statement, I would say generally, it would be neutral to slightly negative. We don't measure that. It's all in, meaning in all of our calculations. As a general rule, I would say it's kind of neutral to slightly, and I'd say slightly would be the key term.
Okay, thanks.
Again, as a reminder, star one for questions. We'll go next to the line of Mark Hughes with SunTrust.
Yeah, a quick question, and this may have just been asked, but on employee benefits, where you take into account the change in the payment structure, maybe the fees from commissions, what's been the net change?
Yeah, Mark, the question that Steve just asked was similar, which basically says, we think that in this last quarter, that those changes were neutral to slightly being the term, the key term, negative, neutral to slightly negative. Not a big positive, not a big negative, just neutral to slightly negative. That's what we've seen so far.
I apologize for the repeat. Thanks.
Again, as a reminder, star one for questions. Please make sure that your mute function is turned off to allow your signal to reach our equipment. At this time, it appears we have no further questions in queue.
Okay. Well, thank you very much, Trish, and we appreciate the time today. We look forward to talking to you all next quarter, and have a wonderful day. Thank you very much.
Thank you, ladies and gentlemen, for your participation. This will conclude today's conference call.