Good morning, and welcome to the Brown & Brown, Inc. earnings conference call. Today's call is being recorded. Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including financial performance. Such statements are intended to fall within the safe harbor 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 will now turn the call over to Mr. Powell Brown, our President and Chief Executive Officer.
Thank you, Cecilia. Good morning, everybody. I'm here with Cory and Tom Riley . We're in Florham Park, New Jersey, for our quarterly board meeting. I'd open by saying that no carrier wants to lose a renewal. They are very aggressive on new business pricing. There still exists a gap between new business and renewal business pricing. Regional carriers are very aggressive. With that, I'll now turn it over to Cory for the financial report.
Thanks, Powell. Our net income for the second quarter of 2010 was $41.2 million, and that was slightly up from last year's second quarter net income of $40.7 million. Our earnings per share for both quarters was $0.29. From a revenue standpoint, commissions and fees for the quarter decreased 1.4%, or $3.5 million to $241.1 million, from the $244.6 million in last year's second quarter. As always, included in our press release is a table that summarizes our total growth rate and the internal growth rates from our core commissions and fees. That core commission and fees excludes profit-sharing contingencies and any books of business sales that we sold that was there last year. From a profit-sharing contingency commission point of view, we received $6.4 million this quarter, and that's about $400,000 less than the $6.8 million that we received in the second quarter of last year.
Looking forward into the third quarter of 2010, we currently expect between $6 million-$8 million of profit sharing contingencies. For the fourth quarter, we will receive whatever FIU receives, which right now is expected to be around $4 million-$5 million, if the wind does not blow in Southeast Florida. Looking at the internal growth rate schedule, we had a negative internal growth rate of 4%. Excluding the negative impact this quarter of Proctor Financial, which we discussed in the first quarter conference call, our negative internal growth rate was only 3%, which is an improvement from the fourth quarter of 2009 negative internal growth rate of 8.3%, and the negative internal growth rate in the first quarter of 2010 of 5.6%. Both of those numbers are without Proctor also.
Our total core commissions and fees for the quarter decreased 1.1%, or $2.7 million of net total commissions and fees. Within that net number was $6.7 million of acquired revenues. That means that we had $9.4 million less commissions and fees on the same store sales basis, and hence the 4% negative internal growth. As the internal growth schedule indicates, the vast majority of the negative growth really came from our retail operations and Proctor Financial. Powell will talk about the activities in each of these business segments in a minute. Our investment income decreased around $100,000, and that's just due to lower interest rates on our short-term money market accounts. Our other income increased $1 million, which is primarily due to a legal judgment that was ruled in our favor.
Our pre-tax margin for the second quarter of 2010 was 27.9%, compared with the prior year margins of 27.2%. That's an improvement of 70 basis points. The improvement is still 50 basis points, even when we exclude the $533,000 credit resulting from the change in our estimated acquisition earn-out liability, which came to us because of FASB 141R. If you look at employee compensation and benefits as a percentage of total revenues, that stayed at 49.8% of total revenues, similar to the same as last year's second quarter. The total dollar decrease, on a net basis in employee compensation benefits was approximately $1.3 million. $1.7 million of this net total was attributable just to the new standalone acquisitions that we've completed since last year.
Excluding the impact of the standalone acquisitions, we actually had $2.9 million in less compensation and benefits, and that is primarily relating to reductions in salaries and bonuses. Around $300,000 came from a positive adjustment in our self-funded medical fund. Our non-cash stock-based compensation cost was $1.8 million in the second quarter of 2010, and that is consistent with the estimated cost over the last few quarters. In the current quarter, other operating expenses decreased as a percentage of total revenues, 70 basis points to 13.8% of total revenue. The total dollar decrease in the other operating expenses was $2 million. $300,000 of this aggregate total was due to these standalone acquisitions. Excluding these standalone acquisitions, we had an aggregate reduction of total operating expense of around $2.3 million.
These decreases were really kind of broad-based, the largest changes, the decreases, were in occupancy costs, supplies, insurance expense, and bad debt write-offs. Looking at amortization and depreciation expense on a combined basis is very comparable to the second quarter of 2009. Our interest expense is tracking online to what we expect, about $3.6 million a quarter. Our effective tax rate currently is running about 39.45% and should be a good number to use for the final two quarters of the year. That really wraps up the quarterly review. The year-to-date number and trends are very similar to the second quarter, and the earnings per share just for the six-month year to date was $0.59, which is 6.3% decrease from the $0.63 we earned in the first six months of 2009.
Really, when you look at that, the main difference is really due to Proctor, in terms of their commissions and fees down $11 million for the entire six-month period. That really makes up the vast majority of that decrease. With that financial overview, I will turn it back to Powell.
Thank you, Cory. Good report. Florida retail was down 3.7% versus 6.8% in Q1. Rates in Florida on property, general liability, and automobile are down 5%-10% on average, sometimes down 15%-20% on rare instances. Citizens rate increases on commercial residential properties are bringing the E&S market back into play. Exposure units are typically flat to down 10%, except in the construction area, where rates are down 5%-15% and exposures are typically down 10% or more, and many times much more. I would like to recognize West Palm Beach for a great quarter in Florida retail of Q2. National retail is down 2.1% versus down 2.2%. Rates on property, general liability, and auto are flat to down 10%, while exposure units are flat to down 5%. Work comp in the Northeast is flat to up several %, depending on the state.
Upstate New York rates are the firmest, while New Jersey and around New York City, the rates are under the most pressure. In the South, GL auto and property rates are flat to down 10%, with exposure units flat to down 10%. In the construction area, rates are flat to down 15%, and exposures are down 5%-15%. In the Gulf Coast region, Louisiana to Texas, property GL and auto rates are flat to down 10%, and exposure units are flat. The oil spill impact in the short term is neutral because of the hiring of contractors to do work on the cleanup efforts. Long-term outlook at present seems to be negative, obviously due to the drilling moratorium through November 30th. More to come as that plays out.
In the Midwest, rates are down 5%-15%, and exposure units are flat to down 15%. In the Midwest, regional companies are very aggressive. In the West, down 8.7% versus down 16.1%. Property GL and auto rates are flat to down 10%. Work comp rates in the West are up 5% to down 15%. The two most competitive places in the West from a rate standpoint seem to be Denver, Colorado, and Portland, Oregon. Work comp is very aggressive in Arizona and to a slightly lesser degree in California. in May, there was a House Bill 1394 that was passed in Colorado that confirms that faulty workmanship can constitute an occurrence, and thus a construction defect claim could be covered. Several carriers are vacating the Colorado construction market. Exposures in the construction area are down 5%-20%.
In the employee benefits arena, small groups, that is under 50 insured lives, rates are typically up 5%-15% on average. Large groups, which are individually rated, are up 5%-20%, depending on their individual experience. The exposure units or total insured lives on health plans are flat to down. In the wholesale brokerage arena, we were down 1.1% versus 3.1% in Q1. In the brokerage segment of the wholesale area, general liability is easily the softest of all markets. Standard markets, especially regional carriers, continue to stretch and write classes of business that are outside their normal appetite. Apartments and condos are targets. Rates can be down as much as 20%-30%. Exposure units are flat to down 10%, except in the construction area where it can be down much more.
Professional liability and D&O rates are down 5%-7% on everything but financial institutions and real estate related accounts. Financial institution market is tightening up with only four to six carriers willing to write primary coverage. Many carriers that work or write small community banks are reducing their limits or getting off the account. Exposure units are typically flat to down slightly, except those involved in technology and financial services, which can be up. In the property arena, cat-prone rates are down 5%-10%, but accounts over a million dollars of premium can see rates down over 20%. In non-cat areas, rates are down 5%-20%. The standard market continues to expand their appetite in the property area as well. In binding authority, rates are flat to down 10%, and exposures are flat to down 10% as well.
In Florida, we continue to see small admitted unrated carriers on some classes of business, i.e., condos. In Colorado, as I said earlier, House Bill 1394 has created limited availability to write contractors with certain binding authority markets. In the programs arena, professional programs were down four versus down 8.4. Lawyers remain very competitive with rates down 5%-25%. Title agent businesses are down substantially, which most of us would expect. Dental continues to be the winner in the clubhouse, growing organically, but rates and exposures are down slightly. In special programs, down 10.4 versus down 25.9 in Q1. Proctor, we expected to be down $6 million-$8 million in Q2 on their core revenue, and we were actually down $2.6 million due to an extension of the runoff of a large account.
Their new business is very good. I would like to point out that we do expect Q3 and Q4 to be down $2 million-$3 million in their core business as that account runs off now. It's really an extension of what we said for Q2 that didn't all materialize in Q2. It's going to hit more in Q3 and Q4. FIU is seeing increased competition in both wind and E&S accounts in Q2. E&S carriers can compete if the condo is willing to accept a 5% wind deductible versus 3% wind deductible. On smaller accounts, FIU regularly sees companies with minimal policy surplus. Ex-wind business is very competitive. I would like to acknowledge Acumen Re in Ephrata, Washington, a public entity operation, for both having a great quarter in special programs. In services, we're up 30 basis points in Q2 as we were in Q1.
Sam Boone and his team continue to do a great job in the Medicare set-aside businesses and the TPA areas. Now I'd like to turn it over to Tom Riley for an acquisition report.
Thanks, Powell. In the second quarter, we completed two transactions totaling $7.6 million, the biggest of which was the Stone Agency near Hartford, Connecticut, which was approximately $7 million. As you've seen, we've completed three more transactions in the third quarter, which totaled $5.1 million, the biggest of which is the Commonwealth Agency in Charleston, South Carolina. We've been very busy in the past quarter and few months as we have quite a lot of inventory in the pipeline. The potential tax change does seem to be driving more acquisition candidates to look at possible transactions. I would anticipate a very busy next few months as our acquisition teams are evaluating several opportunities currently. We really have not seen any new competitors in the current quarter. Pricing remains consistent to what we've seen in the prior few quarters. With that, I will turn it back to Powell.
Thank you, Tom, for a good report. In conclusion, I'd like to say that rates remain soft, even in cat-prone areas, as you've heard. All carriers are under great pressure to grow premiums and thus don't want to lose even one renewal. New business pricing seems to be the most aggressive. Regional carriers are leading the way from a competitive standpoint. With that, I'll turn it back to you, Cecilia, to open it up for questions.
Thank you. If you would like to ask a question, you may do so by pressing *1 on your touchtone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, ladies and gentlemen, if you'd like to signal for a question, you may do so by pressing *1 at this time. Our first question today comes from Keith Walsh of Citi.
Good morning, gentlemen. First question for Powell . When I think about the retail business, and I look at all the small business metrics out there, whether it's lending, new startups, business optimism, they all look pretty bleak. How do I reconcile those indicators with the improving organic numbers that you guys are showing? Maybe if you could speak specifically to your new business, what you're writing right now. Thanks.
All right. Well, good morning, Keith. I would tell you that I think it's probably a matter of perspective, and your question comes at a time where we sort of have felt that although some of the leading economic indicators in small businesses may not have totally reflected that in the past. Remember, we're still In terms of our retail business, still shrinking, as you know. That's number one. Number two, we continue to write a lot of new business, whether it is prior to or during this period of economic slowdown. I wouldn't say that we're writing more new business now than we have historically. I would say that we're writing in a historical, normal amount of new business. The accounts that our existing clients are not shrinking as much, if you want to make a very broad statement.
Some clients or prospects have shrunk to a level that they're either going to stop, and they're going to continue at that level and go back up, hopefully, in the future, or they're not going to exist. That's what we've seen. In extreme scenarios where you have places like Las Vegas, is a great example, Southern California, Arizona, to a certain extent in Florida, where you see more bankruptcies than we've ever seen in terms of businesses, particularly small businesses. I think that what you're seeing is a reflection of what we've felt throughout this period, which is our clients, middle market clients, have been and will continue to be, for the near term, under incredible pressure.
Their businesses have been shrinking, it seems as though they may not be shrinking as much, although they're still shrinking, particularly in certain areas of the country. We continue to write a lot of new business in our system. In a historical norm in terms of new business.
That's great. Second question for Cory or Tom. When I look at your cash balance, I think it's the first time in over a decade that your cash is higher than your debt on your balance sheet. It seems like even with the acquisition pipeline being as strong as it is, you can't deploy this cash fast enough at this point. Any other thoughts for what you would do with the excess cash? Thanks.
No, we think the acquisition opportunities are very plentiful, we'll be deploying in that mode. Until it proves that that's not the case, we really have no other plans for it.
Just to follow up there on the M&A front. If you're out there buying agencies right now, I'm assuming they're feeling the same pressure that you're feeling in your core business. From a return on invested capital standpoint, wouldn't it be better to buy back stock right now than to buy an agency that's actually shrinking?
I'd like to answer that. This is Powell Brown. We believe that there's somewhere between 20,000 and 24,000 independent agencies across the country. Although every single one of those would not fit culturally or they may have a little different business philosophy than we do, we think there are a lot of very high-quality acquisitions across the country. In places, for example, I was in Charleston, South Carolina, in a new acquisition yesterday, and they have a bunch of very high-quality people in that operation. That's what we are focused on. If in fact, their business feels a little pressure in the near term, we believe that good people grow and create good businesses. We know that Charleston, South Carolina, as an example, is a good place to do business. That is not saying that there aren't tons of other good places around the country.
I just happened to be there yesterday on the way to New Jersey. I would tell you that we think our returns on invested capital, even if some of those assets shrink slightly in the near term, will rebound as the economy improves. We're very comfortable with doing not only investment opportunities, but our balance sheet to able to capitalize on any opportunity that presents itself now or in the future, actually.
Great. Thank you very much.
Our next question comes from Jack Shirk with SunTrust.
Thank you very much. Powell, going back to your opening comments about the regional carriers being very aggressive on pricing, has that competition intensified this quarter versus 1Q, or is that kind of just more of the same?
No, Jack, good morning. I think it's more of the same. Regional carriers, particularly in the Midwest and in non-cat prone areas, are historically always very competitive. I don't think there's anything new about that today. The thing that I do believe, though, is you start to hear more carriers, including regional carriers, talk about the pressure they're feeling to grow their premiums. In doing so, they are considering how do they get more opportunities to write new business. Does that mean they appoint new agents? Do they focus more energy on their most productive agents? Every carrier has a little different strategy. We don't think that's a negative. That's just a statement and a potential positive to us because we do a lot of business with regional carriers and think they're great companies to do business with.
Right. Then just a couple of quick housekeeping questions for Cory. Cory, did you say the organic growth rate in 4Q was down 83% ex Proctor, then down 56% in 1Q?
Yes.
Sorry.
I said in the fourth quarter, it was 83% without Proctor and 56% first quarter. Right.
Okay. Then just moving on to other operating expenses. There was about $34 million this quarter versus $36 million, kind of a run rate in the prior quarters. Can we now look at, since it seems that none of those savings were really one-time in nature, more of a $34 million run rate there?
That is true. There's probably a little bit in there, like legal costs, those kind of things that can fluctuate from quarter to quarter, not necessarily one time. When you get into the occupancy costs and general supplies, those are savings that basically are being created at our decentralized office locations. Those are kind of what the normal levels would be right now.
Okay. Then just my final question on the acquisition front. We've all talked about the change in tax law and how that would help the acquisition front, it seems that this quarter, at least so far into 3Q, things have intensified a little bit. Am I kind of hearing that correctly from your language?
They have. I would like to have put more on the books in the second quarter than we did, I kind of put it as an analogy as the World Cup soccer game. We've been running and running and running and running and running for hours, we haven't scored yet. I feel like there's some goals out there that are coming, there is a lot of, I hate to use the pipeline's full because I don't know what that really means, there are a lot of potential transactions out there for the last few months.
Great. Thank you very much. Congratulations on the good quarter.
Thank you.
We'll go next to Adam Klauber of Macquarie.
Thanks. Good morning. A couple questions. The improvement in our organic from year-end to current going from roughly negative eight to negative three, is that five-point differential mainly exposure units?
Adam, good morning. We've said that exposure units have and continue to make up the vast majority of the impact on our negative organic growth. The answer is yes.
Okay. They still make up the negative, but that negative, as you said earlier, has become less. Is that correct?
Yeah. What we've said, Adam, is that we believe somewhere between one-third and 25% of the negative downdraft pressure is rate. The resulting two-thirds to three-quarters would actually be exposure unit shrinkage.
Okay. Have you noticed any change in audit premiums over the last three months or so?
The short answer, this is anecdotal evidence, is not dramatic. Once again, there are places around the country where you get the feeling that people feel more positive about their businesses. Until you see the audit come in, you don't know. We've always said that as the economy goes down slightly, you're going to have more return premiums than APs. As the economy improves, you're going to start to have more APs than RPs. We're not seeing that in aggregate yet because we haven't seen an uptick, as you haven't, in the overall broad market, middle market economy.
Great. The wholesale business seemed like it had a pretty good quarter, particularly as you mentioned, you still have risk going to the standard market. Do you think this quarter could be potentially a blip, or can it continue to stay relatively stable in this tough market?
I think that one quarter doesn't make a trend, in our opinion. We don't know yet. Part of that is we believe there's really 3 types of risks. There are risks that are clearly excess and surplus lines accounts and will stay there. Conversely, there are accounts that are clearly standard market accounts, they will always probably be in the standard market. Then there are accounts that look and feel and smell like an E&S risk, yet in times like today, they can convert into standard market risks. As the economy improves and the market kind of normalizes, those accounts will kind of vacillate or move back towards the E&S market.
We are still in an environment, as I said in my prepared comments, that there are risks that are E&S looking and in nature that are gravitating towards the standard market, many of those are written by regional carriers. They're going to continue to see that. As I also said, there are certain accounts that are flowing back into the E&S market in areas like a Florida, where the Citizens Property Insurance Corporation is raising their rates. With a little bit of a negative, there's a little bit of a positive there, but it's too early to tell, Adam, on that.
Thank you. Finally, on the acquisitions, the deals you're looking at, is there a set of companies that are in the $10 million range and above that are in that mix, or is it mainly $10 million and below at this point?
There are some above that, no doubt, the majority of them are below $10 million, obviously. We have a few in the pipeline that we've got that are above that mark.
Okay, great. Thank you for the answers.
I'll go next to Keith Alexander of JP Morgan.
Hi, good morning, guys.
Good morning.
Most of my questions have already been answered. I was wondering, it seemed that contingents were slightly higher than expected in the quarter. Was there anything unusual there this quarter?
No, I think it was kind of right in the range that we were thinking. I think we said, I think in the f irst quarter, if I recall, we said maybe four to six. Maybe it got to 6.4. A little bit extra there, not significant.
Okay. There wasn't any benefit from deferred FWUA contingents from last year?
No. Nothing from FWUA.
Okay.
I take that back. There was about $900,000 at FWUA, if there was a little bit of difference, that probably was we were thinking maybe $750, I think it came in at $900. You're right, Keith, on that.
Okay. All right. Thank you.
We'll go next to Sarah DeWitt of Barclays Capital.
Hi, good morning. I wanted to follow up about your organic growth in the quarter. Do you expect the trend of improving organic growth to continue? When do you think you could turn the corner into positive territory?
Good morning, Sarah. I would tell you that, and this is not meant to sound flippant as a response, but when somebody could tell us when exposure units are going to flatten and uptick, we would have a better feeling on when we think we could start to move towards positive organic growth. We believe that in the current rate environment, rates on average are down 4%-7% across the country. If exposure units are up slightly to up substantially, but up slightly, we believe we grow organically in that environment. Unfortunately, I wish we had it, but we don't have a crystal ball that would be able to tell us when that's going to occur. It would be just speculative on our part.
Great. Thanks. Secondly, you've been able to expand the margin in the quarter despite negative organic growth. I think you've said in the past that you really need positive organic growth to have positive operating leverage. Do you think that this trend could continue, or what do you have in terms of opportunity to reduce expenses further?
Sarah, what we've said historically is when we have slightly negative organic growth, we can have potentially, not all the time, we could potentially have operating improvement. When we have negative organic growth, we have margin pressure. Coming from an area where we were, i.e., 8.3%, 5.6%, down, we were not in that environment. We believe that as we continue to improve, in terms of as the economy improves, that we'll have better operating leverage. That said, we also think that no one shrunk their way to greatness as a company. Until we grow organically, we at our local operating office level are trying to manage the expenses the best we can, but knowing that it's all about people do business with people, and we need to write more new business and do everything we can to retain our existing clients.
We don't have another lever to pull per se, as some people have asked us before, that are additional expenses as we are in this negative environment. We're pulling every lever we know which to pull.
Great. Thanks for the answers.
Thank you, Sarah.
We'll go next to Brett Huff of Stephens.
Powell and Cory and Tom, good morning.
Good morning.
Morning, Brett.
Thanks for taking my call. A few of my questions have been answered. Just a quick follow-up on the last one and another organic growth related. Powell, I forget the word you used last time, but I think you said pockets of optimism or something similar. It sounded sort of sporadic or distributed around the country. Is the right way to think about the exposure units getting less bad? Were the exposure units in those areas you had kind of referenced last quarter, were those the drivers of that? Or is that not a connection that we should make?
No, I don't think that that's the connection that you should make, Brett. What I would say is this, the comment last quarter about pockets of optimism or things. I think what I said is I gave an example of an area like, not a state, an area like San Antonio, Texas, or Seattle, Washington. San Antonio, Texas, the unemployment rate is under seven. Their economy is based on two big things that drive it, healthcare spending and defense spending. That's a different environment, obviously, as opposed to Arizona or California or Florida, with much higher double-digit unemployment rates. In Seattle, Washington, those businesses were going full steam until the end of 2008.
2009, those businesses out there went down, and if you walked along the street in Seattle, Washington today, and you asked a business owner how they felt about their business, I think there is a certain level of optimism that they have that they haven't had there in a while. We may not have seen that come through in terms of their exposure units being up yet, meaning from an insurable standpoint. To answer, that's kind of long-winded, but saying that I think the performance of our company this quarter was broad-based in nature in all of our divisions. It was not focused specifically on something that I implied or I stated as a pocket of optimism. I actually tried to make sure that everybody didn't misinterpret that comment last time.
As Sarah asked earlier, and you're asking, we're still shrinking organically. Until we grow organically, we're not going to be happy about it.
Thanks. That's helpful. Then one last question. Have you guys thought about the PSP and if that will change or stay the same, just as the stock price has been sort of flattish lately? Have you guys considered how that might be altered over time or address that particular issue?
Yes, we have. I'm not trying to be funny, Brett. The answer is yes, we have. The answer is we are committed to creating a wealth-building system that will reward performers in our company. Coincidentally, we've been talking about it just recently. So I think that we will modify that slightly in the future to the benefit of our team members. So I think that will be something that'll come out in the future.
Great. I appreciate your comments. Thanks, guys.
Thank you.
Our next question comes from Meyer Shields of Stifel Nicolaus.
Thanks. Good morning, all.
Morning.
I'm sorry. Powell , can you talk, I guess, the most impressive sequential organic improvement was in Western Retail. Is there anything unusual going on there relative to?
Well, if you remember, Meyer, what we did is Roy Bridges went from Florida out to the West Coast, as had been actively involved with those teams now for over a quarter. I think it's an involvement. We have a lot of good people in the West, and they have bumped through some unique economic times. I think it's a combination of a bunch of things. I think Roy's helping out. I think the team is doing a great job that's out there, and there's a lot of improvement yet to go. Until we grow organically, obviously, we won't be as pleased as we would be if we were growing in a positive fashion. We will, ultimately. There's no secret sauce if you're looking for that.
No, I just really wanted to understand what was going on.
Yep.
With regard to the wholesale segment, there have been some news reports suggesting that Aon is going to stop sending wholesale business outside of the Aon family. Would that have a dramatic impact on Brown & Brown's wholesale revenues?
No. We don't do a lot of business with them in our wholesale operations. We've heard that, and with all the changes and not only the things with the attorney generals, it would not surprise me or us if Marsh, Aon, or Willis got back into the wholesale business. I don't know what ultimately that will look like in the general landscape. No, if they decided to force everything in-house, that would have a very minor, if any, impact on us.
Okay. Last question, if I can, just for Tom. Should we anticipate a slowdown in M&A if and when the capital gains tax rate goes back up?
That's a good question. I hope not, because we were obviously doing acquisitions before when the tax rate was different. I think you might have two different things moving in different directions. One, when the tax rates go up, which we're assuming they will, you're also going to have, we would think we were heading toward an improvement in the economy, and potentially less soft pricing on the P&C pricing. One would also think that a lifting of that would help give them incentives for the transactions that have not closed over the last couple of years to get back in play. To answer your question, there are some people that clearly are going to try to sell in the next five months, but some other people have been sitting on the sidelines until their business could grow.
I would think they might come in play as soon as things start looking better.
Okay, great. Thanks, all.
We'll go next to Dan Farrell, Sterne Agee.
Good morning.
Morning.
Can you just give us a little more detail on some of the reduction in comp expense and what's driving that? Is it headcount reduction? Is it more just lower profit center bonuses? Just a little more detail there. Secondly, more broadly on the expenses. You guys have done a great job on both comp and other expenses in offsetting some of the negative organic growth. My question would be, when we do start to get to flat to slightly positive organic, do you think there's a need to then go back and reinvest a little bit into the business? Because you're obviously probably running pretty thin right now.
Well, Dan, let me answer that first. As I mentioned, the majority of it does come from salaries and bonuses. First of all, as negative internal growth occurs, offices are less profitable, that does impact the bonuses. That's probably 30%-40% of that number. The rest of it is salaries. Where that occurs is on a decentralized basis. Every profit center leader knows what his team members need to do. A lot of times, if somebody retires or leaves, they kind of hold off in replacing that position and get the team members to figure how they can handle it. That's the way it occurs, because you'll never see us say, "Well, we're going to reduce headcount by 100 people." Well, we don't know how that happens because one office may not be able to reduce anybody.
They may need to hire people, and another office could get rid of two based on their own circumstances. That's the strength of a decentralized environment.
Keep in mind, one thing I want you to remember is that the one area that is actually having an increase, which did have an additional increase, is on new producers. It has continued to go up because we do reserve 1% of our revenue base for what we call people category. That's where we take profit center leaders who have demonstrated a real ability to hire high-quality people, and we tell them to go out and hire a new producer or a marketing manager, and the half of their salary for the next two years will come out of this people category. Essentially, that's about over $9 million a year that we take in from the offices that we then spit back out to people that technically we don't really need right now, but we're training them.
We've been doing that since the '80s, and that continues. I think the main thing to realize is that these are decentralized decisions, and so it's very thoughtful for each office in terms of what they can do and what they can't do. I hope that gives you an idea. The idea is, yes, we are more efficient today than we were three years ago going into this headstrong. That really is the silver lining around this entire company. Because when we do get a dollar's worth of increased revenue, just because exposure units went up, we're not going to have to necessarily hire new people right off the bat. Over time, they will, but it will be done more along the lines as the economy starts to come back.
That's why we do say that when we do get back to positive growth, we think our margins will come back stronger than they were three years ago. Hopefully that answers it.
That's helpful. Thank you very much.
Our next question comes from Dean Evans of KBW.
Yeah, thanks. At this point, most of my questions have been answered. I was just hoping we could touch back on M&A for a quick second. Are you seeing any increased competition from some newer competitors, such as Pat Ryan or someone like that?
Well, obviously, Pat Ryan is in the E&S space now, but we have not seen anything from him. No, I don't think so. We have not run across anybody that we haven't seen before. I'm sure Pat's out there and is going to be looking at some potential acquisitions. So far, the answer to that question is no, nobody that we haven't seen in the past.
Okay. With regards to M&A, I know historically you've kind of just looked for the right fit, is there anything right now that kind of stands out to you as a good opportunity? It sounds like employee benefits is running along pretty strong for you guys. Is that maybe an area of focus?
Well, obviously, there's two sides to every transaction, they have to be interested in doing something. Obviously, we're a little more careful, I guess I would say, than last year on employee benefits acquisitions, we're back looking at them. Obviously, we're still careful with that space. No, to answer your question, there's not any specific areas. If it's a cultural fit and they can run at the kind of operating margin that we want them to run at, it seems to be a fit, we're definitely interested.
Great. I guess my last question, I was just kind of hoping to touch on sort of what your current thinking is on the healthcare reform and how that can impact that employee benefits business.
Sure, Dean. It's Powell. I would tell you that there's still yet a lot to be resolved in healthcare reform. As you probably know, in the bill that was passed and signed into law, it says that the Secretary of Health and Human Services will dot, dot, meaning she will have the latitude to interpret as she sees fit, 1,045 times.
There are a lot of things that are yet to be sorted out. My personal opinion is that there will be a lot of change in the midterm elections this fall. There are certain people that ask us, "Do you think that healthcare reform could be repealed?" I categorically do not think that could be repealed. However, I do think there could be modifications and clarity in the current bill. For example, there are unintended consequences, like certain employers could choose to pay a penalty and force their employees into some sort of exchange program. I don't think that was the intent of the law, although that is how the law is currently written. Some of those things, I do believe, will be resolved or clarified going forward. Probably need to be clarified with the changes, whatever those are, after this fall.
There's still a lot of uncertainty, which creates opportunities, we believe, for us, but it's just a little unclear right now what those are going to look like.
Okay. Helpful. Thank you.
We'll go next to Keith Walsh with Citi.
Hey, guys. Just a follow-up for Powell here. With respect to the oil spill in the Gulf Coast region, I just wonder, are you seeing customers that are filing claims? If they are they engaging you to help them, or are they going direct to BP? Thanks.
Yeah. Well, let's talk about the oil spill, because we believe the oil spill can be a game changer politically in the Gulf Coast regions.
As it relates to, I'll come back to that. As it relates to claims, we have not seen that many claims yet, and I don't know if we will. What we are seeing, though, in places like the Panhandle of Florida, is clients that are talking about their businesses are down, meaning, Memorial Day weekend, Fourth of July weekend in the summer, where people that live in Atlanta and live in the Northeast and the Midwest that were coming to the Panhandle of Florida have canceled their reservations. That doesn't just impact the hotel or the motel or the condo that they're renting. It impacts the local economy with the restaurants and the putt-putt golf and all the other things that are going on in those communities. Fortunately, what we're hearing, though, is that those people are still coming to Florida. They're just going to the East Coast.
They're coming from Jacksonville, Amelia Island, down to maybe the West Palm Beach area and everything in between. That's sort of the zero, as Cory said. That would be the economic environment. We also do not believe that the insured losses from the oil spill, which are estimated to be somewhere between $1.3 billion-$1.5 billion, to have a material impact on rates on a broad market basis. That's number 2. Number 3, as it relates to the political impact. As you know, or probably know, the state of Louisiana, $65 billion of their economy annually is related to the oil and gas business. That's onshore and offshore. In the state of Florida, interestingly enough, $60 billion of our economy annually is related directly to tourism dollars.
If, in fact, you have an individual candidate in the state of Florida that is running in a highly contested gubernatorial race or in a U.S. senatorial race, they have been very pro-drilling, they have footage of that individual, commenting as such, all of a sudden you have a picture of a small bird covered in oil dying on the beach. That doesn't go over real well with the electorate. I can't tell you exactly who that helps and hurts yet, but it definitely is a game changer from a political standpoint. I think that what you're going to find is you're going to have people that own properties in the Gulf Coast region. This is not just Florida. It can be anywhere along the Gulf Coast that their businesses will be impacted.
The question is: where will those vacationers or tourists go instead of going to where they are? Are they going to go to another place in the state, or are they going to go to just another place in the country altogether?
Okay, thanks.
We'll go next to Mike Grasher of Piper Jaffray.
Thank you very much. Good morning, everyone. Hey, a couple quick questions. Can you update us on sort of the percentage of your book that is in the Southeast corridor?
Okay. Well, good morning, Mike. I would tell you that about 30% of our total revenue is in Florida, and so is Southeast corridor in your definition, Florida, Georgia, Alabama?
South Carolina, Mississippi, Alabama.
Yeah. I would tell you that it's just slightly over 30%.
Okay. Not much above the Florida.
No.
Okay. The other question, Powell, when you're talking about workers' comp rates, be it up or down, what classes of risk are you speaking to? All classes across the board, or can you speak any more specifically to particular high risk versus more mundane risk?
No, those are, Mike, to answer your question, those are broader statements across all classes of business. As you know, there are some states that are NCCI states, that promulgate rates that help, Experience M ods there. There are other states that do those on their own. There are also states that allow carriers to deviate from, or they file and then deviate from their own rates versus using a filed rate exclusively from NCCI, i.e., Florida example, as an example, everybody uses the same rates.
The carriers have to develop programs which are usually dividend programs or retros, which allow, really insureds that have good loss experience to pay a reduced amount of money over the annual term. In other states, that could be a California, that could be many other states. They actually file their own rates and then have the ability to deviate off that rate up front. Every state usually comes to their ultimate cost of doing business for workers' compensation a little differently.
My comments were broad market, all classes of business, high risk, low risk, and everything in between.
Within that state or that region. Okay.
Correct. That's correct.
Okay, appreciate it. Thanks very much.
Thank you.
Our next question comes from Meyer Shields, Stifel Nicolaus.
Yeah. I just wanted to follow up on the M&A again. We've had a couple of quarters where you've reduced the earn-out payables, and I'm wondering whether you're actually changing the provisions in the initial contract for current deals.
No, Meyer, we're not. I mean, that FASB 141, it's kind of a ridiculous statement, as you've heard me say before. You got to project out three years what the exact earn-out you expect. Anything changes from that, you've got to run through P&L. The only reason why these things are really changing is that you'll never, ever hit it right on the head. Every acquisition is a little bit different. They kind of plus or minus. You're going to see every quarter numbers flow in and out of that in that account. I know that most of you, including me, I just ignore it. That's why you kind of have to look at the operating profit excluding that. The bottom line is the way the contract that we use doesn't change at all.
Okay, perfect. Thanks so much.
At this time, we have no further questions in queue.
Well, thank you very much, Cecilia, and thank you all very much for attending the conference call, and we'll look forward to talking to you all next quarter. Have a great day.
That does conclude today's conference, ladies and gentlemen. Again, we appreciate everyone's participation today.