Good morning and welcome to the Brown & Brown Inc second quarter 2012 earnings conference call. Today's call is being recorded. Please note that certain information discussed during this call including your 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 law. 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, (Lisa). Good morning, everybody. We're here this morning in lovely San Diego with our board visiting Arrowhead and so it's 5:30 local time and we're glad everybody could join us. I'll turn it over to Cory for the financial report.

Thanks, Powell. Now that we have two straight quarters of positive internal growth, we at least have the beginnings of a trend. Our net income for the second quarter of 2012 of $42.5 million was up 14.7% over last year's second quarter. Correspondingly, our net income per share for the quarter was $0.29, which is 11.5% over the $0.26 that we earned last year second quarter. From our revenue standpoint, commissions and fees for the quarter increased 17.9% or $289.9 million. That's up from the $246 million that we earned last year. In our press release is our normal table that summarizes our total growth rates and our internal growth rates from our core commissions and fees which excludes profit sharing contingencies as well as our guaranteed supplemental commissions, our GSCs. Relative to our profit sharing contingency commissions, we only received $1 million this year, which is a $1.3 million decrease from the $2.3 million that we received last year. The vast majority of this net decrease was from our wholesale brokerage division. We still estimate that we will receive around $10 million to $11 million of profit sharing contingencies in the third quarter and that for the fourth quarter of 2012 we may receive between $2 million and $3 million as long as there are no hurricanes that hit Florida this year. Additionally, we accrued $2.3 million of guaranteed supplemental commissions in the second quarter of 2012 and that's about $600,000 less than the $2.9 million that we accrued last year in the second quarter. As we mentioned in our first quarter conference call, this reduction is primarily due to the fact that some of our insurance carrier partners have reverted back to their profit sharing contingent commission contracts beginning in 2012. Now looking at our internal growth schedule,…

Thank you, Cory, great report. We're very pleased with our organic growth in the second quarter. Some carriers are increasing rates 10%, 15% regardless of loss experience. This is not the norm but more on isolated instances. Regional carriers tend to be seeking slightly less increases than national carriers and we closed $11.8 million of annualized revenues via acquisitions in the second quarter. In retail, we were 30 basis points positive versus negative 70 basis points in Q1. Kind of going around the horn, Florida, property is up. It's really up. It's flat to up 10 points. GL is flat to up five. Auto is flat to up five. Exposures are flat to up slightly. GL construction rates are down five to up five. RMS11 continues to impact different carriers differently both in the standard market and the E&S markets. We're seeing the impact in Tier II counties as much if not more than in Tier I counties. That's not just in Florida. That's in most cat-prone areas. In the southeast, other than Florida, property is flat to up five. GL is flat. Auto is flat to up slightly. Exposures are up slightly. Comp is under pressure. South Carolina, up a couple points; Tennessee up eight, 10, 15 points. Georgia is flat to up five. There are certain – there is a certain carrier or certain carriers that are committing to drive the – committed to drive their rates on their book up 10% and they're willing to stick by it. Regional carriers are typically a little bit more – they're a little more flexible. I would say that property – in the property arena, underwriting approach is firming, as you can tell, and construction has to be there for an individual market to go up or give on price.…

Thank you, sir. (Operator Instructions). We'll take our first question from Keith Walsh – Citi.

First question for Powell, just on the economy and I guess we keep seeing mixed signals in the news. But what would have to happen in the macro economy for exposures to really retrench from current levels in retail? I've got a couple follow-ups.

Well, that's a good question. I think that our business, as we've always said, is a proxy of the middle market economy. And so what we're seeing, Keith, is our clients are cautious about increasing exposures on renewal, even if they know that they're going to be up. And so we've talked about that in prior calls. So I think that there's lots of uncertainty, particularly as it revolves around an election year. I think certainty is better than uncertainty. I've basically said that I think there are two things that overhang the economy. I've said this for the last 18 months that are unusual and different. One is here in America. One is not. I've always said that I think that the environment in Europe is worse than it seems in terms of the banking situation and that could have a blowback onto our economy in the United States and impact our business. The second thing is I still think that there's still a cropping up of the real estate market. I don't know the solution but in terms of Fanny, Freddie, Sallie, in terms of the mortgage environment, so there's a lot of work being done there as well. We still see pockets in our business which are very tough operating environments, places like Naples, Florida, which you probably wouldn't think of. And yet you would think of Las Vegas or Detroit. And so I wish that I had a crystal ball, Keith, on the economy. But we watch very closely and we're trying to obviously do what's in the best interest of our customers and sell a lot of new business.

And then for Cory, maybe you can just give us an update on Arrowhead. Are you still on track for your accretion targets?

We are. They are proceeding along on their goal as we mentioned that we expect for the whole year they'll be at the $40 million EBITDA. So they're doing very, very well.

And then just lastly for Powell, you've been mentioning RMS11 the last few calls and it seems like there's more runway here. Can you just comment on that and where specifically are you seeing this regionally?

Let me give you an example just to kind of give some color around it. Certain carriers are being driven by their reinsurance carriers to adopt it carte blanche. Certain carriers are adopting it partially because they're looking at a blended model with air, the other model that's used frequently. And so if you have a carrier, a standard carrier, that has to adopt it carte blanche across the board and all of a sudden, as an example, they – when they model things – let's just say in Orland, Florida. So it is 60 miles to the coast east, maybe 45 at the closest point, and it's 70 miles to Tampa. And so the model all of a sudden shows that their rates go up in that particular instance 40% to 400%, one carrier. So what that means is that all of their business in central Florida is going to go away. That is not indicative of every carrier. Please don't take that out of context. What it is, though, is it's indicative of a carrier or one or two carriers and so there is a movement in this marketplace. And so I think that a model is probably never actually perfect correct. You could run 10,000 (inaudible) simulations and you're going to come up with all kinds of different scenarios based on very few variables. I think what it is is there are some companies that are being driven by their reinsurance carriers to act and adopt it more strictly than others. That's how I would view it. (Lisa)?

Our next question comes from (Yurin Canur) – Deutsche Bank. (Yurin Canur): Question on the retail space; congralations on turning it to positive organic growth for the first time in several years. But at the same time, I guess, 30 basis points with the competition going on now to grow your organic base by at least 5%, maybe it seems like a little bit light but maybe you can give a little more color on why we should expect those high of numbers or maybe what the trajectory would be from here.

(Yurin), can you – I want to make sure I understood that about the others. I heard your question but did you talk about somebody else trying to grow towards 5%? Is that what you were saying? (Yurin Canur): No, but if I move – remember correctly, you put in place a competition or I think you called it a competition between your retail producers to grow at least 5% organically. And it seems like you've had some expenses come in from that.

That's correct. I got it. (Yurin Canur): So why weren't we seeing more organic growth to go along with that?

So basically depending on where you are in the country, what offices, we are seeing more growth in certain offices. Some offices it's just like anything else. In a larger organization you're going to have offices that have really good quarters and or be down a quarter or revenue can shift from one quarter to another. What I would tell you, (Yurin), that we're pleased about is the trend, assuming that the middle market economy continues to improve, is moving in the right direction and that is the growth engine of our business because you know 60% of the revenue last year. So I would say that we continue to look for incremental improvement in the retail space and we're working towards that for the next – in the future. And (Yurin), I think you've got to kind of reflect on where retail was. If you go all the way back to '08, '09, we were negative 8.7. Then we were negative 4.8 and then in 2011 we were negative 4.2 and now we're just basically back to flat with the retail division. So it's trending the right direction and, as you know, we're very tied to the middle market economy. And even though the middle market economy it just seems like it's found it's fee, it's not necessarily going to move up quickly but we think it will be a gradual come back. And I think that's positive because that is the largest division and I think there is real potential there. (Yurin Canur): And a couple follow-ups on that point, so would it be fair to assume that roughly 50% of the eligible producers were able to achieve growth similar to last quarter just because the numbers seem similar?

Well, (Yurin), I would think you might have seen our schedule and it really is very close to 50%. (Yurin Canur): And could you give us some estimates of what portion of – the 50% that actually made that 5% target, what portion of their growth came from new business?

We don't – well, we track new business and we are making – we set up accrual on a quarterly basis and we can't answer that right now because it'll look at the end – we'll look back on that at the end of the year. But a lot of it.

Yes, because don't forget the retail in total is just marginally up, which is a little bit exposure in rate. So just naturally those 50% that did exceed it generally are still playing in the same realm and they're getting the same kind of price increases. So the majority of it is new business. (Yurin Canur): So when I think about next year, that extra 5% bonus goes away and then the compensation naturally goes down from 40% to 20%. Is it because of the renewal business?

That is theoretically correct the way you're thinking about it.

We'll take our next question from Sarah DeWitt – Barclays.

Now that organic growth is firmly in positive territory, when do you think we could see margin expansion?

Well, if you remember, Sarah, we talked about – I specifically said in October on the call that I was prepared to take the margin down slightly or keep it flat to grow the business organically. We know that we can grow our business organically and increase the margin. The great part about it, as you know, is on every incremental dollar of revenue on the existing account, that can be very profitable into our business units, meaning I'm talking about exposure increases. I'm not talking about new business that's on top of it. And so we're working very hard to grow our business organically and improve our margins.

Is there a level of organic growth at which point we would expect margin expansion and at what point we should expect margins to be flat?

Well, remember, as Cory articulated so nicely earlier, we have some additional expenses that are flowing through right now, which I’m perfectly comfortable with. And I've said that we're going to do things that will stimulate growth and reward performance. So that's a nice way of saying we said this is a one-year sales contest and that's exactly what it is. But we may do things in the future that will continue to stimulate growth. But no, there's not a stated internal growth number where margins expand. I know that you're referring to someone else that said that that's how it works for them but we feel good about our business in a normal, steady state. When we grow our business organically we believe we can get margin expansion.

And Sarah, as I tried to explain, is that if you take those four or five items that are relatively newer cost, basically that's 1.1 percentage points on the margin. And then that one operation we have, ICG, adds another 40. So that's 1.5 points on the compensation employee benefit line and that basically moves us down to just without anything else that's roughly 50.3% versus last year's same quarter at 51%. So that in itself is a margin improvement. We do have a couple other unique things. For instance, like Proctor, they do an exceptional job in their area. But to compete with the big 800 pound gorillas in that space, several years ago we had beefed up their IT and they provide really superior service in that area to the smaller, mid-size banks and mortgage bankers. And for instance, they grew for the year to date roughly $2.2 million from new accounts that they had picked up. But at the same time they're having to beef up their IT area and really very much some of the best systems in the industry. But they've added $1.6 million of employee costs and benefits relative to that. So that's part of their growth plans and so that, even excluding the differential that I just explained to you. So overall, margins will continue to increase. This is just a transitional year and we're just focused on internal growth in the short term right now.

Our next question comes from Ray Iardella – Macquarie.

I guess first, Powell, I know you mentioned $11.8 million of revenues closed year to date in terms of acquisitions (inaudible) looking pretty good. And potentially the cat situation this year could lead to some more opportunities. But do you think you can talk about the appetite for another larger deal similar to an Arrowhead?

The $11.8 million, just as clarification, were closed in the second quarter. And as you know, Arrowhead was the largest acquisition that we've ever done and we're very pleased with the teammates. I have met a large number of our teammates. Of the 520 I've met, probably 480 of them here in San Diego, and we're very pleased with the team here. That said, there aren't many Arrowheads out there, meaning there's only one and we purchased them. I have said to the team here and I will say to the team or everyone on the call that if there was another Arrowhead out there or something similar, tomorrow we buy it. And so we've always said it's all about the people because good people develop and grow good businesses and attract more good people. It sounds kind of trite, I understand that. It sounds sort of basic management 101. But we really believe that. And so we continue to look at acquisitions of all sizes and shapes and there's lot of speculation by people on this call and others about all kinds of things that could happen in this industry. That said, the great part about it is that we feel really good about our company and we're committed to keep doing what we're doing for a long period of time and acquiring strategically good partners.

And then I guess maybe talk about organic growth at Arrowhead. I think you had mentioned on track to reach sort of the $40 million of EBITDA. But is organic growth still as strong as it was in the first quarter?

Yes, yes.

And that's around the 7% to 8% range, if I recall.

Yes, 6% to 8%.

Then lastly, I don't know if you guys talk about this metric or use the metric but organically has the producer or agent count increased year-over-year or has that been pretty steady, I guess trying to strip out acquisitions? Has that been a pretty consistent number or has that been going up or down?

Well, we consistently, as you know, we invest – we allocate 1% of revenues into a people category in which we invest in high-quality, new people who are not originally in budgets. And so we supplement that expense or offset a portion of that expense at the local level in sort of a partnership or a cost sharing basis through the local offices. So we are looking to organically grow that number and invest in our teammates around the country in different – in all four segments of our business. But, no, we haven't given that metric in the past but that's what we're doing.

Our next question comes from Matthew Heimermann – JPMorgan.

A couple questions, one, just if we think about in retail the slight growth we're seeing this quarter, could you give us a sense of what that looks like by product – in other words, if I’m a retail agent, let's say in San Diego, I mean, how much if I'm up 0% to 1%, how much is work comp contributing, how much is (NYSEARCA:GAL), auto, property, construction, kind of the normal costs that you talk about rate change in and exposure change in?

Matthew, take this in the spirit it's intended. It's very different for every producer. Some producers are specialists where they'll write just construction or just healthcare, just as an example. And inside of healthcare, there would be a focus on nursing homes or assisted living facilities or hospitals and in the construction business it might be residential or inhabitational. It's condominiums and apartments. And so what you find is – and then you, conversely, you have people who are more generalists and they write different kinds of businesses all over the place. So you can have a manufacturing operation and a construction firm and a beer distributor. And so that's a hard answer to give. We don't track it that way in terms of what really makes it a comp over property over whatever the case may be. I would say that if you look inside of the books of business with the production force of Brown & Brown and you listen, as I know you did, closely to what I said on rates, you hear a recurring theme of comp pressure and property pressure. Those are the recurring themes. And so different states, as you know handle work comp differently. And Florida is a state where you have dividends and wealth sensitive programs but the rates are fixed. In a state like California, there's rate variability, so you could go up or down due to the deviating of the rate. And so you have more discrepancies in rates in California versus in Florida but I would content that the buyer ultimately gets the same benefit long term if they are profitable, meaning if they have low losses.

Just in terms of – one of the – the comment that stuck out to me in your prepared commentary was just the comment that in the northeast you've got some price – or I think you said GL but that was looking like it was starting to roll over. And I guess the question is when you think about what you're seeing with price on the carrier side, do you think the underwriting approach is to kind of look at this in terms of get what you need today or do you feel like people have kind of a multiyear rate need and are addressing the market as such as kind taking it as they don't want to push too hard and they'd be willing to get it over one or two years?

Well, I think that the answer is sort of a bifurcated answer. There are certain carriers that are sticking to their guns. Most of those are national carriers more so than regional but both regionals, too. And I think that if – we all know that the industry is overcapitalized to the tune of probably $550 billion. That was as of the end of last year. And so you have – it sounds good to have rate pressure, upward rate pressure for the near to intermediate term. But the reality is will it stick? And let me elaborate. I have said and will say today and in the future that I think that rate increases in the current – rate increases in the near to intermediate term can continue to go up. I think that the rate at which they go up moderate. That's a broad statement. On a specific statement, if you look inside the excess and surplus lines market, specifically the property, the cat property providers, if in fact there is no wind event this year – so by December 1, if there has not been a wind event, nothing comes into (Harith) county in Texas, nothing rips into Florida or Louisiana, nothing comes into the coast up in the mid Atlantic, I would tell you that I think there's going to be downward pressure on those rates next year. Downward may not be all negative. It might be just flat. But I don’t think it goes up as much because of the amount of capital that's chasing it. I'd like to clarify for you, Matthew, one other thing. The comment that I made was in the E&S markets and it was in binding authority specifically. So that is one place very isolated in a northeast region and so that could change depending on the experience of that particular market or those markets. But as a general rule, we're seeing flat to upward pressure on rates everywhere for the near term.

And then just one last question on how should we think – you've done a pretty good job of laying out the kind of the expenses and how we should think about kind of adjusting for comps there. But I’m just curious. When we look at the services revenue given the very quick ramp we've seen in growth off the Medicare and Social Security disability programs, should we think about that kind of being a disproportionate one-year growth bump that then moderates? I just want to get my arms around that.

Yes, I think that the way I would want you to think about services is not unlike the acquisition landscape. I think that it's kind of lumpy, not bumpy, lumpy. And so I don't – I think that you should – I don't think that you should think of it as just a one-year event but I’m saying I think it could be up but up less in the future or it could be up more. It just depends because of the opportunities and the services that they're providing to their carrier partners.

Our next question comes from Meyer Shields – Stifel Nicolaus.

One, is it fair, Powell, to infer that more business that you're placing is going to the regionals, if they're being less aggressive on pricing and get a better deal for your clients that way?

We, Meyer, do a lot of business, as you know, with regional carriers already. And so that's going to occur on an office-by-office basis. Regional carriers typically don't have large property capacity or they may have constraints relative to the limits that they put up, even on a liability basis. So you could draw that conclusion but I don't think that that's categorically across the board fair.

When we look at the trend for other income, it actually came down. Is it fair to view that as a positive because it means that fewer producers are leaving and buying the books of business?

Well, remember, we don't, as you know, when we invest in someone, in an agency, we intend for them to be part of Brown & Brown for the duration. And as you know, sometimes people's attitudes or views on the world change and maybe they would be better served being part of a different team. We don't like people to go to other teams but sometimes it's better for both parties involved. So like I said, on $1,150,000,000 base, we're going to have some people leave periodically and we'll have some dispositions.

And Meyer, I'd warn you to that as a general rule we don't feel like we lose that many producers that we want. And not all the businesses that we sell is – some of the business that we sell are people that we've asked to leave, too.

There's been a lot of I guess political rhetoric about fourth place housing rates. Is that a threat to Proctor going forward?

Sure. We've got it. You’ve got an environment that is very unclear as yet and so you've got an environment that is probably going to be more highly regulated and absolutely could be a threat.

Is there any way of quantifying that or you just have to wait and see what happens?

Well, we don't know. That's the thing. I mean, once again, someone may – somebody may dictate the rates that they charge or – we don't know. It is unclear as of yet and as that information becomes available we'll provide it.

Our next question comes from Mark Hughes – SunTrust.

Any noticeable trend through the quarter in terms of the tone of business, how did trends look as you exited the 2Q compared to when you started?

Well, like I said, I would tell you that we were pretty darn pumped, about a 3.2% internal growth and the fact that we had growth in all four of our divisions was good. So I would say that's good and a lot of people feel really good about it and it's not just me. So I know that's not a very scientific answer but I would tell you that I think the trend is positive.

Cory, the 1.5 points of extra expenses on the comp line, if we look at Q3, is there any reason why that might be a little bit higher or a little bit lower? And I will sort of ask a question again. How much more organic would it take to kind of overcome that – say your pre-tax is down 40 basis points year-over-year. You know, how much more organic would it take to put you in flat territory?

Well, on the first question, I think it's probably fair to go and assume about he same level given all the same fact patterns they reoccur in. You know, it should be relatively consistent on that. So with that said, when you pull that out, I make the argument that you basically do have margin improvement, even at this level. Keep in mind the retail only grew a total of $400,000 net, 0.3, and I think that is an even stronger engine for the margin side of it. So, again, I think we've – outside these items I've listed, our margins will continue to improve.

So assuming incremental improvement in the retail then we should get – the margin picture should be better, obviously.

As the internal growth gets stronger, yes, from here.

Our next question comes from Adam Klauber – William Blair.

Wholesale clearly had a good quarter. Rates are beginning to go up. Are risks beginning to flow back in that market also?

What's interesting, Adam, as you know, we've talked about the three kinds of risks that exist. You have those that are always in the standard market, those that are always in the E&S market and then you have the tweeners and the tweeners actually tend to tilt towards the E&S market. I would tell you that a lot of that tweener business had gone into standard markets for a period of time and I do believe some of that is starting to come back not – this is not a gusher. I don't want you to get that impression. I'm just saying I think that the E&S marketplace is seeing more and more business opportunities today than ever before. Part of that is driven by this risk appetite. Part of that is also driven by some exposure increases in certain classes of business, i.e. some areas of the country that are seeing some construction improvement. So I would tell you that they're seeing a lot of accounts. I would say that's driven on a tweener class but I don't think it's a gusher yet.

Specialty programs, I think you mentioned it was up 9%. What was driving that?

Proctor was big. Cory, what else?

Yes, Adam, that grew roughly $2.2 million and Proctor was about $1.2 million of that. And then the other $1 million really came from a lot of all the other different programs in $200,000, $300,000 each chunk. So overall programs are all moving well and there's very few that were really negative.

And then finally in acquisitions, I think you mentioned pipeline's pretty good. We've heard from a number of sources that the market's also pretty robust. There are properties out there. Any reason over the next 12 months we would see – I know the acquisition business is lumpy but any reason over the next 12 months we would see like the norm, the deal flow return to what it usually is?

Well, Adam, your guess would be as good as ours on that because, as we've said, it's all about good people and the properties that become available. We're actively looking all the time. We are proactive in that process, as you know. And so we'd like to think that there would be a lot of opportunities for us to consider. But it would be purely a wild ass guess on my part if, in fact, I said it's going to be in, so-called, your definition of normal. But we think it's going to be – we think it looks good.

We'll take our next question from Dan Ferrell – Sterne, Agee.

I just want to come back on the expenses and ask you within the incentive structure there's some parts that you're definitely trying to think about as sort of one year, like the contest, for example. I’m wondering what are the chances that those would be extended or become a more permanent part of the structure? And obviously pricing improves and the economy improves then it's easier to pull that back. But if those positives were to moderate you may face a decision further down the road of choosing between organic growth and margin expansion and I wanted to just try to see how you think about that decision.

Sure, let's make sure that we're clear. This contest is for one year. I've basically said that we want to do things that stimulate growth. In the future we'll try different things and we want to award performance. So we are more focused on margins than it seems to anybody else and we're going to continue to be focused on margins but we're going to grow our business organically. So as I said in October, I'm prepared to do things that will help drive both of those forward, Dan.

We'll move on to our next question from Ron Bobman – Capital Returns.

I had a question. Powell, you hypothesized that if we don't have any sort of active storms that there will be rate pressure, I guess sort of your answer is (early) some point in the near future. And I was wondering, we haven't had significant storms in obviously sort of (Harris) County or in Florida. We've had obviously some tornadoes and hail that have been mostly sort of homeowners events. But for the most part it's been cat free the last few years in the US. It's really been, I think, sort of interest rates that have been maybe the number one thing hammering carriers. So why isn't the sort of table set for rates to just continue even in the absence of a storm?

Rates to go up you mean?

Yes, continued to sort of lap increases that they've been experiencing.

Well, it's interesting. That, Ron, is very logical and rational and I’m not saying it's not correct. But as you know, our industry, the risk bearers, that has not been the case historically. And so if you look at the amount of capital that's been destroyed over the last 20 or 25 years, chasing returns, it's substantial. So I would tell you that I don't think the underwriting marketplace is rational all the time. And so I think that – I've said that the best estimate that I've got is we could see rate pressure for the near to intermediate term which I’m considering, for the sake of this discussion, to be the next 12 to 18 months.

Would you acknowledge though that the rates that have gone up, let's say the last 12 months – maybe they're picking up steam the last thee or six months – that's contrary to carrier practice in the past, and again, logical but contrary to the convention that you always need a cat to create rates or you need companies collapsing?

Well, I think what you've got is there is a – I'm going to call it kind of a – the carriers are in a conundrum. And the conundrum basically is they're looking for returns, the ROEs that would be acceptable to the investment community. That would be investment returns, in terms of on their investments so low, that drives that acceptable combined ratio way down. And what you have now is you have two things that are going on. Work comp is running a temperature across the board. And number two, property losses are little more than you might have alluded to early and let me be specific. Even though we haven't had an event, if you talk to some of the large carriers, I don't call it hurricane – I mean, tornado ally. I call it tornado highway. And so all of a sudden, the losses that have been incurred in Oklahoma and Arkansas and Texas and places like that, are more significant than people realize. Also, I point out there are certain very fine regional carriers that have had events which are not so-called name storms over the last year or two that have just clobbered them in places like the Midwest. And so we've seen some, I think in their vernacular, risk bearer, abnormal events which have impacted their underwriting results. I just don't think, Ron, when you have $550 billion of surplus and you have an industry, the risk bearers, which have done a great job of attracting capital when they need it after events, they've done a great job of destroying that capital in terms of chasing market – or chasing prices down, and the industry has not done a real effective job of returning capital to investors when, in fact, they can't get an appropriate return on that capital. So I’m looking at something that just, to add – this is from AM Best and ISO and III – cumulative underwriting deficit from 1975 through 2011, $479 billion. Underwriting losses in 2011 totaled $36 billion. That's the largest since 2001. So there is a little bit more to that story, I think, the underlying theme than a big event coming into Houston or Miami or Tampa or New Orleans.

(Operator Instructions) We'll take our next question from Brett Huff – Stephens.

One question that I wanted to tie back to the way you used to talk about the pressure that you were seeing in the business, Powell. I think you used to say it was one-third rate and two-thirds exposure in terms of the headwinds you were facing. Am I remembering that right?

You are.

It sounds to me like most of the headwinds that are abating or at least the ones that are abating most and maybe even turning into tailwinds is the one-third of rate. How would you characterize how far through the headwind of exposure units we are? Are we in any two of being done of being done with that headwind and we have yet to really see it fully get better? Or kind of how much more organic growth tailwind can we expect from exposure units as the middle market turns around?

Well, your memory is correct, Brett, number one. It was one-third, two-thirds. Number two, you've heard us talk about that our clients – and I'm going to give you an example, a hypothetical example but not too far off. If you are a manufacturer of widgets and two years ago you did $14 million of sales and last year you did – a year ago you did $12 million and then last year you did $10 million, and so all of a sudden you've secured a contract to provide $2 million of additional widgets, which are not in the original budget, and you are going to do a minimum of $12 million of widget sales in this coming year. What do you tell your insurance agent what your exposures are going to do? I put my money on saying they're going to be flat. That means that they're going to be picked up at audit. And as we've talked about on this call before, if, in fact, that's occurring, there can be a lag from – it would be like 14 to 15 month lag, so you have people that renew their business on July 1st. Next July 1st when they renew, the insurance carrier has 60 days up to 90 days to audit their books and give them, if in fact they have an uptick in their business, an audit for them to pay an additional premium. So we've talked a lot about and, as you well know, that our business is a reflection of the middle market economy. If you go out to dinner in Orlando or here in San Diego or many places in between on a Friday night, you'd say it surely doesn’t look like the economy is in a recession or slowdown. Having said that, if you talk to those same people about their businesses, I don't understand the disconnect because their businesses are still struggling. And so if you – I know you heard in my comments, prepared remarks, that exposure units, generally speaking, are flat, generally flat. And so there is an embedded silver lining in what you're referring to and the embedded silver lining for Brown & Brown is exactly what you're talking about, exposure unit increases on existing clients and new business. So think of it this way, Brett. When you have a retail customer and we generate $10,000 of commissions on that account and it's down from a high of $15,000 four years ago, the incremental dollar back to $15,000, we don't have to add another person. They're not going to send more mail or correspondence to them. They're not going to handle the client differently. It's just going to be incrementally up. And so that's very positive for our organization and specifically what everybody's been asking about, which is the margins.

Our next question comes from Ken Billingsley – BGB Securities.

Just following up on the margin question in general and to you, Cory, you talked about how the margins were impacted by some benefit costs and maybe if you adjust those back out obviously it would be a little bit higher. With Arrowhead, and I understand that this is still a small piece in general of revenue, but Arrowhead margins are much higher. Would you expect that that should be offsetting some of the differences or that the – are the margins performing in line at Arrowhead as expected or are those down a little bit from initial expectations in December?

No, their margins are getting the expected levels. And they are in general on an operating profit a little bit higher. So that's having a marginal impact on it. I think you've got to look more to the normal nature of our retail and other businesses that have a fairly good leverage comp on a go-forward basis.

And would that mean then with the addition of Arrowhead and the better margins that the impact from some of these other items might be a little bit greater than they are on the surface or am I misreading that?

No, I think it's not that much greater. So I don’t think it's not going to have a huge impact on the margins. And there are – there's different parts – Arrowhead margins show up in two areas: in national programs and also the services. In the national program parts, their margins are in the same range that our other programs are. If you look at the – in the service area, their margins are actually a little bit less in American claims management right now. So that would actually be more of a negative there. So you've got a positive and negative in two different areas.

And we have a follow-up question from Meyer Shields – Stifel Nicolaus.

Is there any opportunity – again, I'm in the fourth place housing realm – if (inaudible) starts to diversify from the two carriers that control most of the market now, could you see that reasonably actually accruing to your benefit?

Possibly. That thought has definitely crossed our mind.

And there are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, (Lisa). No further comments and we'll talk to everybody next quarter. Have a great day. Bye-bye.

And that concludes today's teleconference. Thank you for your participation.