Brown & Brown Inc (BRO) 2016 Q2 法說會逐字稿

Good morning everyone and welcome to the Brown & Brown Inc. 2016 second-quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature.

Such statements reflect our current views with respect to future events including those relating to the Company's anticipated financial results for the second quarter of 2016 and are intended to fall within the Safe Harbor provisions of the securities laws. Actual results and events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated and desired or referenced in any forward-looking statement made as a result of a number of factors.

Such factors include the Company's determination as it finalizes its financial results for the second quarter of 2016 that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the Company may not have currently identified or quantified and those risks and uncertainties 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 as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with the call and in the Company's filings with the Securities and Exchange Commission.

We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

With this said, I would now like to turn the conference over to Mr. Powell Brown, President and Chief Executive Officer. Please go ahead.

Good morning, everyone, and thank you for joining us for our second-quarter 2016 earnings call starting on slide four.

For the second quarter, we delivered $446.5 million of revenue growing 6.5% in total and 2.6% organically. We also realized organic growth in each of our four divisions with incremental improvement seen in all divisions compared to Q1. For the quarter, our EBITDAC margins remained steady compared to the prior year.

Our earnings per share for the quarter increased 9.3% over the second quarter of 2015 to $0.47 per share. Andy will provide more detail about our financial performance in a few moments.

During the quarter, we acquired two companies with annual revenues of approximately $34.5 million. I can tell you that we continue to talk with a number of prospects about joining Brown & Brown. However, we continue to see the marketplace is very active with valuations remaining high, even increasing a bit, and seeing some more creative terms and conditions. We remain vigilant in our commitment to find organizations that fit culturally and transactions that make sense financially.

Overall we are pleased with the top and bottom line results for the quarter and it is a good improvement from the first quarter. Our teammates delivered these results through a lot of hard work.

On slide five, we would characterize the second quarter as another quarter that is moderating upward but inconsistency in the middle-market does remain. These inconsistencies can be seen in certain geographies or industries or a combination of both. During the quarter, our customers continued with modest hiring and exposure units are increasing.

As a general comment, we continue to see a tremendous amount of capital in the market and risk bearers want to put it to work with some being more aggressive than others either with their pricing or terms and conditions or both.

Rates for the admitted market remain under pressure and are generally flat to down 5%. The exceptions to this are commercial auto where rates are generally flat to up 5% and then coastal properties and commercial DIC that continues to see rate declines of 10% to 25% which we have experienced for a number of renewal cycles. We expect this to continue for the remainder of this year and the rates in 2017 will depend on the occurrence of a major weather related event or events this hurricane season.

However, we are starting to see some standard carriers begin to draw the line with their underwriting guidelines in coastal property. The continued increase in overall exposure units has helped offset some of this decline but these rate decreases are putting pressure on all of our property business in retail, wholesale and national programs.

Professional liability rates are generally flat except in certain lines. From a retail perspective, it was a good quarter and nice improvement over the first quarter. We continue to see improved new business during the quarter across most geographies and industries versus the prior year and with some offset by the impact of declining property rates with aggressive pricing in certain areas around the country.

Similar to previous quarters, management of healthcare costs remains front and center for our customers as small employers are generally experiencing rate increases of 8% to 12% while larger employers are seeing rates that are generally flat to up slightly. While these rate increases in small employer groups do not have a direct impact on our revenues as many of those carriers have moved to a per employee per month compensation model, it does drive plan design. Companies are focused on how to best manage health and pharmacy costs and have their employees proactively share in managing these costs.

Many of you also might have seen that we have had the departure of two senior leaders during the quarter. Both chose to leave the Company in order to pursue other opportunities. We parted ways as friends and wish them both well in their new endeavors. As with all these changes, it creates new opportunities and during the quarter we promoted four new senior leaders that are taking on broader leadership roles that will help us further grow our business.

We continue to have a lot of interest from our risk bearers in the program businesses to create new programs but we are also experiencing certain programs being impacted by changes in carrier risk appetite. During the quarter we had continued growth and forward momentum across many programs specifically led by our lender place coverage program and right flood to name a few. While we have a number of programs performing well, we have a number of programs that continue to face material headwinds such as our property and auto programs that are being impacted by either declines in pricing or changes in risk bearer appetite or a combination of both.

As you know, carriers continuously evaluate their risk appetite for programs. This will probably have some impact on our growth rate for the national program in the second half of the year. Our goal is to have a diverse offering of national programs that will deliver balanced growth as some programs will perform better than others at certain times.

In our wholesale business, rates are flat to down several points except for cat property brokerage. This line remains under the most consistent pressure and we continue to experience 10% to 25% declines in renewal rates which we have experienced for the last 3+ years.

As I mentioned before, we expect this to continue for the remainder of the year and put downward pressure on organic growth.

The big story though in wholesale this quarter was the acquisition in June of Morstan General Agency located in Manhasset, New York and other locations in New York, New Jersey and Florida. Morstan is primarily a binding authority agency that has been in operation since 1964 and places a wide range of commercial lines, personal lines, employee benefit and life insurance products. It has annual revenues of approximately $34 million. This acquisition positions Brown & Brown as one of the leading wholesale brokers in the Tri-state area. We welcome all of our new teammates and are excited about the potential for growth.

For our services division, the main story is about the claims revenue we realized in the second quarter. Our Social Security Advocacy claims businesses performed well during the quarter and the integration of Social Security Advocacy for the Disabled business which we refer to as SSAD that we acquired in the first quarter of this year continues to go well. We are watching some of our claims processing businesses closely as certain carriers are starting to take claims back in-house due to low volumes and the federal government continues to have some delays in reviewing and approving claims. This is not unusual during times like this but may cause some short-term volatility in the services division revenues. As of now, we do not see any long-term impacts to the growth opportunities.

In summary, we are pleased to see the continued growth in all of our divisions. As we have discussed before, rate impacts our organic growth by one-quarter to one-third with exposure units making up two-thirds to three-quarters of the impact. We view the second quarter as a good quarter both financially and operationally.

Now let me turn it over to Andy to discuss our financial performance in more detail.

Thank you, Powell. Good morning, everybody. Let's look at our financial results and some of the key metrics for the quarter.

I am on slide six, which presents our GAAP reported results. For the second quarter, we delivered 6.5% revenue growth and an organic growth rate of 2.6%. Our income before income taxes grew by 8% and increased by 30 basis points as a percentage of revenues. Our income before income tax growth was impacted by a charge for the change in estimated acquisition earnouts. I will talk more about this in a few minutes.

From a EBITDAC performance perspective which we define as income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnouts, our EBITDAC margin increased 60 basis points to 33.5% when compared to the prior year. Our EBITDAC margin improvement was primarily impacted by a premium tax credit of approximately $2.8 million in our national programs division.

During the quarter, we realized about a 25 basis point impact associated with our technology investment programs which are continuing to gain momentum. We are managing the financial impact of these programs through some strategic purchasing opportunities that are delivering some savings to help fund the program. As a result, for the full-year we are expecting the impact to be about 30 to 40 basis points rather than the 40 to 50 basis point impact we mentioned during our previous calls.

Our net income improved by 8.5% as compared to the prior year and is slightly higher than pretax growth due to a modest decrease in our effective tax rate to 39.3% this quarter versus 39.5% last year. As of now we see 39.4% to 39.6% as a good estimate for the full-year effective tax rate.

Our earnings per share for the quarter increased over the prior year by 9.3%. This increase outpaced revenue growth of 6.5% and was driven by the improvement in EBITDAC margin, our lower outstanding share count versus the prior year of 1.6% due to our share repurchases and the lower effective tax rate.

I'm going to move over to slide seven, I want to point out some of our adjusted income and earnings per share. This adjusted view excludes the impact of the change in estimated earnout payables. These payables represent additional consideration to be paid to acquisitions based upon their performance. Since the adjustments can be lumpy on a quarterly basis, we exclude them from this view to provide another look at our operating performance for the business.

For the quarter, we recognized an incremental $3.6 million of expense versus the prior year. On an adjusted basis, our pretax income grew 11.5%, net income grew by 12.3% and our earnings per share grew by 14% to $0.49.

I'm going to move to slide number eight; I will walk through the keys components of our revenue performance for the quarter.

Our contingent commissions and guaranteed supplemental commissions are up about $4.4 million as compared to the second quarter of last year. The increase in contingents is primarily in national programs related to a program that became eligible for a contingent commission this quarter. We continue to expect contingent commissions to decrease in the second half of the year as they will be impacted by lower written premium by our coastal property programs.

As we have noted before, other revenues do fluctuate on a quarterly basis. In the second quarter of 2015, we received $2.2 million for a legal settlement. In the second quarter of this year, there were no material other income items. We also disposed of businesses or books of business in the past 12 months which represented $2.5 million of revenue in the second quarter of last year.

For the second quarter of this year, we recognized $15.9 million of revenue associated with acquisitions we completed over the last 12 months. We isolate these four categories in order to determine our organic revenue growth which was 2.6% for the quarter.

I'm going to move over to slide number nine. We will look at each of our divisions in a little more detail. We are going to start with retail.

For the first quarter, our retail division delivered 5.3% revenue growth with organic revenue growth of 1.8%. Retail's year-over-year income before income taxes as a percentage of revenues declined by 80 basis points which was driven by the incremental cost associated with the changes in acquisition earnouts that I mentioned earlier.

The EBITDAC margin for the quarter was substantially with the prior year.

Moving to slide number 10, for the quarter, total revenues for our National Programs division increased by 5.5% in total driven by our acquisitions in the last 12 months and grew organically by 2.2%. For the quarter, income before income taxes as a percentage of revenue increased by 700 basis points and our EBITDAC margin increased by 380 basis points.

Our income before income taxes was driven by lower intercompany interest expense charges and then both income before income taxes and EBITDA were impacted by higher contingents, the premium tax credit I mentioned earlier along with continued expense management across all programs.

I'm going to move over to slide number 11, the wholesale division had another good quarter reporting total organic -- reporting total revenue growth of 10.6% driven by the Morstan acquisition and delivered organic revenue growth of 3.9%. Our EBITDAC margins were 32.8% which is a decline of 280 basis points from the prior year. This was driven by the previously noted rate decreases primarily in brokerage and a higher number of transactions across the business. While rates are down, we are seeing in increased number of transactions that results in our need to add incremental resources to handle the volumes.

During the quarter and as Powell mentioned, we acquired Morstan which has margins lower than our average. But over the coming years we are seeking increased productivity and expanded carrier relationships that will enable margin improvement. We expect our margins to be down for at least the next few quarters based upon the above. We will provide more information once we have additional insight on the trajectory of these areas.

Moving over to slide number 12, the services division, we delivered a good quarter with total revenue growth of 8.9% and organic growth of 6.3% for the quarter with the difference being driven by the SSAD acquisition that we completed in the first quarter of this year. The organic growth was driven primarily by increased claims revenue. For the quarter, income before income taxes as a percentage of revenue increased by 220 basis points with about half of the improvement driven by lower intercompany interest charges and the remainder by operating leverage. Our EBITDAC margin increased by 100 basis points for the quarter primarily related to claims activity.

With that let me turn it back over to Powell for closing comments.

Thank you, Andy. Great report. In summary, we continue to remain optimistic about the remainder of the year and the outlook for our Company. We are focused upon attracting and renewing customers, hiring and rewarding great teammates and investing in our business for the long-term. Our technology initiatives are moving forward nicely and we will look forward to these gaining momentum in the future.

As I mentioned earlier, we do expect rates for 2016 to remain under pressure. The significant decline in cat property rates will continue to impact segments of retail, wholesale and national program's growth in the second half of the year.

From a M&A perspective, the activity in valuations are continuing to heat up. We remain focused on finding companies that fit culturally and makes sense financially. As we have said before, we are patient and disciplined operators. We are focused on the long-term and how to best invest our capital that will help us drive long-term shareholder value.

With that I would like to turn it back over to you, Shirlon, so we can open it up to questions.

(Operator Instructions). Elyse Greenspan, Wells Fargo.

Good morning. First question, in terms of the retail organic growth, just wondering if you can kind of talk to your outlook for the balance of the year just do you expect growth to pick up sequentially? Just any kind of view on new business trends from here? And then also just in terms of some of the recent employee departures, have you guys thought about any kind of retention plan in place just to prevent any potential further departures within that retail segment?

First, as you know, we don't give organic growth guidance but as you know, our goal is to continue to improve. We were pleased with the performance this quarter and we've told you a little bit about some of the headwinds that we face relative to rates specifically in cat property being down. Although that is not an enormous part of our business, it still does impact many of our coastal offices in Florida and up the East Coast and into Texas.

That said, relative to departures, the recent departures, we are very focused on keeping all of our teammates and we are looking at all kinds of things in order to maintain the right people on our team. However, as it relates to some retention strategy that would be different than what we have been doing, we are not looking at something outside of the normal. We always review how people are rewarded and we believe that we reward people fairly and for those that take on more responsibility, they will have the opportunity to earn more.

So that is kind of how we have looked at it. I don't want to diminish the fact that we have had two senior leaders leave. I am not diminishing that at all, I am just saying that at the end of the day, sometimes people choose to do other things and we are going to continue to move on focused on our business.

Okay, thank you. Then in terms of the tax spend and the impact on the margins, you mentioned some purchasing savings that went into effect in the quarter. Can you just elaborate on that? Also was the majority of the tax spend, did that impact the retail segment in the quarter?

Good morning, Elyse, it is Andy. On the comment that we made about the strategic purchasing, one of the things that we have been trying to focus upon is how to utilize a number of the purchasing capabilities that we have across the organization through enterprise agreements in order to obtain more favorable pricing in certain areas. We are using some of those statements to help fund the program. We will continue to seek out those opportunities as they arise going forward.

And then the cost for the program itself, most of it is sitting up in corporate and we are trying to isolate it right there, unless there is something specific to a division.

Okay, that makes sense. Then just on capital, you guys, it seems like there was no share repurchase in the quarter. I know you guys have historically looked to repurchase stock under an accelerated program which one is not currently in effect. Can you just comment on views on capital and on share repurchase in your mind how you look for that to come into play for the balance of the year?

Sure, Elyse, as you have heard us say before, we continue to evaluate share repurchase as a potential way in which we would invest our capital. That does not mean we are going to say we are going to purchase X amount of shares or X amount of value on a quarterly basis. We will continue to evaluate it and when we think that is a good investment for us we will do it. But it is conceivable that through the remainder of the year we might not buy any shares back.

So like I said, we look at it as investment an option. It is not something that we are saying we are going to categorically do each and every quarter for set amount. We are going to look at the valuation of the stock, see if it makes sense and we will consider that with the other investment opportunities that are in front of us.

Okay, thank you very much.

Charles Sebaski, BMO Capital Markets.

Good morning. First question is on the retail segment and the earnout adjustment and the pressure that that had on margin. And I guess just conceptually, I guess I think about earnouts increasing because the operations of acquired businesses have been improving and why that would be a contra to margins I guess -- if you could conceptually help me understand that, I would appreciate it.

Good morning, Charles. The way to think about the earnouts and the adjustments that we make, when we acquire a business, we will project out over the applicable earnout period what we believe the performance to be and then based upon how that business is performing either higher or lower than original expectations, we will make true ups to that charge out or to that reserve for payout purposes.

The reasons why what happens is on the outlook for the back end, you could end up with taking either a charge or a credit in one period. But it doesn't mean that there is a direct correlation to the amount of expense with the amount of revenue recorded because again, you are truing up the remaining period.

And then within the EBITDAC, as we described, as we exclude the changes in there to show underlying margin.

Okay, that makes sense. On the national programs and the $2.8 million tax credit, did that just hit the bottom line? Did that flow through topline as well? I guess just I'm trying to understand where that is flowing through the numbers for the national programs?

Just bottom line it was a credits within expenses.

And that had no effect on the overall tax rate for the business?

No, it is not. It is a premium tax so it shows up in other income, it is not an income tax. It is like a sales tax equivalent.

Okay. And then I guess overall and in wholesale, and I guess I don't know if this is from the recent acquisition that you mentioned has got lower margins, but I guess when I think of a wholesale business and organic growth nearly 4% that it would be generally I would think margin accretive as opposed to margin contracting at that level of organic. And then you have got this acquisition which I believe is all going to roll through wholesale going forward that you said is lower margin. So going forward, what is the expectation of wholesale brokerage margins on a run rate? So maybe not next quarter but for 2017, is this new acquisition pretty sizable to the wholesale operation going to have a material contraction on EBITDAC margins next year?

Charles, let's start by saying the impact is really the compression in rates and the number of transactions so you have some additional people that are involved. That is the bigger impact on the margins as opposed to the impact of the new acquisition. So you have heard us say that historically what we try to do is have acquisitions be 20%, 25% minimum type margins when we make that acquisition and over time, we try to increase those over time. But specifically if you look at -- and then you've heard us talk about this -- in the property brokerage area, we have had rates go down for 3+ years in a row, 10% to 25%. That is number one.

Number two, in the binding authority business, we are seeing more and more transactions yet the price on those transactions are down slightly so it means we have additional costs incurred.

So what we said in the commentary was that as we get into it a little bit more and when I say that going forward, we will be able to give you that but today we are not going to give any speculation or guidance on margins for next year.

Okay, but there is two components, I guess I just don't have the timing of the acquisition in my head and the effect that that had on --.

The timing of the acquisition was 6/1. So it was very minimal impact in this quarter. What I'm trying to say is it will be part of the go forward. What I think we want you to think about is this, when you have business particularly where you have it under a lot of pressure in terms of rates that like I said, they are running faster to keep up if they can or fill in the hole and so that is the unique distinction there.

Okay, but nothing in the market environment I guess from what I heard from you guys leads me to think that that is going to abate, right? That the pressure seen in the wholesale brokerage because of how binding authority is doing, more transactions, compressed rate is not something that is changing for the positive at least as the signs say right now. Is that fair?

I think that is a fair statement. I would just say let me back up and say the investment community and my impression is you don't have as much clarity into the wholesale space in terms of all of them that are owned by private firms. But I would tell you that we are number one, very, very pleased with the organic growth that we have had in our business, number one.

Number two, we are very pleased with the margins that our wholesale division delivers. And Tony Strianese and his team have done an exceptional job.

So I know that sounds kind of like interesting but it is a statement because we believe that we are one of the best run wholesale operations out there so it is a relative statement but I believe what you just said is fair.

And then finally just last on the contingents, you mentioned that the uptick this quarter was due to a new national programs business that took effect this quarter but that the second half contingents are likely to be down. Does that mean that the second quarter is kind of a -- this program is going to have a potential contingent every second quarter? I guess the extent of the bump was material and yet we are still talking about the back half being down. I'm just trying to understand how that works.

Let me see if I can't explain on that, Charles. It wasn't a new program. It was an existing program but based upon the performance of the program, they became eligible for a contingent this quarter. Would we be able to say if they will get that in the future? Wouldn't know because again all based upon how the program performs. Our comments about the back end of the year, that was really focused around coastal property programs and that is primarily going to be driven by the fact that there is just lower written premiums so we have every expectation that those programs which they normally earn in the second half of the year, will more than likely be down.

Thank you very much for the answers, guys.

Sarah DeWitt, JPMorgan.

Good morning. I think I heard you mention that program, wholesale and services organic growth will be lower the next few quarters. Can you just elaborate on what is driving that and quantify if you can?

Sure. The answer is specifically what we are referring to was property rates and specifically coastal property rates and commercial DIC rates across the board. So when you hear that, there is an impact in retail, there is a significant impact in wholesale which you are already seeing which you have seen and there is an impact in our programs division specifically with our property related programs.

We also alluded to some -- in a couple of our automobiles related programs that are under a little bit of pressure as well but once again, we don't give organic guidance as you know, Sarah. I know you will appreciate that but what we have said is we are just trying to give you an indication that we continue to face a headwind that I would say that three years particularly in coastal property, some of the pricing that we are seeing surprises us now but that is the way it is and so we just continue to work through it.

And how was that different versus this quarter? Is it just that you have more coastal premium renewing in the second half?

No, no, no. It is not different. It is just the fact that it is -- let's just say three years in a row a 25% decrease on pricing. What I'm saying is there has got to be a point usually where you hit the bottom. And so what I am saying is if you compare it to the quarter last year in 2015, we might have thought that the rate decreases on certain properties would be not as great and so what I'm trying to say is we are just continuing to see more of the same and we are trying to give you a clear path or a clear understanding of what we are seeing and how that impacts our business.

Okay, great. Thank you. And then just on the contingent commissions, can you quantify how much they will be down in the second half? I think in the past you have given guidance on that line item.

No, we wouldn't be able to give that exactly because there is calculations that need to be done by the carriers. All indications that they will be down but we do not know approximately how much.

Okay, great. Thank you.

Quentin McMillan, KBW.

Good morning. Thanks very much, guys. Could you just help us -- there was an increase in the claims activity in the services segment. How much did that benefit organic growth by in the quarter in the services segment kind of a basis point impact that you guys have? And additionally in the first quarter you had sort of highlighted that this was going to be up from the Texas claims activity. Is there anything that you are seeing so far in the back half of the second quarter or early in the third quarter that might indicate that services would be sort of up or above or below normal in the third quarter?

The benefit for the second quarter was primarily related to claims. One of the things that we have talked about on previous calls is that we do look at our claims businesses over a longer-term horizon only for the fact that the claims have kind of come back and forth. I think as we had talked about previously what we were seeing during the end of the first quarter and into the second quarter is that the volumes were not unusual though. What the volumes really represented was more kind of in line with our 10-year average. So it is not like we had this significant pop all of a sudden. There was a lot of noise in the press and a lot of coverage but the volumes were fairly consistent with the volumes that we saw last year.

Then as it relates to outlooks no, nothing that we see right now we would be able to give any guidance on.

Okay, so just to close that thought, the 1-2 that you had in the fourth quarter and the first quarter in the organic was really more the outlier on the low side and the 7 is more of a normal course of business in terms of claims activity. Is that what you are kind of saying?

Yes, the Q1 was definitely down, there is very, very little claim activity because of almost no storms in the back end of the fourth quarter during the first quarter. And then second quarter maybe more on an average. I don't know that I would call it a standard level but --.

In the first quarter as well, you guys had mentioned just an overall sort of retention like issue where you were losing some contracts and some business that was a little bit maybe concerning to you at the time. Can you just talk about whether that trend has continued at all, whether that has reversed or what has happened there?

We are always focused on retaining our existing clients and as I said in the first quarter, I don't remember exactly how I said it, but I was pleased with the new business that we had written but I thought we had a little more lost business than we would have liked. That was in the first quarter. This quarter we have done better and I think that is reflected in our organic growth which we are pleased with and we are making progress and so it is a very competitive marketplace out there. And so as you know many times the reason you lose business, there is a lot of reasons why you lose business, but most of the time it is loss of relationship with the buyer, both the economic buyer and/or the user buyer.

Having said that in a market like this where you can see carriers do some really squirrely things in terms of pricing, sometimes you just see crazy things, they do pricing that just doesn't make sense where they blow something out of the water and we don't know how long that is going to last or if it is real or whatever the case may be. But sometimes you lose a little bit of business like that.

So we are continuing to work through it and I would tell you that I didn't see some trend in Q2 that would be similar to Q1. I think it was just periodically things like that happen.

So more positive and nothing -- it sort of has reversed itself. Okay, great. The last question just in terms of the IT spending -- thanks for giving us the update in terms of the impact, the 30 to 40 basis points that you spoke about versus the 40 to 50 basis points of drag previously in 2016. But you also mentioned in there, there was about a 25 basis point impact I believe from the technology investments in the second quarter. Can you just talk about what the overall impact has been in the first quarter?

And then obviously related to how much impact there might be in the back half because it feels like we have done a little bit better in the first quarter so maybe there will be a little bit higher impact in the back half?

Yes, our comments during the Q1 earnings release is that there was not a material impact during Q1. The 25 basis points was about the impact that we had in the second quarter. But again, that was benefited a little bit by our strategic purchasing and then utilized the 30 to 40 for a full-year on it, Quentin. So again if it continues to grow the way that it is and our momentum is picking up that is probably pretty good range for us right now which will mean arithmetically more expense in the back end of the year.

Great. Thanks very much, guys.

Josh Shanker, Deutsche Bank.

Thank you. Just a quick numbers question first. How much did you guys spend on acquisitions for the quarter?

A little over $78 million, Josh.

Thank you. That is for my notes. And so I know you are not going to give guidance on the quarter but I'm trying to understand all the moving pieces. With the IT spend, where does it show up and in which segments you really feel that in the margin?

Right now it is primarily in our corporate segment but depending upon the individual components of the program over time, Josh, some of it will show up in the individuals segments. The one primarily that it may show up in will be retail. And again if there is a material impact in any of those, we will talk to you guys about it.

And so I guess overall you are pleased and I mean I am surprised and happy about it but margins have been better than you thought. Can you talk about -- skipping wholesale for a second, what has been improving the margin trend I guess in retail and national programs?

Well, I just think that we had a good quarter. You heard us say that we wrote a lot of new business. I believe our retention was appropriate, it can always be better. In National Programs, we continue to work through challenges and some of our programs as we have said are doing really well and some of them are under pressure, i.e., property, both cat and/or commercial DIC. And so I just think it was a good quarter overall. We just executed well.

So you wouldn't say you have reached a new plateau of efficiency or anything like that, some quarters will be better than others I guess is where we are at right now?

That is correct.

Josh, make sure you take into consideration our comments about the drivers of margin in National Programs because those do have -- they did benefit the margins for the quarter.

That makes sense. Can you give a little color on this revenues per transaction sort of relationship in wholesale? I'm trying to understand how that works exactly and the extent to which is that a permanent feature going forward of the way the wholesale business will operate and therefore margin erosion over the long-term?

So this is a hypothetical example. So in binding authority business, the average premium size is around $3000. So let's say that generates $300 of commission and in a market like this, there is lots of marketing of individual accounts so if the underwriter normally has -- I'm going to pull a number out of the air -- 100 commissions in a week hypothetically and in light of the changes in the rates and/or terms and conditions that 100 goes to 150 for the week, they have to process 150. So the question is do they have to have another person not only help that production underwriter but let's say two or three other production underwriters. That is example number one.

Example number two would be if you have accounts that generate X amount of commission whatever that is and this is in brokerage now and all of a sudden your rates are down 25% so your commissions are down 25% and you are actively trying to fill that hole in and so are you the broker out more on the road and you have to have somebody help back at the office depending on how you have it structured in the past or not?

Like I said, the wholesale business as you know usually has higher extremes on both ends. When the market hardens, typically it goes up quicker, higher, faster and when the market slows, it typically in the slowest parts it goes down the quickest and it has the most drag. Having said that, it has been our best-performing organic growth business over the last several years.

It is hard other than to speculate on how that is going to play out because as we continue to see the market change, it impacts the number of submissions that we get either in binding authority or brokerage or both.

And one final question given the -- this issue of you needing new heads, we talked I think last year about a significant desire on your part to hire from college campuses and create new young teammates. Where are we in that training program and when would you expect these new teammates to be revenue accretive?

Okay. So Josh, I know that you and the other people on the call would like to have a linear map which talks about investments in people and it doesn't really work like that. What I mean by that is you could hire a young person or new person I wouldn't even say young; it could be somebody that has been in the industry somewhere else or in a different industry. And come in and depending on the job that they come into, they may be able to impact revenue sooner than in other segments of the business.

Or we may have hired somebody in in a production role and as they get in, there is another opportunity presented to them and we need them in a marketing or a service or a placement type role. So what I would say is I think it is going to be very difficult for you -- for us to give you a clear linear path on, okay, if we hired this person right out of college, how many years does it take at their salary in order to be accretive. And then at what point does that really start kicking in.

It is different with different people. That is why it has been difficult to describe on the earnings calls in the past, because at the end of the day our greatest asset as you know, we are a people business. So our people go home every night and then come back to the office every day to take care of our clients and solicit new ones.

So we are going to continue to be opportunistic in terms of our hires. We have done that. We have hired people, you have heard us talk about in Beecher and around the system, not just Beecher, but that are seasoned people that we expect to come in and have a revenue impact more quickly. And then we hire people right out of college where we not only have to teach them insurance, but we teach them about life as you can appreciate.

So that is kind of the way we view it, and it is going to be hard for us to say, okay, we are not going to say we hired 100 people and this is where they are. The answer is we understand about recruiting and developing talent. It is not a science, it is an art, and some people develop quicker or not as quickly as others.

Okay. I will take that. Good luck in the next quarter. Thank you.

Thank you.

Greg Peters, Raymond James.

Good morning and thank you for hosting the call. I just wanted to circle back on the technology investment, and sort of I'm looking for an update on what this means to Brown & Brown. And I guess when I think about it, I was struck by your hypothetical example in wholesale where you have gone from 100 submissions to 150 submissions, so there is an increased expenses. It seems like there is something to be said for technology playing a role to help improve efficiencies there.

So I'm just looking for some additional color on how this rollout of the technology is improving the operations of your company.

When we talked about the areas in which we are going to invest in technology as we talk about this next phase which is around optimization and the number of areas that we were looking at were around financial reporting and analysis systems, we are looking at core infrastructure and then we were looking at updates to our retail agency management systems. Specifically on wholesale is that business has a lot of automation already today and I think what Powell was really just trying to tell you, he wasn't saying that they actually went from 100 to 150. He was just trying to give some perspective that more and more submissions come in even while there is a lot of automation inside of there either interaction between ourselves and the retailer or back to the risk bearer, there is a point where just you need a number of hands on the pump just to be able to get all of the volume through because you still have to look at it.

We are always looking wherever we can to continue to drive automation through the business.

And Andy, how are you measuring the return on investment for these projects in the context of all the money that is being spent?

So our previous commentary on this one is we said that we would spend around $30 million to $40 million and the payback would be somewhere in the range of five to six years. We know exactly where the savings are going to come from and so we are quite comfortable with that.

Okay. And Powell, it seems every quarter during your remarks you talk about upward pressure on M&A multiples and in this quarter, you mentioned it again and then you talked about or you highlighted there is some different type of structures that are popping up on top of that. Where does this end? What do you mean by different types of structures? How high are the multiples and in the context of what you are continually telling us about market conditions, should we expect less M&A going forward?

Greg, as you know, it is interesting what people or who says how much they paid or how much they got in terms of a multiple. I always say a multiple of what? So if we are talking about a multiple of 2018 pro forma earnings, that is much different than a trailing 12 or a true vetted pro forma over the last 12 months or the forward-looking 12 months.

So what I would say is as you know, there continues to be a lot of activity in the PE space and there continues to be more money it seems to other flood into it or they want to put more money to work. And so like I said, remember, we just sell and service insurance at Brown & Brown and those guys are doing their financial modeling relative to shorter-term things that include a flip with a terminal value. What we look at is does it make sense financially? And the answer is a number of the ones that we have seen don't make sense financially.

And when I refer to terms and conditions, that could mean that guaranteed amounts down or up or kickers or unusual things that are just creative, I think you should just take it as saying the minimums continue to be pushed up and the amount earned, all of these different things and so having said that, we continue to evaluate all of our investment options.

As you know, we talked about one, hiring new teammates or additional teammates. Two, it could be acquisitions which we did two last quarter of which one was Morstan. Or three, the potential of returning it to shareholders in some form or fashion. And we have said that we continue to evaluate that, we obviously are paying a dividend. Our dividend again as of August I believe is 17. Is that right, Andy? Yes, sorry. But we will continue to evaluate share repurchases.

I will tell you, Greg, what I would say is this, I think that evaluations are going to continue to remain high for the near term, the near to intermediate term -- let's just make it easy, let's say the next 18 months. I don't if I can speculate out further than that relative to how those multiples will continue after that. But I would say that I don't believe that it can continue like this forever.

So we are continuing to operate in an environment that maybe we don't do as many acquisitions, that does not mean we don't want to, that means that they've got to make sense financially and fit culturally. Cultural fit is the most important thing. You have heard me say that over and over and over again. And so I am really pleased that the acquisitions that have joined our team this year not only this quarter, this year and over the last several years, because I think we continue to have lots of high-quality people and additional capabilities join the team. We are not going to do something stupid.

I get a kick out of the fact that I made a comment several quarters ago that lit up Andy's phone which I said that in order to get to $2 billion of revenue we are going to have to I think I said hire or acquire 2500 people and everybody on the call got nervous that we were going to go out and just hire all of these people.

Well, we are at 8474 people as of 6/30 and we are pleased with our quarter and if we wanted to be our intermediate goal of $2 billion of revenue we could have been there two years ago but it wouldn't have made sense. So we are not going to do that.

So we are not in it for growth's sake, we are in it for growth and profitability. And like I said, it is really important we walk away from deals that don't make sense. We are not deal jockeys. That is an important distinction because we are going to do this forever.

Got it. Thanks for the color and congratulations on the quarter.

Ken Billingsley, Compass Point.

Good morning. I just want to follow up and get some clarification on some comments you made. One, on the organic growth. I know you've talked about the different segments and some volumes but I just wanted to get some maybe a little clarity. The majority of the organic growth, was it just new customers, were you expanding any of the products, expanding the business that you are writing with your existing customers? I am sure it is a mix of everything but what really drove the organic growth primarily?

You are not going to like this question but it is all of the above. That means we number one start with do we retain our existing clients and in retaining our existing clients, our clients can actually shrink if their business has gone down or they can go up. So that is going to start the baseline. Then the question is what about our retention? We talked a little bit about that and retaining those existing customers. And then new business could be defined as new new where we didn't have the customer before or a new line of business on an existing client where let's say we wrote the employee benefits and then we wrote the property and casualty or vice versa or whatever the case may be.

So it is a combination of everyone executing well in the quarter. There is not some magic thing that we just started doing this quarter versus another quarter. It is just we executed well in Q2.

With rates being down in general, are your customers buying more coverage, are they continuing to buy more coverage than maybe they did two or three years ago because the prices are attractive or are they looking to increase coverage in other areas that maybe didn't have?

I think it could be either with a customer. But let me back up and clarify something. The way we look at it is we are in the solutions business. A solution might be transferring it to a risk bearer. It might be self insuring it or identifying an exposure that you don't know that you may not have realized that you had before when we weren't working with you. We acknowledged something like a contingent business interruption exposure or higher non-owned motor auto exposure or something out there that maybe someone had never talk to you about or maybe you just never thought of it. But that is our job.

So having said that, we try to bring solutions that involve transfer of risk but that doesn't mean all of our clients think that would be the best decision to do so. We have those conversations with them.

So every client is different. I don't want to make a broad general statement that says, okay, every contractor is buying more umbrella coverage or everybody in the wholesale food business is buying employment practices, liability coverage now or cyber liability. I would tell you that we quote a lot of cyber liability but the uptake is not nearly as high as I would think it should be.

Having said that, it is not dissimilar to what it was in employment practices liability coverage 10 years ago. We quoted a lot of it and there wasn't a lot of uptake, then there started to be more claims and it started to register and then more and more people started to buy it. I think that cyber is the same exact scenario and as you have these high profile instances where businesses are violated if you want to call it that, then all of a sudden other people say well maybe that can happen to us.

Okay. And on the earnout, the earnout was just a little bit higher this quarter and obviously I would expect that you believe the business is doing better than you had initially expected and there is going to be a payout. What was, what conditions changed though maybe from last quarter to this quarter where you identified that the conditions had changed and you were going to have a higher payout on those prior acquisitions?

Okay, so as you know the acquisition earnout estimation or from a GAAP standpoint, we have to give our best estimate on a quarterly basis and so what can happen is a business can write a bunch of new business that would come into the pipe so that doesn't mean necessarily all of it is booked in that quarter but we have more clarity with certainty that we believe that is going to come either in this quarter or quarters in the future.

And so this is one of those things that Andy and I talk about in the sense that it has a tendency to cloud -- I wouldn't say cloud that is maybe strong -- it has an impact on how people view the earnings and it is a non-cash charge.

So having said that, it is interesting because the fact that our businesses are doing better is a good thing and so we don't want to have these adjustments but we would much rather have that adjustment than the opposite and even though the opposite would actually non-cash charge again, benefit earnings, it is still the business isn't performing as well in some instances as we anticipated and sometimes we have that. That is the thing that is kind of unusual because GAAP, the SEC is actually asking us to estimate the ultimate value of a business when we don't know how much new business they are going to write and how their retention will fully flush out over the earnout period.

And I agree, I view this as a positive long-term but it sounds like they are writing more business than you expected or is it on what you purchased or is it an increase in them adding on ancillary products?

So Ken, this is what I would call a high-quality problem. That means that they are doing a great job at growing their business. So it is a combination of existing clients maybe growing, they may be purchasing more lines of coverage and we are writing a bunch of new business. Remember in some of those businesses in this particular instance this quarter, those businesses have long sales cycles and many of them are larger accounts so you have better transparency in that at a set time. Hey, we wrote days four accounts, these are going to come in over the next 12 months, that is going to impact our acquisition which is good. We want the people that joined our team to hit the maximum. They just have to perform and that is a good thing for all of us.

We spend a lot of time up front trying to do a lot of work to determine where we think the business is going to turn out. You are not allowed by GAAP to book the maximum nor can you book the minimum. You've got to book your best estimate and so what we do over the earn out period is we are monitoring how they are performing on a quarterly basis and then once we see a trend that says you know what, I think our assumptions need to be adjusted up and down, then we will do it. We don't go in every quarter and make adjustments. Otherwise we would have a whipsaw effect at times so we monitor these pretty closely.

Sure. But again, it is more of a volume as opposed to maybe a margin. It is not like the margin efficiency changed dramatically from when you purchased them, it is more about volume of business?

It could but I don't want to give you the impression that is the reason. It could be either or both. Most times it is both.

Thanks for taking my question.

Ryan Byrnes, Janney.

Thanks for taking my questions, guys. Obviously you guys noted that you are surprised by the pricing environment for coastal property right now. Just wanted to maybe take us back to maybe historical, where are these rates currently as compared to where you guys have seen in the past? Are we in the mid to late 90s pre-Andrew days? I just want to get an idea of where your book rates currently are.

Okay, so what I would tell you is we are starting to see rates in the pre-hurricane Andrew levels. That would be 1992 for those that may not remember the exact year. But remember, you have had enormous -- I don't want to say, Ryan, that we are surprised like all of a sudden we are just surprised. I think we have continued to sort of scratch our head at the continued rate decrease or pressure. So it is not like second quarter we opened woke up one day and said, whoa, we are surprised. It wasn't that kind of deal.

It has been if you look at it for the last three years and I'm just using Southeast Florida because I live here in Florida and know that area well. You look at these very nice high-rise condominiums in Dade, Broward, and Palm Beach County and all of a sudden the rates have come down let's just say 20%, 25%. Those are big cuts. Now that is great for our customers but it is hard to fill in the hole from an organic standpoint when you have that much pressure in an office, like an office specific. I am not talking about the entire business, I'm talking about in the office or in a region or in a division depending on how much is connected to that coastal property.

Great. And then can you just remind us how those rates responded after Andrew? Again I realize that we are in a completely different environment with liquidity these days but I just want to get a precedent for what happened to rates after Andrew for your I guess coastal property books?

Okay, so let me back up. I actually joined Brown & Brown in July of 1995. I worked for an insurance company then and so I saw rates go up in admitted markets as much as were permissible by rate filings. However, here is what I would say, remember in Hurricane Andrew, it was much different because the modeling for insurance companies was not nearly as sophisticated, it was more like a map and there would be people in Kansas City writing hotels in Miami Beach and the people in Florida with the same insurance company didn't even know that they were writing the hotel in Miami Beach. So there was these aggregation of exposure units that was substantial which most insurance standard carriers realized that had been it direct hit in Hurricane Andrew on Miami Beach that we might have had some very significantly impaired insurance company because they didn't realize how much they had.

I think a better example would be to go to 2001 and 2002 and 2003 so you had a constricting in the property market, you had post 9/11 events, you had lots of other things and rates started going up and up and up and up. The amount, I don't think you can say this is how much they are going to go up in the event of a loss because the size of the loss is going to be a significant impact, the number and the losses by individual carrier will impact it and it depends on if how opportunistic certain carriers will feel on the way in. If the marketplace is bearing -- I am making this up -- 25% increase and all of a sudden you have a capital provider which is not taking a bunch of losses and maybe didn't participate in that segment and said that at this level we might do that, they might come in write it at 15%.

So there is not going to be a linear relationship. I can just tell you when you have a big event that goes into Florida which is not a question of if, it is a question when we have another storm hit Florida, there will be upward pressure on rates. The size and the magnitude of the loss will dictate the rate pressure. If you had a $40 billion loss, then maybe the pressure is not nearly as much if it is $100 billion.

And it is pure speculation on mine, Ryan. I wish I could give you a little more color. But look, here is what I want you to know. I have been in Florida for 48 years and I can tell that hurricanes happen usually every 10 to 14 years. We are 11 years in since it struck land the last time. So I could be wrong but since I came on this earth, I can remember the first storm that was in the late 70s and so I can remember each one distinctly and so we don't wish that to happen but it is going to happen somewhere sometime.

No, great. I really appreciate all that color. If I could ask one more just kind of numbers-based question, obviously you kind of lowered the tech spending impact on margins for 2016 but is there any change to 2017 or is that range I think of 35 to 60 basis points still there?

That is still a good range for right now. If information changes or the outlook changes we will let everybody know. That is good for right now.

Okay, great. Thanks.

Kai Pan, Morgan Stanley.

Good morning and thank you for fitting me in. First just following up on the recent departure, how long is there a noncompete or nonsolicitation period?

As you know, we have traditional covenants with people that are on our team which are typically two years and as it relates to certain covenants, there were in improved or enhanced covenants which will last for a year as well.

Okay, thanks. And then on the property -- like coastal property rates, I remember the last few quarters you are talking about down 15 to 25, now you say 10 to 25. Are we seeing any early signs of stabilization or am I reading too much into it?

You are reading too much into it.

Okay, thanks. Lastly on margin, so if you take out the $2.8 million of premium tax refund, the EBITDAC margin roughly stable year-over-year but you have sort of benefit of probably $4.4 million self contingent commission. That is roughly about 100 basis points of margin. So I just wonder is that the right way to think about it?

And then secondly, so you talk about 30 to 40 basis impact from the IT investments. I just wonder is that the overall margin impact or just IT, not including anything like you hiring additional brokers or the other impacts?

So I'm going to let Andy touch on that in a moment but I do want to make one comment because this is my favorite, I am being facetious. 141(R), you didn't mention that, Kai. That is the change in acquisition earnout payable. So remember there are some offsets to some of the things that you raise. That is number one.

Number two, as it relates to and we haven't and we are not going to by the way, we haven't broken out the cost of our strategic hires or opportunistic hires or whatever the case may be. The answer is we just make those investments because when we have the right leaders in the right places and they feel like they have the right opportunity, we are going to back them.

So the answer is it is not -- I know you want something that you can put into your spreadsheet and unfortunately it is not that simple. If we find four people that we feel like we've got to have them and they are not so called in the budget, we just make it work because at the end of the day long-term, those capabilities and those people if we feel that strongly about them will make us a better organization.

Andy, do you want to respond to his comment on the other stuff?

Good morning. Let me touch on a couple of a points there. Keep in mind I made mention about the other income last year. While we didn't call that out in the quarter, just always kind of when you are going through, look at those line items because those movements do have impacts. So that is part of back and forth.

And then on the technology, when we said 30 to 45 basis points, that is what we would estimate right now on a full-year impact to our EBITDAC margins and it may move around a little bit, may be impacted by how well we do on some of our more strategic purchasing initiatives, etc.

That is just related to the net IT investment impact?

Yes, only IT, not any investments and that is what we talked about back when we did the year-end results, those were the range is that we had given before.

Great. Thank you so much for the answers.

Mark Hughes, SunTrust.

Thank you. Good morning. The strategic purchasing, it has always been my impression that you have a little bit more of a decentralized model. Is this something that you can repeat in future quarters, is this something there is going to be more of or conversely was this kind of a one quarter benefit? Would we see a similar benefit in coming quarters?

Let me clarify. When we are doing our definition of strategic purchasing does not mean that we are doing centralized purchasing. We are not going away from our decentralized model. That is core to how we operate but what we're trying to be able to do is leverage our purchasing power as an organization for the benefit of all of our individual offices. They still determine what they buy and when they want to buy it but we try to get the full power of Brown & Brown. Hopefully those will all continue as we keep going forward. We have been working on them for a while and we will seek more opportunities in the future.

Okay. And then in the claims area, I think you had suggested you are getting some good new clients but maybe some of the volume from existing clients was slow and they are bringing some more that in-house. Could you kind of clarify what is happening there? Is it just a lower underlying level of claims because of the better economy perhaps?

Yes, that is the right way to think about it, Mark. Yes. So the answer is think about a standard insurance company who has a large infrastructure that is already built in their claims management system and in some instances, we are outsourcing on their behalf and if their claims activity in house is down then they may want to bring some of that back in house until and at which time the claims activity kind of bumps back up to maybe a normal level for them.

Right, so new business is sort of offsetting that other underlying impact? Is that the right way to think about it?

I think that is the right way to think about it.

Thank you.

Quentin McMillan, KBW.

Sorry to have a follow-up. Can you guys just tell us what the CapEx number was in the quarter?

I apologize, I don't have that right here in front of me, Quentin. We will circle back and then I tell say what the number was. Sorry, I just don't have it right here in front of me.

No problem. I will shoot you a quick email. I just wanted to follow up on that. Thanks very much.

Let me just clarify for full-year purposes though, we have been saying somewhere around $25 million and that kind of is our average over time, $20 million to $25 million so that is a good full-year estimate.

Perfect. Thanks, guys.

Mr. Powell and Mr. Watts, we have no further questions in the queue at this time. I will turn the conference back over to you for closing remarks.

Thank you very much and thank you all very much. We look forward to talking to you next quarter and have a wonderful day. Goodbye.

That does conclude today's conference. Thank you for your participation. You may now disconnect.