Brown & Brown Inc (BRO) 2013 Q4 法說會逐字稿

Good day and welcome to the Brown and Brown fourth-quarter earnings conference call. Today's conference is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties actual, results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the Company with the Securities and Exchange Commission.

Many of the factors that will determine the Company's future results are beyond the ability of Management to control or predict. Listeners should not place undue reliance on forward-looking statements which reflect Management views only as of the date hereof. The Company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time, I would like to turn the conference over to Mr. Powell Brown. Please go ahead, sir.

Thank you, Lynette. Good morning, everybody.

We grew 2.2% in the quarter, and Cory will get into the information about the impact of Colonial Claims on Q4. As you know, Colonial was very busy in Q4 of 2012 and Q1 of 2013. Excluding their results, our internal growth would be 4.5%. National Programs and Wholesale both grew at or above 10% organically, and without earn-out liabilities, we earned $0.33 for Q4 and $1.50 for the year.

So with that, I 'd like to turn it over to Cory for our financial results.

Thanks, Powell.

Our net income for the fourth quarter 2013 of $47.2 million was up 8.3% over last year's fourth quarter. Correspondingly, our net income per share for the quarter was $0.31, or up 6.9% over the $0.29 in the fourth quarter of 2012. However, more importantly, when you exclude the line item change in estimated acquisition earn-out payables, our net income per share for the fourth quarter of 2013 was $0.33, versus last year's $0.30, and that's a 10% increase.

From a revenue standpoint, our commissions and fees for the quarter increased 13%, to $339.4 million, and that's up from the $300.3 million in last year's fourth quarter. As we do the, press release has a table that shows our total growth rates and our internal growth rates from our core commissions and fees, which excludes profit-sharing contingent commissions and the guaranteed supplemental commissions that we have.

For the fourth quarter, we did receive $4.4 million of profit-sharing contingent commission, which was in line with what we thought we'd have in the third-quarter conference call. That $4.4 million represented a net decrease, though, of $1.9 million from the $6.3 million of contingencies that we received in last year's fourth quarter. The majority of this net decrease came from our FIU operation.

Additionally we accrued $1.9 million of guaranteed supplemental commissions in the fourth quarter 2013, and that was very similar to the same amount in the fourth quarter of 2012. If you refer to the internal growth schedule, we had a positive internal growth rate of 2.2%; however, it was 4.5% when you exclude the impact of Colonial Claims, and we'll get into that in a minute.

For the fourth quarter of 2013, our total core commissions and fees increased 14.9%, or $43.2 million of net additional core commissions and fees. However, within that net number was $36.7 million of acquired revenues. That means we had $6.5 million more commissions and fees on a same-store sales basis.

The biggest number in this internal growth schedule that jumps out is the negative growth rate of 17.8% in the Service division. That amounts to $6.1 million, and that was due exclusively to our flood claims operation, Colonial Claims. As we pointed out in the fourth quarter conference call, we would have this big downdraft, and it was due to the prior-year revenues from Superstorm Sandy claims.

Colonial Claims revenues in the fourth quarter of 2012 was $7.4 million as a result of those Superstorm Sandy claims. In the fourth quarter of this year, our revenues [weren't] at a normal run rate of $1.3 million. Thus, that's a $6.1-million decline. So if you exclude that $6.1 million, our total organic growth dollars would increase from $6.5 million to $12.6, an internal growth rate of 4.5% for the quarter on a consolidated basis.

Our Wholesale Brokerage division continued to have a strong new growth with $5.9 million of new business, and that translated into a 14.7% internal growth rate for the fourth quarter. Our National Program division had a strong quarterly internal growth rate of 9.9%, and that represents $6.3 million of net new dollars. Out of that, only $339,000 of the $6.3 million related to Arrowhead's automobile aftermarket and the Everest non-standard auto. $5.9 million of that growth really came from our Proctors, ICG, and our Arrowhead commercial lines earthquake operation.

When you add up the internal growth rates of all four quarters of 2013, you'll see that three out of four of our divisions, National Programs, Wholesale Brokerage, and Services, had annual internal growth rates of their core commissions and fees between 12% and 14% each. These three amounts added up to about $66.7 million of net growth dollars. Of the $66.7 million of growth dollars in these three divisions, $25.1 million came from the Arrowhead's automobile aftermarket and the Everest non-standard operations. $13 million of that increase came from our Colonial Claims operation.

I think it's important to note that when you exclude the impact of Colonial Claims as well as the Arrowhead automobile aftermarket and the non-standard, our consolidated internal revenue growth rate improved sequentially each quarter during 2013. So when you exclude these three operations, the growth rate in the first quarter would have been 1.5%. In the second quarter, it improved to 3.5%.

In the third quarter, our consolidated growth rate moved to 4.1%. And then our fourth quarter, without those three operations, we are at 4.4%.

So you can see that it grew incrementally each quarter, and I think that's important to note. If you look at the whole year without these three operations, the internal growth rate was a combined 3.4%.

As you attempt to project the growth rates for 2014, I think it's important, also, to realize that in 2013, Colonial Claims had $23.7 million of core commissions and fees, mainly due to the Superstorm Sandy revenues. However, their 2014 budgeted core commissions and fees, only $6.5 million, and that's a $17.3 million differential. Out of that $17.3 million differential, $16.2 million of that will come in the first quarter.

And as you know, with that incremental growth dollars, those are very high margins for Colonial Claims, and so that by itself, on the $16.2 million differential in the first quarter, that will amount to over $0.045 cents of earnings per share for our Company. And so obviously, those -- that $0.045 will not be there in the first quarter of 2014. So in summary, excluding the impact of Colonial Claims, we have budgeted a consolidated internal revenue growth for the entire Company for 2014 in excess of 4%.

So moving on to the other line items on our income statement, our investment income decreased by approximately $100,000, and that's just due to lower invested assets this year versus last year. Our other income increased by one $1.4 million, just due to some sales books of business and some settlements that we received. Looking at our pretax margins, for the fourth quarter, it was 22.3%, compared to our pretax margin of 22.9% in the fourth quarter of 2012.

Looking at the employee compensation and benefit, as a percentage of total revenue, it was 52.3% in the current fourth quarter, which was the same cost factor in the fourth quarter of 2012. The total dollar increase of our employee compensation and benefits was approximately $21 million. Of that $21 million, $16 million was attributable to just the stand-alone new acquisitions since last year.

Therefore, excluding the impact of these stand-alone acquisitions, we had effectively $5 million of additional compensation on a semi-same-store sales basis. Of this increase, $1.4 million was due to increase in salaries of new producers. $1.6 million was due to increase salaries of just normal staff teammates. Another $300,000 was due to increased commission expenses paid to our commissioned producers. And $2 million was a result of increased cost for our self-funded healthcare coverage.

Our non-cash stock-based compensation cost was up on a net basis $3.2 million for the quarter. And that is due mainly to the new grants that we issued under our stock incentive plan grants in July of 2013, which we discussed significantly in the third-quarter conference call. In the current quarter, our other operating expenses as a percentage of total revenues increased 20 basis points to 15.1%, from a 14.9% ratio to total revenues in the fourth quarter of 2012.

From a dollar perspective, the other operating expenses increased by $6.8 million, or 15.2%, in the fourth quarter 2013 over 2012. However, our new stand-alone acquisitions added about $5.8 million of net new cost for the quarter, and therefore, our existing same-store offices had a net increase in their expenses by little over $1 million. This increase related primarily to about $900,000 of increased cost in our legal claims expense and our E&O reserve.

$400,000 was an increase in some bad debt expense. $400,000 was also an increase in our data processing software licensing fees. And there was about $200,000 increase in just employee meetings. Now, partially offsetting these increases, there was about a $500,000 reduction in our consulting inspection fees, and then we had also another $500,000 reduction in our telephone cost for the quarter.

Amortization and depreciation as it was up about $2.3 million as expected from last year's fourth quarter, just due to new acquisitions. Our interest expense increased about $300,000 over the prior years, and that was a result of our increased borrowings that we took out on additional the $60 million from the Beecher Carlson acquisition. Our line item referred to as change in estimated acquisition earn-out payables was a debit, or an expense, of $1.02 million, versus a similar debit or expense last year up $1.552 million, and therefore, our GAAP income decreased by a $0.5 million from that line item.

Our effective tax rate for the entire year of 2013 was 39.3%, but since the final true up for our annual tax rate falls in the fourth quarter, our quarterly tax rate ended up being 38.2%. But looking into 2014, we still think that 39.6% is probably a good number to use on a projected go-forward basis.

Now that we've reviewed each of line items in the quarterly income statement, I'd like to step back and just highlight some of the results of our pretax earnings when you exclude amortization, depreciation, interest and our change in estimated acquisition earn-out payables. Some of you referred to that as EBITDA. Additionally, since our non-cash stock-based compensation essentially doubled based on the grants that we issued in July 2013, and the fact that we've talked about the reasons for that grants and that we've talked about in our third-quarter conference, call so you most of you know that that cost is increased, and most of investors are aware of the nature of those increases.

I'd also for this purpose like to exclude that from these costs and doing an EBITDA-type comparison. So another way of looking at it, it's really total revenues less our employee compensation cost and benefits and just the other operating expenses, which are really the more controllable ongoing true cost of our detailed divisional operations.

If you look at that basis, our consolidated operating profit margin for fourth quarter of 2013 was 32.6%, and that's compared to last year's fourth quarter of 32.8%, so that's a reduction of 20 basis points. However, if you exclude Colonial Claims from this calculation, our fourth-quarter 2013 margin would have been 32.65%, versus last year's fourth quarter margin of 32.08%. That's a 57 basis point improvement.

On the same basis, looking at the Retail division, the straight comparison for the 2013 fourth quarter would've been 34.11%, compared to 32.78% in 2012 quarter. That was an increase of a 133-basis-point improvement, and this is an improvement with only 0.2% internal growth rate.

On a side note, the Beecher Carlson large account division, which you know missed their budget in the third quarter and only had a 2.7% operating profit margin. I'm happy to say that they exceeded their budget in the fourth quarter, and their operating profit for the fourth quarter was a 34.7% margin. So as we said before, we still believe that the entire Beecher Carlson operation will still be very close to their 12-month goal of delivering approximately $33 million of EBIDTA earnings before our stock incentive plan and corporate overhead charges.

Looking at the Wholesale Brokerage division on this EBITDA-type comparison, for the fourth quarter of 2013, their margin was 30.38%, and that's 82 basis points improvement over the 29.56% margin in the fourth quarter 2012. Also, for the National Programs division, their margins on this basis of 2013 was 37.43%, and they had a 271-basisoint improvement over the 34.72% margin in the fourth quarter 2012.

And finally, looking at the Service division, their comparable margin for the fourth quarter 2013 was 21.4%, versus 30.35% in the fourth quarter of 2012 when -- that was when Colonial Claims had their big quarter. However, excluded the Colonial Claims from the calculation, the 2013 fourth-quarter margin was 21.51%, versus 21.76% for the 2012 quarter. Therefore, it was a decrease of about 20 basis points.

The other operation that I want to mention on Services that had a difficult time in 2013 fourth quarter was our Social Security disability claims operation, the Advocator Group. Where they missed their budget for the quarter by over $2 million, a little over $2 million, and that was mainly because the US government slowed down the approvals of the disability claims as a result of the sequester. We believe that most of those claims will ultimately, eventually be approved, but they just didn't happen in this quarter.

So without this slowdown with the Advocator Group, the operating profit for the services would also have improved over the prior year's. So thus, you can see that we believe that all of our business divisions are operating more efficiently effectively than they did last year. And they will continue to operate nicely as the middle market economy slowly improves.

Now, as a final point just, a few mundane points about 2014 that I know a lot of you will ask about, the projections for what amortization expense will be and some other items. So for 2014, excluding the Wright acquisition, just as we stand today, our amortization expense is expected to be around the $71-million mark.

Our depreciation for 2014 is expected to be somewhere around the $20-million mark. Our non-cash stock-based compensation for 2014 should be between $29 million and $30 million. Our interest expense, just at our current debt level, should be about $16.5 million.

So with that overview, I'll turn it back to Powell.

Thanks, Cory. Great report.

From a retail standpoint in Florida, the overall market hasn't changed much from Q3 to Q4. I'd characterize it as an underwriter's market. Accounts with losses or tough classes are feeling rate pressure. Clean accounts, underwriters are looking for rate, but probably won't get it.

Newer construction without losses, good classes, there's lots of competition. Lots of property capacity, both admitted and non-admitted, particularly on large TIB schedules, and it's quite competitive. We're seeing an uptick in construction payrolls. Property, generally, is flat to down slightly, and liability and auto is up 3% to 7%.

In the Southeast all around -- the states all around Florida seem to be up 3% to 5% with slight exposure increases. Texas rates seem to be up more than that, and work comp rates are up 2% to 10% depending on the state.

In the Northeast, New York City construction continues to be a tough placement. Rates are up 5% to 7%, and the umbrellas with those contractors are even tougher to place. Most overall risks are up single digits with slight exposure increases. The habitational risks in the Northeast are seeing higher rate increases than the rest of the classes at 5% plus. Work comp rates are up 5% to 10%.

In the Midwest the rates are generally up 3% to 6%, and incumbents want to get rate, but new business is very competitive. Work comp is a challenge to place with losses.

On the West Coast, good accounts are getting 3% to 5%, and those with losses are getting 10%. Work comp is hardening in all the Southwestern states. If a renewal is offered, it's up 8% to 10%. If it's not renewed, it's up 15% plus.

Not many P&C carriers are looking to do mono-line workers' compensation. The California state fund is very aggressive, and earthquake coverage in the Northwest is still up 10% plus.

On the benefits front, in both small and large groups, we see rates, they're going at 5% to 10% plus. On the wholesale side, in property, cat property rates are generally flat to down 5%. However, there's an expectation of retailers that it should be down more than that, maybe up to 10%, because of all the reinsurance news.

Habitational continues to be a challenge. Seeing an uptick in builders risk and renovation submissions. DIC in excess flood areas are our areas for growth on the post-Sandy underwriting world. Liability rates are flat, except for liquor liability. And habitational accounts are flat to up 5%.

In the professional area, public company D&O is typically up 5% to 10%. Private company D&O/EPLI is up 5% to 7%, driven primarily by the losses in the EPLI line. Standalone EPLI is up 7% to 10%. Carriers are watching this line item very closely, and retentions are generally going up.

Miscellaneous professional rates are down 5% to down 10%. Real estate accounts are up 10% to up 15%, with retentions going up. Lots of requests for cyber liability, but low binding rates.

In the binding authority, rates are flat to up slightly. Companies are trying to get rate on all renewals.

We seem to be seeing more habitational and hospitality, and even lessors risk-only accounts from admitted markets. Transportation rates continue to be hardening as well.

As Cory, said in the Programs arena, the winners in Q4 were Proctor, ICG and Arrowhead, commercial earthquake. From a Services standpoint, Cory also said Sandy had a substantial impact on Q4 for Colonial. The impact was $6.1 million. Please remember to adjust your models for the Q1 impact that Cory described earlier.

I know we'll have questions around acquisitions, and as you know, we did three acquisitions in December for just over $17.2 million in annualized revenue. We're very pleased with the announcement of the Wright organization joining our team sometime in Q2. I've had the good fortune to meet approximately 400 of our 500 soon-to-be new teammates, and I'm very, very impressed, as we all thought we would be, so we're excited to them to join the team.

In conclusion, we are very pleased with our progress in 2013. I'd like to thank all of our teammates for everything they do to provide solutions for our clients. In Q4, internal growth without Colonial Claims was 4.5%, and for the entire year of 2013, it was 5.6% without Colonial Claims. As Cory said, without Colonial Claims, automobile aftermarket, and the Everest program, our internal growth sequentially improved each quarter 1.4%, 3.5%, 4.1%, 4.4%. We are well on our way to our $2-billion intermediate goal.

With that, I'd like to turn it back over to you, Lynette, and we'll open it up to questions.

Thank you, sir.

(Operator Instructions)

We will take your first question from Sarah DeWitt with Barclays.

Hello. Good morning.

You had mentioned that you're budgeting in excess of 4.5% organic growth for 2014. Just to clarify, does that include or exclude the impact in the first quarter from Colonial?

That includes the Colonial's 2014 budget. So it does exclude that impact.

It excludes the impact. Okay.

That's right. You're right.

Okay great. And then on the Retail organic growth, what drove the slowdown in the quarter to 0%?

Well, Sarah, as you know, we've always talked about Retail operating just like any of our businesses in a band. Some up and some down a little bit, but constantly, we believe, moving in a direction, in this case going up, but this one was down this quarter.

Last year in Q4, we had a very good quarter, as you know, 5.6% internal growth. And I would say, without making any excuses, we didn't write as much new business in Q4 this year as we had hoped. And so we didn't grow as much as we would've liked.

Okay. And then finally, could you just update us on the CFO search?

The answer is, we continue with the process. And as I said, we engaged an outside firm to help us with that process, and we are continuing to move through that process now. And very pleased with the progress based on our intended or our expected outcome of those results. But when things are finalized, you all will be the first people to know because we'll send out a press release.

Okay, great. Thanks for the answers.

We'll move next to Michael Nannizzi from Goldman Sachs.

Thanks. Maybe, Powell, just a follow-up on Sarah's question.

Can you give us any more detail in terms of what within the Retail segment was more challenging or timing related, or any more granular color on that just because it's a pretty stark drop-off. So I appreciate the bands comments, but just if you could give us a little bit more color, I'd appreciate it.

Sure, Michael. I'll try to -- look, as you know, we're straight shooters on this stuff, and our goal is to grow our business organically and profitably -- grow it organically and profitably, and we were not successful in doing that in Q4 in Retail. And like I said, I can give you what happened in this office or what happened -- I think that defeats the purpose.

Ultimately, at the end of the day, we had some offices grow, and we had some offices shrink. It could be for a whole host of reasons. We could have not written enough new business; we could have lost some accounts. We could've had a change in some sort of accrual. You could have any of those type of things, but at the end of the day, we were surprised.

And it's something that -- we know that we have to grow each of our businesses organically. So it's something that yours truly and the rest of the Senior Leadership Team at Brown and Brown is very keenly aware of. I'm sorry I'm not giving you a lot more to chew on, but I'm just trying to give you a sense of -- in the way we view that.

Well, how about this -- from this perspective. Renewal book versus new business. Could you help us understand in terms of, did retention change meaningfully from last year or third quarter to current, or whether new business was different? Even if we could break it down into renewal versus new, that might help.

Yes, I would tell you that our renewal retention in 2013 was inside the historical ranges. And so, once again, that does not mean on an individual office, you could have one office have, for whatever reason, lower retention in a book, in their book of business than another office. Or conversely, somebody who had budgeted a lot of new business who didn't budget a lot of new business -- I mean who budgeted it but didn't write a lot of new business.

There also scenarios where -- and this is something we don't really talk about typically, but you can have a program which is a first-dollar program that all of a sudden goes to some deductible or retro or something where the amount of retention by the insured goes up, which in turn may reduce the amount of premium upon which we are either paid a commission or a fee. And I'm talking specifically, Michael, about middle market accounts. Remember, these are accounts that are $25,000, $50,000, $150,000, $250,000 accounts. I'm not talking about mega accounts.

And so if you take a deductible, it can reduce that premium paid in some instances substantially. But I'm not going to tell you that's the reason. I'm saying that could be one of the reasons. And so I would tell you that it's a combination of a little bit of all of the above, but our renewal retention was in the historical range for 2013.

Got it. And then just one last one just on looking ahead. Obviously, you have to write -- you guys have done some pretty large acquisitions here recently.

How should we think about your capacity for more M&A from here? And what level of leverage are you comfortable getting to? Obviously, you've historically preferred to remain in a pretty low level, so how should we think about capacity, and what sort of pipeline are you looking at? Thanks.

Okay, Michael. Let me answer the last question first relative to the pipeline, and I always enjoy saying this to you all on an earnings call day. As you know, the pipeline is good.

And so when you ask me that is a year from now, the pipeline will also be good. And three years ago, the pipeline was good. I'm saying that not trying to be facetious.

I'm trying to say that we're always talking to people, and when and why people sell their businesses are different. That's number one.

Number two, and I think part of the question you were asking is, should you budget a large acquisition every year because several people have asked that before, and the answer to that is no. Although someone might say, well, you did one in 2012, you did one in 2013, and now you've got one in 2014. I think that there have been some larger firms, clearly, that became available in terms of were deciding to sell. And we believe that they fit culturally and they had the right type of people that would be consistent with what we're all about.

So that said, as you know, we continue to look at acquisitions of all sizes and shapes, as evidenced by the three acquisitions we did in December for just over $17 million in revenue. We have worked really hard to develop strong relationships with our financial partners.

And in doing so, I have been asked on numerous occasions the question of what would we be comfortable in doing? And the answer is, I believe that we would be in a steady-state environment comfortable with the 1.5 to 2.5 times debt to EBITDA, subject to the acquisition or acquisitions being -- which we thought were cultural fits. And so we're not going buy it just to buy it.

And some of you have either said specifically or intimated in the past that you know as you get bigger, to move the dial, you have to do more transactions and all this other stuff. And the answer is, we totally understand that. But we are long-term thinkers in the terms of how we invest in our business, and so we think of acquisitions as forever.

And so when we look at these things, we are thinking about them not only next year, but 3 years and 5 years and 10 years down the road, and what they bring to Brown and Brown, and the quality of the people, and how that will help the overall organization. So I would tell you that we as a Team are optimistic about the investment opportunities going forward. As I said earlier, the investment pipeline looks good, as it always does.

The idea of larger acquisitions in the future, there are three things that people tell us in the investment community that are pretty well known about Brown and Brown. Number one, we pay in cash. Hard to argue with greenbacks.

Number two, we do what we say and say what we do. And so when we give a term sheet, that is not a license to renegotiate during the due diligence process.

And number three, when we make our mind up, we move with alacrity. So having said that, that puts up in good steed, and with our financial relationships, we have dry power to invest in our business. So I feel good about those opportunities.

And like I said, we have had an aversion. We haven't needed to take the debt up substantially, and if we did, we would try to pay that down aggressively anyway. Hope that answered your question.

Great. Thank you.

We'll hear next from Greg Locraft with Morgan Stanley.

Wanted to go back to the Retail organic. Is there any way to measure the -- 2012, you had the sales incentive plan. The one timer -- the one-time payout for the producers. I'm suspecting that that probably pulled forward some demand or caused a bigger fourth quarter.

Is there any way to measure the impact of that now that we're one full year out? Obviously, this isn't going to recur into 2014, so the numbers get a little cleaner. Any thoughts there?

Greg, the short answer is no, I don't believe so. Several people have either written about that or said that as a possibility, and we don't like to use the terms never or always. You've heard me, and us, Cory and I, talk about why we did that, and we were pleased with the outcome. And as I said, that was a one-time-only event.

We have reward systems internally that we think are -- make a lot of sense with our -- corresponding with our shareholders and our teammates, which are performance driven, as you are aware of. But we haven't, to tell you the truth, Greg, spent a lot of time looking in the rear view mirror on that. What we've basically said is, we look at the year and we look at the quarter we just came out of.

And as I said, we are pleased with the result in the year. We are not necessarily as pleased as [your rate] with the growth. We're not accepting that growth as something that we want to have going forward, and we're looking into the future about growing our business organically in each of the divisions, specifically Retail.

Okay. So you mentioned that people are talking about that. Are these people internal to Brown and Brown?

No.

Or do you mean people like us in the Wall Street community?

No, that's you and all your friends up there in New York in the snowstorm.

(Laughter) Okay.

When I say that, there were one or two analysts that actually wrote about that last night. And so when I say that, no one is talking about that internally. We're all focused on selling and servicing insurance. And as you know, we're very focused on writing lots of new business and working very hard to facilitate our relationships and improve our relationships with our existing clients so we can retain them as well.

Greg, some people on the line may not have -- know much of the background of that, but when we put that in place at the end of 2012. When we thought about doing it, putting it in place in 2011, the rates had not started to more, and the exposure units really hadn't grown. And so we were trying to make sure that we put that in place to really get everybody focused on January 1 of 2012 to really hit the ground running hard. And it just was coincidental that that first quarter of 2012 was the first time the rates really started to stick and the economy and exposure units started to move up, so that was a big help.

So we never really -- you can never really determine whether or not that had a direct impact to change the each individual producer's behavior unless you crawled inside their mind and said, did that really motivate them? The point being that we really reiterate very frequently in 2012 is that regardless of whether that gave them an extra incentive are not, it did help the motivation in terms of the producers really appreciated the fact that it had gone so many years with basically reduction of exposure units with their clients, and therefore, less compensation.

So in an inadvertent way, it had a very, very positive impact that they just appreciated that the Company recognized how difficult it was as a producer. And that now it was a nice transition to help them get a one-time little bump, but now, we expected the rates as well as the exposure units to continue to grow. Even though they're not growing as fast as we all would hope, it is a steady and consistent growth that we think is going into the future, into the fourth quarter. And the producers now are getting the benefit of that by seeing their book rise. It's not a lot, but it's still rising.

So overall, the Retail force is very positive, and Charlie Lydecker is doing some great stuff in terms of new competitions, and there's just a lot of excitement and enthusiasm in Retail. And you just have a quarter like fourth quarter here that just a bunch of offices had between $20,000 and $30,000 less revenues than previous quarter, and it was just -- it's just a lower quarter than normal. But the trend of the band is still going north in Retail, and we are positive about going into 2014.

Okay great. Thanks, Cory. And Cory, best of luck to you. I think this is your last call, and you've had a great run, so congratulations.

Thank you.

(Operator Instructions)

Adam Klauber from William Blair has your next question.

Good morning, everyone. A couple of different questions.

What is your outlook for contingents supplements next year? And if you could remind us, does Beecher and Wright, do those firms accrue contingents or supplements?

As it relates to the contingents and GSCs, we anticipate generally the same. Well, we will not really have -- we can only wait to the first quarter to give you any real guidance because as it stands right now, we don't really get stuff from the carriers until the end of February into March that really will give us a clarity in terms of 2014.

However, as a general rule, if the loss ratios of the carriers have improved, then generally, our contingencies will move up. That's about the best guidance that we can give you right now. Otherwise, your guess is as good as ours as of it stands right now.

And Adam, to your point, inside of Beecher, there are some accounts which are commission based, but those -- in the large accounts area. Inside the Retail, the traditional Retail in Oregon, Mississippi, and Arizona, the answer to that is yes. And then inside of Wright, the answer is no.

Okay. That's helpful.

Powell, you also mentioned an interesting dichotomy on the wholesale property pricing where there's this impression that because reinsurance is weak, prices should be going down. But that isn't been reflected in the market. Do you think that will eventually flow through, or do you think there's a different dynamic in wholesale market than we are seeing in the reinsurance market?

Well, Adam, I do believe it's different between the primary market and the reinsurance market. So the actual primary rider, whether it admitted or non-admitted, I think there is a divergence or this dichotomy that you are referring to.

As you know, when reinsurance rates go up substantially, the rate pressure that is applied by the primary carrier is not necessarily reflected in the entire increase in the rate given to them, upward as well as downward. And so remember, the national carriers and the non-admitted carriers, you know all by name, either public or private, all of them have to work that and manage that to the best of their ability locally. But if you read something -- or throughout the country.

If you read something that says reinsurance rates are down, let me just make this up, 10% in a said line of business, well that's for a broad portfolio of risks. And then the question is, if you take those risks and you zero into a place like Texas or Florida or California or New York, and you say, well, how does that impact that, well, it may impact it more or less depending on how that's factored into that underwriting book.

But overall, the carrier is going to say, okay -- the primary carrier is going to say maybe the rates come down 5%. But they don't come down commensurate with the amount that it's come down on the treaty because, by the way, when it's gone up, they haven't been able to pass it all through. So no, long answer, I don't think it's going to be -- it will come to settle at per se what you are hearing in the reinsurance market.

Okay, thank you. Another question. I realize this may be sensitive, but it's a big name out there.

Obviously, QBE hit the headlines a little while ago. Do think that will cause -- two questions. Will cause changes in the overall program market, number one? And number two, do we know that today, or are we going to have to wait maybe 6 months, 12 months to understand what those changes could be?

First of all, I would say that, as you know, QBE is a very large partner of our organization, and they are going through some changes, and they'll work their way through it. They are a large program -- they're big on programs. We write a lot of programs with them.

Based on what we've heard, they want to keep doing what they're doing with us. So I don't -- we don't have any news other than that.

I believe that the leadership there are very thoughtful around their business. And they're looking at certain businesses that may or may not fit exactly, or how they fit, and when they made a number of acquisitions, and I think that long term, it works itself out, whatever that means. We don't have any information to the contrary right now.

Okay. Thank you.

And then just one final. The Zurich aftermarket auto business, is that growing?

The answer is, there's lots of opportunity there, and we have continued to work with Zurich about how we can grow it. And so we were very pleased with how it came in in the first full year, as you know, is October to October. And so we believe it is absolutely a growth engine going forward.

Okay. Thank you.

And I echo the last sentiments, Cory. Thank you for all the help. Thanks.

We'll hear next from Josh Shanker from Deutsche Bank.

Good morning. Thank you.

In the responses, you mentioned that Charlie Lydecker is putting together sales competitions. There was some criticism or skepticism about your numbers back in 4Q 2012, that they were enhanced through sales incentive programs. I'm wondering if you can talk about the impact that that had then, that that might have in the future, and where that hit's Retail?

I think your referring there to that producer bonus program that we have. I think the people were trying to still figure that out, if that had a big impact.

We generally always have sales contests going on at one time or other, but different ones. This particular part of the year, Charlie is focused on growing the personal lines, and the contests are focused on that. And so we're always doing something, and he's always keeping things changing an exciting for the producers.

Yes, but I don't think you should draw a parallel between Cory's statement about a sales contest and the producer incentive plan at the end of 2012.

Do you think that producer incentive plans accelerate growth, and would they be valuable today?

Well, the answer to your question is, we believe that keeping it fresh and new relative to like a sales contest is really important, but you don't have sales contests in the same business area every quarter or every month or every year. And so you -- and we do things that local offices, so in local offices, the leaders set the course for growth there. So I would tell you, Josh, that we believe, and we as an organization are focused on long-term wealth creation for our teammates, particularly those that help us grow the business.

And so that said, we think we have an appropriate mix between cash compensation and equity-based compensation on a performance lever that ties this all together. So as you know, we talk about this being long term. We talk about this being how do we grow organically and how to we grow profitably, and we believe that those are all put together or in that concept of how we compensate our producers.

In terms of the characterization that a surprising number of producers came up maybe $20,000, $30,000 short during the quarter, do you think that although you are concerned, rightfully so, do you think that we may discover one quarter from today that that was a one-off situation? Will you be as surprised one quarter from today if it doesn't remedy itself?

Well, like I said, Josh, we talk about Retail, and just like our other divisions, operating in a band. And so as you know, Retail this last year grew 80 basis points in Q1, 230 basis points in Q2, 250 basis points in Q3, and now 20 basis points in Q4. And so that operated in a band.

It was upward for three quarters. Now it was downward. And so once again, we are very focused on growing our business organically and profitably. So we're optimistic about 2014.

Okay. Well, thank you for the answers.

Thanks Josh.

Moving onto Elyse Greenspan with Wells Fargo Securities.

Hello. Good morning. I just wanted to follow up just a little bit more on the Retail segment, just specifically in terms of -- I know you provided the over 4.5% organic growth excluding Colonial for 2014. What does that imply just numerically that you're thinking about that the Retail segment will show in terms of organic growth?

Well, as you know we don't give traditional -- traditionally give organic growth guidance. Cory said that in our budget, and I think Sarah may have -- she said, I think, 4.5%, but Cory said we are budgeting as an organization north of 4% organic growth for 2014 without Colonial Claims. And so I would tell you that when asked in the past what does Retail look like, I would tell you in a steady-state environment that it's usually a low to mid-single-digit organic growth business. But we aren't saying what our particular organic growth projections are for Retail.

Okay. And then I know in the past you have said that exposure changes have about a 2/3 to 3/4 impact on our revenue growth. And I know we've seen a little bit of a switch in business mix due to some of the recent larger acquisitions. Would you still say that that impact still falls within the same range?

I think it does, Elyse, and here's the thing that I would just want to reiterate. As you know, we believe that we are probably the purest middle-market play of these so-called publicly traded brokers. And so what I'm not as clear on is how -- in the bank-owned agencies, how clear the information is to you and the rest of the people out there in the investment community. I just don't know. I'm talking about the two big bank owners.

But having said that, we believe in our case of the larger publicly-traded brokers that are just insurance operations, we're probably the purest play from a, as I said, a middle-market standpoint, and what we're seeing in that middle market is fits and starts. There is still caution among our clientele of making large capital investments and hiring people. And so you've heard us say that our clients are trying to do more with the same number of people or do more with the same equipment until they see or feel better about their business and the economy

Are people feeling better? We believe the answer to that is yes. But what you read in the Wall Street Journal and other national publications about the success of some very large organizations or lack thereof in the United States, that GDP mirror or monitor is not indicative necessarily of middle-market businesses across the country, whether they are in Tulsa, Oklahoma or they're in Northern California or they're in Buffalo, New York.

So I say that because it is a little different. That's not an excuse; that's an observation.

Okay. Thank you. And then you guys do -- on your private healthcare exchange, you do offshoot that to liaison. Have you seen any kind of change or impact that you might expect from the [Ries], the Towers Watson deal?

No, actually we haven't. And as you know, we believe that exchanges are a solution, not the solution. And so we are in the solutions business. It's our goal to bring our clients viable solutions, and in doing so, help them make the best decision that fits their risk appetite and how they want to pay for it.

You were going to read and hear a lot about the national -- which we all have, the national exchanges and the state exchanges. Some state exchanges have been a little more successful than others. Connecticut, New York, and Rhode Island might be three that you might say seem to have done well, and three that are having a hard time are Maryland, Minnesota, and Oregon.

We believe that a private exchange like the one that we have is one of the solutions. We have seen and continue to see carriers across the country move on some of their smaller business, and we've talked about this in the past, from a commission-driven platform to a per-head per-month charge. But the flip side of that is because of ACA, certain employers are being forced to offer coverage to more employees, which may in turn present an additional opportunity for us there.

Okay, perfect. And just one last quick question.

Cory mentioned the Advocator business missing targets in the fourth quarter. Has anything changed in terms of what we should expect in the first quarter, or should we adjust that down, our revenue expectations for the Q1 as well?

Well, right now, I think they're still trying to figure out if the government is going to start opening it up, and so I think it's a little early to tell.

Okay. Well, thanks so much for the answers, and best of luck, Cory.

Thank you.

Moving onto Dan Farrell with Sterne Agee.

Hello. Good morning.

Within Retail, can you comment on how you're seeing the trends in your employee benefits business. Is it similar to the overall segment, better, worse?

I would tell you that, Dan, what we're seeing is, one, we're seeing a lot of discussion from prospective clients and existing clients around how does ACA affect them. And there are many clients that their plans that were offered in 2013 may have been renewed in 2013.. And so some of the full effects of ACA and how it impacts their individual programs won't be fully played out until this year, sometime between now and the end of the year, number one.

Number two, that has created a great opportunity for us to grow in offices that have big, or maybe not so big, smaller benefits operations, so we viewed it as a growth opportunity. And depending on the office, it may be growing substantially faster. It might be growing at the same, or it might be growing slower depending on the way the leadership and the focus on benefits in that particular office.

In all of our Retail offices, not every single Retail office writes employee benefits, but most do have benefits operations. Conversely, we do have a group of benefits-only in offices that have done quite well as well. So it's a pretty broad statement, I know, but depends on the office, but it could be up, it could be the same, or it could be slightly less, depending on the office.

Okay. And then just another question on the auto aftermarket. It's been a margin headwind overall as it came on. You're now past the first year.

Can you talk about that business, update us on how you're thinking about margin trend in that business going forward? And then as we head into next year, is it more of a neutral to overall, and we do think it can actually start to be a positive comparison?

Dan, thank you for the question. As you remember, we said that we believe that the margin pressure on that would be 18 months to 24 months. And so remember, it's an October transaction when it came online.

So I believe for the vast majority of this year, it will be a neutral. And then there will be an opportunity as we go forward for that to improve. So like I said, I can't recite the auto aftermarket budget in Q4 of 2014 off the top of my head, but I know that until the fourth quarter, it is very similar to how it has been trending, so let's call it a neutral.

Okay. And then just one last numbers question. I apologize if I missed it. The $16 million of revenue for Colonial in the year ago -- in the first quarter last year, can you just remind us what the margin was on that?

Well, what Cory said is we had and incrementally $16 million more in revenue, and it was over $0.045 impact.

Okay, thank you.

Ryan Byrnes from Janney Capital.

Thanks for taking my question. The first one, can you guys give an update as to what range, or the band, would be for Retail going forward, especially in a 2% to 3% GDP world?

Remember, Ryan, we've said that we don't know of any leading economic indicator that directly correlates with our middle-market business, so let's start with that. And two, as I said, or mentioned earlier, we believe that it is a low to mid-single-digit growth engine in the steady-state economy.

Okay great. And then the second one is with the Beecher Carlson. I think you guys mentioned that may have been seasonality with the fourth quarter. I just want to think about, how do we think about that into first and second quarter this year?

Sure. I would tell you that the cyclicality of their business is really Q2 and Q4 are their bigger quarters, and Q1 and Q3 are their smaller quarters. This is for large accounts, so on our large accounts division, in the first half of the year, we did just over $39 million of revenue.

And then I would tell you that the budget for it Q1 is just over -- is smaller, it's $12 million and $21 million plus in Q2. So like I said, the core budget is about $33.5 million in the first half of the year.

Okay. Great. Thanks.

Meyer Shields with KBW.

Thanks, good morning. Two maybe bigger-picture questions. One, do you have any sense as to how much of your employee benefit revenues are attached to plans that are not compliant with the ACA, in other words, where there is a risk of cancellation next year?

Right. The short answer, Meyer, is I can't give you the exact number. But the number that we have talked about in the breakdown of our book is we have just under 1/3 of our business is small group, defined as under 50 lives.

Okay. I can work with that.

Second question, I understand that when you're looking at acquisitions, it's a long-term approach for a permanent acquisition. But as we start to see rate trends get a little bit less positive on the primary side, does that tend to influence willingness to sell in a way that -- in the aggregate?

I think it can in some instances, but in many instances, no. If you put yourself in the position of an owner of a business, Meyer, and you say you have a mindset of what you think the asset is worth, depending on -- it may be rate environment. It's going to be a function of the growth of the business organically, a function of the operating profit or EBITDA, that it drives.

I think that basically it's more of a valuation issue, and the cycle can play part of that, but not all of it. So as you remember in the 2008, 2009, 2010 period, businesses, particularly middle-market insurance agents, the gap between the expected value and what the willing acquirers were willing to pay was -- could be substantial.

And so as the economy got better and businesses grew, and that was enhanced by the rate environment, those valuations started to come back into -- they weren't so stratospheric. They were more reachable in certain instances.

That's a long answer on saying, can it have an impact, yes. But I don't think -- there are always reasons why people sell, when, why, and the opportunity to grow or to join a growing organization like ours and share information which might be -- might present a better opportunity for that group of teammates as a whole to grow individually and collectively.

Okay. Fantastic. Thank you very much.

Moving on to Ken Billingsley with Compass Point.

Good morning. I had a couple fill-in questions throughout the call, so I'm going to jump around a little bit.

When you talked about mix of business and compensation margins, can you talk about what impact it had on producer retentions. And in the past, you've given a comparison of how your major producers have stayed with the Company as a very high percentage. Can you say how that is trended over the last two years?

Sure. Good morning, Ken. I would tell you that we are very pleased with the retention of our producers at all stages, both as they come on to the Team, they join the Team, and they're developing and advancing in their careers. And then at a senior -- not from an age standpoint, but a senior level from a standpoint of the size of their books, we've been very pleased with that. And we've not seen any noticeable change, meaning downward if that's what you're implying about our teammates.

As you know, we have a very strong culture, and we have been very pleased with the teammates. We have over 7,100 teammates, and the producer group is a very large percentage of that. We are very pleased with the people who have not only come but continue to be a large part of our business. And so we have not seen a dramatic change, i.e., downward, that you were implying in the last two years.

And have you adjusted -- I know in 2012 you had the incentive program, but excluding that, calculations for the last five years, the comp and benefit margin has remained relatively stable. With the mix of business changing with some of the large acquisitions, would we expect to see that go up, or could be even see that tick down?

Well remember, as I alluded to earlier, we have a performance-driven equity reward plan, which is currently known as SIP. And we used to have a plan called that PSP. And so it's a performance-driven mechanism, which part of it for a producer, 50%, is based on his or her individual production and growing their book over a five-year measurement period.

The other 50% is based on earnings-per-share growth. And so we think that has worked very well. We obviously had some -- a large program that was given out this summer, July, and we were very pleased with the response that got with our teammates internally. So I think what I would say in the near term, we don't like to say never or always, but I think it's going to be more of the same.

Okay. Shifting to contingents and supplemental, where is the percentage going towards? I know there's been talk in the past that there's going to be a shift or has been a shift. Do you continue to see that shift, and where do you see that going to from an underwriter standpoint with their desire to pay supplementals versus contingents?

I think that as a broad statement, if you asked all of the leaders quietly in a private place what they would like, I think the response would be contingency payments versus be urging supplementals. There are continuing discussions and/or movements towards that. Last year, Cory, didn't you receive about $8 million of GSCs?

That's correct.

And $8 million of the total received in contingencies, and that's all in, was $59 million.

$59 million.

And so that said, I think, Ken, that that number, the GSC, would stay flat or only go down in the future, barring something that we can see right now, but that's how we would view it.

Last question is regarding the Wright acquisition and Senate's voting to delay the Biggert-Waters change. Two parts. One, does this impact maybe the initial plan for making the acquisition? And two, do you see any change for maybe the private company participation and maybe how that may affect revenue expectations in the future once the deal is completed?

Thank you. As you know, relative to Biggert-Waters, there was a bill that was passed in the Senate which has a rate moratorium for four years on a rate freeze. That said, FEMA is pushing to get the rates to an actuarially-sound level over the next five years.

So there is a bill that has been introduced that would -- it's a proposed cap to only increase 25% a year. And obviously, none of that has really gotten going in the house, so the way we look at it is -- and this would give you a little insight probably into the private market as well.

Of the total flood policies written out there -- this is not a Wright statement. Of the total flood policies out there, 70% of those have mortgages on them. 20% of all of those are deemed to be subsidized, 20% of the 100%.

And 2% of the overall are really, really subsidized, meaning substantially. And so some people that said, well, if FEMA drives their rates up, which there's a sensitivity there, I believe, that they could drive people out of the program, and so there is a possibility of that. However, if 70% of the policies have mortgages, I believe that banks will have some input on that. That's number one.

Number two, the discussions that I've had personally with leaders of insurance operations who have inquired about this, the interest up to this point has all been around excess flood. And in many cases, when you look at, Ken, the rate charged in the primary versus the rate charged on the excess, that rate may be 2 to 3 times higher in the excess than it is in the primary. The rate -- not the premium, but the rate.

And so the way we look at it is this. First of all right Wright is the largest flood servicing company in the country. They've got a lot of great teammates, which I've had the good fortune to meet a number of them.

And so there is a lot of history, there's a lot of data, there's a lot of information that would enable, and we would be able to talk to carriers on behalf of our clients to try to put together the best solutions for them. So I've always thought all along that if there was someone that wanted to do an excess flood program, we would be a very interesting candidate because of the platform that we have within Programs. And our knowledge of Programs and obviously, the interface with the National Flood Program and the Write Your Own program.

So we're very pleased with that. And as you know, that's a big part of the acquisition, but that's not all of it. We also have a public entity, several public entity businesses that are in there in the insurance reciprocals in State of New York, very well run insurance reciprocals, and some national public entity offerings.

And then another piece, which is just traditional programs, like in Arrowhead. So we're very pleased with the opportunity there, and equally, if not more pleased, with the teammates that are all 500 or so teammates at Wright.

Thank you for taking the question.

Thanks, Ken.

We'll hear next from John Campbell from Stephens Inc.

Hello, guys. Good morning.

Good morning, John.

First off, Cory, congratulations on a great run, and we wish you the best of luck as you work on lowering that handicap.

Thank you.

But Powell, you mentioned renewals in 2013 in aggregate were within that normal range. Can you just remind us what that normal range is for renewals? And then secondly, does that normal renewal range change much as you look out from your more traditional, smaller accounts and some of those newer larger accounts?

Right. The short answer is, in a traditional Retail office, and once again, that can be broadly defined, but in a traditional Retail office, I would tell you the renewal retention is usually 92% to 95%. That's a good range.

And so what we saw, John, and you may remember, when we were in the economy and the depth of the slowdown, we said that our renewal retention was very similar, however, excluding insolvencies and acquisitions, but really, the implication was insolvencies. And so we did see a lot of businesses go out of business then. We are not seeing that as much today.

And so an office that writes a lot of new business, typically has quite a good retention ratio. And so think of it this way. Whatever business you are in, but in this case, we are selling an intangible, a promise to pay for a future-covered cause of loss.

If you think about it, when you are in the market all the time, you have a sense of what's going on, which we are, and so we bring that knowledge to bear to the benefit of their existing clients and to our new customers. So to your comment in terms of looking forward, I think that that would be a reasonable expectation relative to the renewal retention, barring some unforeseen economic slowdown where there was a repeat of what we just came through.

Great. And then that renewal range is pretty similar on the larger-account side as well?

Yes, remember, larger accounts is -- it can be lumpy. And when I say lumpy, if you have an account that generates several hundred thousand dollars in revenue, if you lose one, it puts a dent in you for that month or that quarter. Conversely, if you use a $10,000 account, in one account in one office one month, it doesn't ruin the month or affect that month, depending on the size of the offices, much. So I would tell you that I would be less comfortable in saying that with absolute certainty on large accounts because it's usually is very high retention, but when you lose one, that's when it clicks it off that very high retention level. And so I'm sorry I can't give you the historical for the last 15, years but as we continue to grow with Beecher and Steve and Dan and their Team, I fully anticipate a very good retention ratio and writing a lot of new business.

Okay great. Last question here. Just as you best as you guys can, can you just give us a very high-level update on organic growth trends for Arrowhead and Beecher?

Well, the short answer is, remember, Beecher is not in organic growth for another two quarters. But it was a nice growing business when we announced it, and it continues to be relative to an organic growth number. What we said, because we did not break it out for large accounts and the other accounts, Cory, didn't we say it was mid-single-digit growth?

Yes.

Yes, that's what I thought. We said mid-single-digit growth, and we continue to feel comfortable about that, or more, which we're pleased about.

Arrowhead, as you know, has enjoyed a lot of success in terms of these two large programs that we've gotten from our carrier partners. Don't know if that would ever present an opportunity again. But what we have seen is there are growth engines inside of those existing programs right now, and so we are very pleased with what Chris Walker and Steve Boyd and Steve Bauer are doing at Arrowhead.

Okay, great. Thanks for taking our questions.

Thanks, John.

Mark Hughes from SunTrust has your next question.

Thank you. My questions have been answered, and congratulations, Cory.

Thank you.

At this time, there are no further questions in the queue. Mr. Brown, I'd like to turn the conference back over to you for any closing remarks.

Thank you very much, Lynette. I'd like to thank everybody, and I wanted to -- you all have sometimes chuckled at me when I've made this comment before, but I'd like to give this comment to our friends in New York City.

Yesterday, I understand it was snowing really hard in New York City, and as you know, the state of Florida, the economy we believe is coming back. And Florida just became the third-largest state by population in the United States. Yesterday afternoon, here at our office, it was 84 degrees and sunny.

And so the point is that as people decide to retire and consider living in a place either in retirement or in a more tax-advantaged state, that might be Florida. So we think it bodes well, so as the growth occurs, and we're starting to see condos being built in Miami and homes and things like that, that's good. I just say that because some of you have gigged to me a little bit on that before, but I wanted to use that as an actual example. Yesterday, heavy snow in the city versus beautiful sunny here at 84 degrees.

We look forward to talking everybody again soon. Thank you for your listening, and have a great day.

Again that does conclude today's teleconference. We thank you all for your participation.