Brown & Brown Inc (BRO) 2014 Q1 法說會逐字稿

Good morning and welcome to the Brown & Brown 2014 first-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 first quarter of 2014 and are intended to fall within the Safe Harbor provisions of the security laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the Company's determination as it finalizes its financial results for the first quarter of 2014 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 this call in and 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 that said I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thanks, Joseph. Good morning, everybody, and thanks for joining us this morning on our earnings call. And before I get started I wanted to formally introduce our new CFO, Andy Watts. Andy joined us, as you know, in early March when Cory retired and although he has only been on board for a short period of time he is quickly getting up to speed regarding Brown & Brown, our businesses and the financials so you might go easy on him a little today but we will have hopefully all of your answers.

Andy and I have talked quite a bit about how we present our financial performance. And as you will see this quarter and going forward we will be using an earnings deck in order to lay out our performance and make it easier for everyone to understand our numbers.

Let's get into the performance of the first quarter. Once we walk through how each of the divisions performed and you see how we adjusted for comparability of certain items, I hope you'll find that our results are really solid for the quarter.

I am very pleased and we are pleased with our topline and bottom-line performance in Q1. Looking at slide 4, we delivered $363.6 million of revenue for the quarter and growth of 8.5%. When we back out the impact of Colonial Claims and Beecher Large Accounts our revenues grew by 10.1% and organically grew by 3.9%.

We think this is a really solid performance for the quarter as the markets are still a bit choppy and rates are under pressure. In spite of this we are growing across each one of our four divisions.

From an earnings-per-share standpoint on an as-reported basis we decreased 12% versus prior year; however, when you remove the impact of net income associated with the Hurricane Sandy that we realized in our Colonial Claims business and remove the adjustment for earnouts related to acquisitions and last year's EPS would be $0.36. As we noted previously there is a cyclical nature to the Beecher Carlson Large Accounts business, therefore we believe it is appropriate to adjust for this impact plus the acquisition earnout adjustment in order to arrive at a pro forma EPS of $0.40, which is an improvement of 11.1%.

When compared to the 10.1% growth in adjusted revenues noted earlier we think we had a solid financial performance in the first quarter. So let me hit the Beecher Carlson matter right out of the box. First, I want to say how pleased we are with the performance of the business in the fourth quarter and in the first quarter.

Steve Denton, Dan Donovan and all of our teammates at Beecher Carlson we believe are doing a great job and we are seeing good growth. I mentioned previously that our revenues are lower in Q1 and Q3 and higher in Q2 and Q4. I also stated that Q1 was budgeted to be $12 million in revenue and Q2 was projected to be $21 million.

With a cost base that is relatively stable this means our margin profile for this business is lumpy. So while there was a drag of $0.02 this quarter there will probably be some upward mobility in the second quarter, which we would break out as well.

We will break out Beecher Carlson the entire results for one more quarter for the first full year and report those to you after Q2. From a cash flow perspective our margins remain solid. We delivered strong cash conversion both on which our industry-leading versus our public competitors; we're very proud of these metrics as they speak to the power of our business model.

Lastly, I mentioned that we are targeting 4% organic growth this year excluding the impact of Hurricane Sandy revenues within our Colonial Claims business. We are reconfirming this target.

We now go to slide 5. Now I would like to talk about the overall performance of each of our divisions and specifically the market performance driving each.

Let me start by saying how pleased we are to deliver as-reported and organic revenue growth within each of our divisions. We believe our diversification helps us balance market risks and also capitalize on market opportunities.

I want to give you a flavor of what we are seeing regarding rates and exposures across the United States and our businesses. In our retail businesses rates are typically flat to up for 5% in all lines. Work comp is seeing moderate upward pressure in certain states like California and the Midwest.

Those rates could be up more than 5% in some of those areas. Middle-market exposure units are flat to up slightly. Employee benefits rates, depending on the size, the plan design and loss experience can be up anywhere between 5% and 15%.

Cat property is under pressure and we are seeing rate reductions in most areas. From a wholesale standpoint liability and professional rates are flat to up 10%. Large cat property is softening due to excess surplus.

Rates are typically down 5% to 10%. Large accounts over $250 million in premium may be down more. Non-cat property is typically flat to up slightly and binding authority business, that is property and liability, is flat to up several points.

Services had a good quarter, specifically USIS, as Ron Warble and his team and NewQuest, a Medicare set-aside business, Tracy Lazzopina and her team. Programs, the aftermarket business is growing nicely, ICG had a really good year. So now I'd like to turn it over to Andy who will walk through more detail regarding the financial performance.

Great, thank you Powell and good morning to everyone. Before I get started I wanted to reemphasize the importance we see in utilizing a deck to present our financial performance.

Since we are close to the business every day we know it well. It does have a lot of moving parts as any large organization does. However, our goal is to present the numbers in a clear and understandable fashion so each of you can model our business in your investment thesis.

We hope that you will find that this is the case. Let me get started with our financial highlights and talk about some of the key metrics. I am on page 6 right now.

Our total revenues grew by 8.5% but when you remove the $16.2 million of additional revenue related to Hurricane Sandy within our Colonial Claims business, we grew the topline by 14%. We believe the infrequent nature of a storm of the size and impact of Hurricane Sandy warrants adjustment in order to best present comparable numbers.

As you can see removing Hurricane Sandy impact our organic revenues increased by 540 basis points and grew 3.9% year-over-year. From an EBITDA perspective these revenues were very profitable and increased our EBITDA from a decline of $5.8 million to an increase of $7.6 million. Our underlying EBITDA margins were relatively flat at 35%.

From an EPS perspective these revenues had a $0.04 impact and improved our EPS from a $0.05 decline to only a $0.01 decline. As Powell noted once you adjust for the Beecher Large Account acquisition and the adjustment for our acquisition earnouts, our EPS actually increases $0.04, or to 11.1% year-over-year.

Moving over to page 7. Let me highlight the key components of our revenue performance for the quarter.

Our core commissions and fees increased by $28.2 million year-over-year, or 8.4%. Sorry, 8.5%. $25.7 million of this growth came from the net acquisitions and dispositions that we did.

The largest component was the Beecher Carlson acquisition in July of last year. We also realized $7.4 million of increase related to contingents and guaranteed supplemental commissions known as GSCs. $5 million of this was related to our FIU business.

Last year this was realized in Q2. So I wanted to note that during the past four years we have realized these in three different quarters so there's some definite variability of when we know the exact amount.

The other $2.4 million was recognized across the board and was driven by lower loss claims. This was not in every office as some offices realized a positive contingent recovery and others realized a loss. As you know it really depends upon the loss experience of the policies being written in that single location.

So in summary, when we remove the $16.2 million of Colonial Claims we delivered 3.9% organic growth for the quarter. From an expense standpoint we believe it is important to present the underlying performance. Similar to the organic revenue analysis we adjusted for a few items in order to arrive at comparative numbers.

Our total expenses increased by 17.5%. But then when the impact of net acquisitions and dispositions are removed our expenses only increased by 6.5%.

Then removing the effect of the adjustment for acquisition earnouts our underlying expenses increased by 4.5%, which is on a comparative basis with our organic revenues. The main driver of the increase is compensation as this is our primary cost base. However, it was partially offset by savings in other expense categories.

Let me talk in a little more detail about this. Compensation increased with our annual merit and the flow-through of stock compensation that was granted last year. During the quarter we also recognized about $1 million of costs associated with Cory's retirement and dual running cost with myself during the quarter.

Taking all of these into account our underlying compensation cost only increased slightly at about 3.5%. This really demonstrates that we continue to be focused on growing the business profitably and running efficiently.

Moving over to slide 8. Let me now talk about each of our divisions. Starting with the retail division, which represents about 55% of our total business, we had a really good quarter and rebounded well off the fourth quarter.

We posted 16% growth primarily driven by the addition of Beecher Carlson and our underlying organic growth was 2.5%. When we exclude the seasonality of the Beecher Carlson Large Accounts business our margin improved by 150 basis points, or 4.2% so we are getting some nice margin expansion as the revenues grow.

Moving over to slide number 9, our national programs division, we had another good quarter with total revenues growing 7.7%, or 1.6% organically. We are continuing to see improvements in the marketplace and more carriers are interested in our niche programs as an alternative approach to addressing market needs.

Last year we discussed the aftermarket program related to Zurich and Everest auto program. Those programs continue to grow very nicely and we also realized good margin expansion within the programs division with growth of 4.9%.

Moving over to slide number 10, our wholesale division had another great quarter reporting revenue growth of just shy of 13% and organic growth of almost 12%. This is very impressive performance as this division is being faced with downward pressure on rates, on cat property placements in the range of 5% to 10%.

This is being offset partially by some recovery within construction. The performance for the quarter really comes down to the team that Tony Strianese has assembled and their focus on growing the business. With the revenue growth we also delivered strong flow-through and increased margins by 6.3%, up to 33.6%.

Moving over to page 11, our services division. When you normalize for the Colonial Claims impact, specifically around Hurricane Sandy, the division delivered solid organic growth of 4.9%. This was primarily delivered through our USIS and NewQuest businesses.

Please remember this division does have some lumpiness in revenues and margins like last year with Colonial Claims driving the margins up materially. However, we believe this division will continue to deliver solid margins and cash flow for the organization.

Moving over to page 12, let me shift gears now that we've discussed our financial performance and talk about our new credit facility. The objectives of this new facility is to put more maturity into our capital structure and give us the financial flexibility to support our growth. With our strong track record of delivering solid financial performance we had significant interest by many banks.

We ended up closing the facility at $1.350 billion, which was in upsizing of $100 million from our original target. So we are very pleased with the outcome and to have such a strong backing of 17 participating banks.

The structure of the facility gives us good flexibility with a term A loan of $550 million and a revolver of $800 million. This revolver can fluctuate as we need funds for acquisitions or can be paid down as we generate cash from operations.

We have previously said we are comfortable with a debt-to-EBITDA ratio of 1.5% to 2.5%. With this facility we are right in that range.

Culturally on a long-term basis we would like to be on the lower end of the range. We believe that we have secured favorable covenants and interest rates within this facility which will lower our average cost of debt from about 3.5% to about 2%.

We closed the facility last Thursday. We'll not draw upon it until the right acquisition closes in the second quarter. With that said let me turn it back over to Powell who will give us an update on Wright and provide closing comments.

Great, thanks Andy. Great report.

If you go to page 13 I wanted to talk a little bit about the anticipated closing of Wright in the second quarter. And wanted to just take a moment to remind everybody, as we talked about earlier in the year, this is comprised of three businesses.

The largest business being the flood business, that's the NFIP. And that is where we -- this is a write your own flood company that's roughly $71.5 million of revenues in 2013. You've read a lot about flood and bigger water specifically and rates either going up, down or sideways, more specifically up and then coming down.

I'd like to just take a couple of moments and make a couple of comments about that arena. As a whole, if you look at the flood business in America, 70% of those flood policies have a mortgage on them. 20% of all total policies written are subsidized somewhat and 2% of all of the policies outstanding are what I call super subsidized.

Having said that, Biggert-Waters, as you know, was in an attempt to move the rates to actuarially sound levels over a several-year period. What they have done is limited the ability to move those increases up. And in the budgets for our estimations nothing was incorporated into the plan going forward about the repeal of Biggert-Waters, or Biggert-Waters when it was passed.

So we believe the projections for the first year acquisition are still reasonable. I would also say that we have two other divisions, one being a public entity and program services arena, as we talked about it primarily works with insurance reciprocal administration. And then the specialty division, which develops national programs very similar to our national programs inside of Brown & Brown and distributes them across a network of agents across the country.

Aquiline is currently awaiting approval from the New York State Insurance Department relative to the closure of this transaction. Having said that I'd like to call on Andy to just review the revenues and earnings flow projected for the first year for Wright.

Great, thanks Powell. Yes, we wanted to take just a couple of minutes and talk about this so that hopefully you guys can better understand how the business will flow and again you can model it in.

This business also has some seasonality to it based upon the renewals of a lot of the policies and we want to make sure you guys get it right in your models, at least closer. We had said that the revenues on the 12 months post-acquisition would be $121 million. If we were to close this acquisition May 1, the revenues for 2014 would be in the range of $105 million to $110 million.

If we close the acquisition on June 1 they would be in the range of $95 million to $100 million. The lowest quarter of the year is the first quarter and the highest is the third quarter. And to give you an idea of that the second quarter would be probably around about $28 million and then will springboard up during the third quarter to a range of about $34 million to $35 million and then come back down.

So again you guys can get an idea of how this works and that is just how policies are renewed. The EBITDA margins do move underneath of this business. Let me give you the full year on this one, and we are not going to break this down by quarter right now because we do not have complete access to all of these numbers at this stage but we will at least give you an idea and you can work from there and we will refine them.

If we were to close on June 1, and again I am referencing the $58.8 million on a 12-month basis, if we close on May 1 the EBITDA would be in the range of $42 million to $45 million. If we close on June 1 it would be $38 million to $40 million.

And again the margins do move around on this business. So please don't straight-line them all the way through and so they will flow somewhat similar to the revenues but not exactly on there.

So hopefully that helps give everybody some direction as we -- once we close the acquisition we are able to get further into the details we can provide more refinement. Powell, back over to you.

Thanks, Andy. To summarize the quarter we believe we are well positioned to grow organically but continue to face a market that is under pressure or moderating rates. That means it really comes down to selling new business and continuing to retain all of our existing clients.

I am very pleased with our new credit facility and the capacity it offers. As you notice, Andy started on the first part of March and we got him right into it, so he has been busy with a lot of other teammates here at Brown & Brown.

This facility is going to help us capitalize upon good acquisition candidates when they present themselves. I know you will ask me about our acquisition pipeline, so let me address that too. As I like to say the acquisition pipeline is good and we don't believe that it is done until it is done.

So until we announce transactions and close on them, don't believe it but we have lots of activity. And I also want to reaffirm our outlook for organic growth excluding the impact of Colonial Claims for the year to be 4%. So Joseph I would like to now turn it back over to you to open it up for Q&A.

Certainly, thank you. (Operator Instructions). Sarah DeWitt, Barclays.

Hi, good morning. First on the organic growth, what gives you confidence that you can still achieve the 4% target given you were slightly below that this quarter?

Well, like I said it isn't done until it's done, Sarah. But we feel good about the business and the teammates that we have in place, the new business that we are working on and the relationships that we have with our existing clients. And so we did give that, it's unusual as you know last quarter as a guidance for the year, but we do believe that that is still our growth target for the year.

Okay, and what caused the slowdown this quarter on the core organic versus the prior and what gives you confidence that that trend won't continue?

I'm sorry, can you repeat that again, when you said the core organic are you talking about 3.9%?

Yes, it slowed to 3.9% versus 4.5% last quarter on a core basis. So what drove that?

Actually, if you think about it, the slowdown really is in programs because programs had a higher growth rate. And I don't have it right here in front of me but it was double digits in Q4 and so, as you know, we've had some programs come on and doing well.

Some of those have a little bit lower margin than we ultimately would like and those are improving as well. But we had a great quarter in wholesale and we had a good quarter in services ex-Colonial and we had a good quarter in retail.

So like I said, as you've heard me say before, organic growth is kind of lumpy, I think, and we're trying to operate in a range, and that range we believe is continuing to trend in a positive direction and as evidenced by what we did this quarter. I know that there were a number of people on this call last quarter that had some concern about our retail internal growth and so we grew 2.5%.

That excludes any acquisitions. If you put in any acquisitions it would be higher.

Okay, great. If I could just ask one more. The organic expense growth of 4.5% in the quarter, is that the right run rate to be thinking about and if so can you still expand the margins given that's mostly in line with your targeted organic revenue growth?

Yes, Sarah, it's Andy here. The 4.5%, again that has the incremental $1 million and therefore the compensation. So it's actually closer to 4%, that's probably a pretty good run rate on the expenses but obviously we are always continuing to look for areas where we can standardize more and pull more margin out of business.

Okay, so can you expand the margin then given that's mostly in line with organic revenue growth?

Sarah, as you have heard me say, as we as an organization continue to evolve we are trying to grow the business organically and profitably. And as you saw this quarter, and Andy broke it out, we have some seasonality in the expenses incurred in one of our retail areas and so we are going to do everything that we can to expand our margins but do it by growing our business.

We want to grow our business organically and profitably. So we are endeavoring to do so but like I said in the past it was said that overnight, or what is going to happen, we're going to drive the margins up to historic levels. I have been more cautious in saying that as we continue to acquire businesses strategically and add them to Brown & Brown that we are going to maintain and try to expand slowly the margins going forward.

Okay, great. Thanks for the answers.

(Operator Instructions). Michael Nannizzi, Goldman Sachs.

Thanks. I guess one question was maybe, Andy, looking at the retail segment, it looks like adjusting for Beecher Carlson, margins improved 150 basis points. You had 2.5% organic growth there. Can you help us understand what -- is there a growth bogey in order for you to see margin expansion there, or were there other tailwinds that allowed you to achieve that much margin improvement just given a very low organic growth? Thanks.

Yes, Michael, let me clarify a couple of things inside of here. If you look at the margins down below we talked about excluding the Beecher Carlson Large Accounts. If we were to pull out all of the acquisitions, the margins actually increase up to 37.9% for that.

So that would take us probably to just a little over a 5% actual growth on it. And that is just continued focus on growing the business in a profitable fashion through all of it. No guarantees that it is going to have the exact same margin expansion every quarter all the way through, but there is some expectation that it will slowly move up over time.

Yes, and Michael, if I could elaborate a little on that. As you have heard us say before I believe that when we grow the business organically there are opportunities to expand our margin. However, there are also equal opportunities for us to invest in our business to grow the business organically so we're not trying to operate in the steady-state.

So there might be expenses that would be incurred in an individual office to hire more people, producers and otherwise that would enable us to grow the business further in the future. So it is always a balancing act as you know, but we have said historically we stand by that, is when you have organic growth you can have margin expansion. It just depends on what kind of investments we made in that quarter or that part of the year.

So that would imply maybe this quarter you had fewer investments so you were able to achieve --

No, don't read into that. That's just me making a broad statement.

That's not a correlation between this quarter or otherwise. I'm just basically saying that that could be one of the reasons.

Got you. Okay. Would it be possible to break out a bit more.

It just seems like Beecher created some, because of the seasonality, we had some distortion to 1Q. It seems like we are going to see that flip the other way potentially in the second quarter. Could we maybe just get a better look at what that should be?

So we got 1Q, we are going to get 2Q. 4Q we had last year but we didn't get the breakout, would it be possible to either maybe find out what that impact would have been in 4Q last year or just get some idea, a notion of what the rest of the calendar year should look like top and bottom from Beecher? Thanks.

Well, remember Michael, number one, I want you to know that Beecher is, as you remember, three components. There is the programs component, which was on point. There is the middle-market retail component, which is predominantly in the states of Oregon and Arizona and in operation in Mississippi, and then there's the large accounts areas.

So that's kind of the three parts of the business. We did specifically try to break out for everybody the seasonality of the revenues and large accounts because there is not such a seasonality in the rest of the business. And so what we have tried to say is that on a somewhat steady-state expense level throughout the year when you have $12 million of revenues in Q1 and you have $21 million in Q2, you do have an earnings variation or lumpiness to it.

Having said that, as I said earlier, we are going to go through and make sure that everybody understands what we have bought and what we said we were going to do and how that all worked out after Q2 and then that is going to be part of the business. So it would be just part of retail just like everything else. But to the extent that we need to give further definition around something that is lumpy, we are going to need to get a little -- we would like to give a little thought to that and maybe get back to you.

Got it. Okay. Thank you.

Elyse Greenspan, Wells Fargo.

Hi, good morning. I was hoping to spend a little bit more time on the retail organic growth. I know it did pick up in the quarter and just a little bit more on your expectations in light of the other quarters this year in terms of if we should expect to see improvement from the 2.5% growth level that we saw this quarter.

Okay, Elyse, good morning. And what I would say is as you know we don't typically give internal growth guidance although we did give an overall guidance from a budget standpoint of the 4%. That 4% was not broken out by division and I've said before, and I know I will say it again in the future, is that we believe that each of our businesses operate in a band and that band can typically be trending up, or trending down, and we have been in an upward trend barring the performance last quarter.

And as we said we thought that was a one-off situation, which as I said, we did improve or rebound from that nicely. So we have said historically that we think that retail, the business in retail is a low to mid single-digit organic growth business.

So that's the guidance, if there is such a thing that we would give you but we don't give specific guidance by quarter. And some of that, as you know, is driven by the economy in the middle-market and our ability to write lots of new business, which we are very capable of doing and I am very pleased with we are doing and specifically retaining the existing clients that we have, which is so important.

Okay, thank you. And then just a couple of numbers questions.

I know you in terms of the contingent supplementals pointed out this is where the shift in FIU program from the second quarter to the first quarter. Any more numbers you want to provide in terms of the outlook for the (technical difficulties) or supplementals for the balance of 2014?

Elyse, I think on this one here we don't budget for contingents and GSCs because they can be quite lumpy in nature. And they can move up and down quite a bit. So we don't really have a view to the back end of the year at this stage.

Last year, Andy, do you have right there what we did in Q2?

Yes, hold on one second. Last year -- one second, guys. We did, in the second quarter, just looks like just contingents.

Hold on. I just want to make sure we get a total here before we quote a number. It's got to be more than that.

Elyse, why don't you do this, if you got another question do that. Just I want to make sure we have got a good number here before we respond. If not we will follow up after the call, okay?

Okay, that's fine. And then also on the acquisition earnout expense in the quarter, what transactions did that stem from?

Yes, perfect. Yes, so we had three different ones that we did on -- three big ones that came through on earnouts.

We had Texas Security, and that was the largest of it. That business is performing really really well for us right now so we are very pleased with that.

We also had Rowlands & Barranca, again, also performing well for us. And then our Edgren Hecker & Lemmon acquisition. Those were the three big ones that came through.

All of them we are seeing really solid performance and indications that the go-forward performance will be good. As you probably remember underneath of FAS 141R is, this is based upon a forward projection of revenues, and therefore we have to book the expense now.

So we will see those revenues coming forward in the future but we have to take the charge now. So while we never enjoy taking the charge in the P&L, we think it is actually a very positive thing that the underlying assets are performing well for us.

Okay. Thanks so much.

And then just one last quick question, in terms of your private healthcare exchange offering, I know you guys are partnered with Liaison, and just in light of the Towers Watson transaction there, has your view on that arrangement or anything that you are doing on the private healthcare exchange front changed at all in the past few months?

No, Elyse, thank you for the question. I would tell you that we continue to put clients onto our exchange. We have roughly 20 clients on the exchange and maybe 2,100 roughly people onto that exchange.

The transaction in our business, as you know, there is lots of firms that could be in the space which could be deemed a competitor in one segment and a trading partner in another segment. We obviously watch those very carefully and they have assured us that the information that is in the exchange will be kept private, as you would expect, for whole bunch of reasons.

But at the present time we are comfortable with that relationship. We also as we have said think that the exchange is an option. It is not the option.

And so as we go forward and we look at the exchanges as an option for all of our clients, some of them could be small, some of them could be large. We are going to continue to look at ways to invest in that type of -- those type of capabilities to continue to prepare us and better prepare us going forward.

But we think that we are going in the right direction. I am very pleased with it.

Okay, thanks Powell and thanks Andy and thanks for taking the questions.

Hey, Elyse, can I close off on your question here? So second quarter of last year we did just under $8 million in contingents and that included the FIU. So if you pull that out a range for last year would've been about $3 million, $3.5 million excluding FIU, okay?

That was last year.

Last year.

Yes.

Okay, thank you.

Adam Klauber, William Blair.

Thanks, good morning, everyone. The program business, that's always a volatile business but clearly the quarter was lower than the range it has been in the last couple of quarters. Were there a couple, one or two areas that just didn't do as well during the quarter?

No, well, let me back up for just a second. I want to pull something here before I -- we had a couple of businesses, it's just like anything else.

We had a couple of businesses that didn't hit their budget for the quarter and we had some that exceeded their budget substantially. So remember what you have seen in the organic growth in programs over the past couple, let's say 18 months, as you have had the impact, a very positive impact of one, the automobile aftermarket program coming in and two, the Everest program coming in.

Sure, sure, okay. So as we think about going into the summer, I always think of June, July renewals being pretty big for property particularly Southeast Wind. Is that pretty significant for both the program and also the wholesale business for you?

The answer is that is a fair assumption. I think that if you were going to put up by industry type, I think you would say -- think about it, quarters are big dates, so July is a big date.

Number two, a lot of public entity business renews in July, either July or December, actually. But as it relates to cat property if you are asking on a seasonality of business and programs in wholesale, I'm not going to tell you that there is some huge bell curve lump in the bottom of the summer, because a lot of people want to move their [ex-dates] out of wind season.

So if you think about it, when is the awareness the highest in the underwriting community? It starts in about May 1 and it goes until November. So you could make the argument that you would want to move your effective date, if possible, outside of wind season so they look at it slightly differently. But there's a lot of business that renews in the summer anyway, so there's not a huge lump. Like if you are looking for a lump in there, that's not the case.

Right, right. Okay, that's helpful. And then how is Arrowhead doing?

Arrowhead is doing great. We are really happy.

We are really pleased with the team. Chris Walker, Steve Boyd and Steve Bouker and all the rest of the team out there.

So we've got some good stuff going. So we've been very pleased with the investment. It has grown nicely and we expect there to continue to be other opportunities in that operation, so we are very pleased with it.

Okay. And then finally on retailing, and obviously it's coming up again, even on a range, came up this quarter from what it's been over the last couple of quarters. Are we starting to see more of a bump from exposures in audit premiums than we saw say a couple of quarters ago?

The answer, Adam, is depending on the part of the country you might see that, yes. So I have always -- I was reading in the Wall Street Journal last week, there was an article about a development in Miami.

So anybody who has been to Miami recently sees a lot of towers being constructed. I didn't realize there's 50 new towers going up. That is just mind boggling.

And so now there's a boom-and-bust cycle that has always occurred in Miami as we all know as well. You take that and you compare that with Naples, and Naples is still very slow, and we've talked about that before, and so depending on where you are in the country we are seeing flat to slight upticks in audit premiums, particularly on contractors. And so whether you did it in Phoenix, or you did it in Northern California or you did it in Upstate New York, you are seeing a little of that but it depends on the region specifically.

Okay. Thanks a lot.

Mark Hughes, SunTrust.

Thank you, good morning. Could you give us an idea how Beecher Carlson year over year at the top line in the first quarter and then what is your expectation for full-year topline at that unit? Again, year over year.

Let me let Andy, we're going to pull it up and get the exact number for you.

I think maybe the first piece that, Mark, we would talk about inside of there is the Beecher Large Accounts. They grew just a bit over 10% year-over-year in the quarter, so that underlying part of the business is performing very well. On a full-year basis --

I would tell you that is $115 million, that's what we gave guidance on --

$115 million, yes, and we are still targeting for that number right now. Should be right in that range.

Also if you remember we gave guidance of $0.05 to $0.07 on EPS. We still believe that we are right in that range at this stage.

The impact on 3Q, I think if I remember correctly, there was a seasonal weakness in Q3 for Beecher. Would that be comparable to the $0.02 that you saw in Q1?

No. Remember, let's talk about that. The issue in Q3 we talked about was the senior leadership of this organization are salespeople. That's good.

We are salespeople. And they were very focused on consummating a transaction with the right party, right party being us. So they weren't able to dedicate as much time and energy to the new business production.

So that was where the miss was on the top line and the resulting bottom line miss in Q3. Every quarter since then, that means Q4 and Q1, they have met or exceeded the topline revenue targets and bottom line for that matter, for the most part in Q4 and Q5. I mean for Q4 and Q1.

Right, so there's not an underlying seasonality at Beecher that is less favorable in Q3, is that what you are saying?

No, remember the only thing if you want to call it a seasonality component is remember their big quarters are two and four and their smaller quarters are, and that is simply when the business has been written. It's not a -- that doesn't mean that in a year from now we couldn't write more business in Q1 and Q3.

I don't know that. But I am just saying there is nothing more than the fact that the two big quarters are two and four.

Yes, I was just curious if that's the case if Q3 is not a big quarter, then does it have a little bit of a drag like you might have seen in Q1?

Mark, it wouldn't be to the same extent but it would definitely be a drag in the business.

It was this last year. Meaning last year in Q3.

But that's because we missed the revenue.

Right.

But I think again because the expense base is relatively flat the margins and correspondingly the EPS impact.

Okay. Then final question, Powell, you had suggested that there were national program opportunities that you are looking at. Are there some that are perhaps closer to fruition than others?

No, the implication was not an acquisition standpoint. What I am saying is that we feel really good about the partnerships that we have with our carrier partners and programs.

And what that opportunity exists is to either expand an existing program, or create new programs of which we are always evaluating and talking to our carrier partners about. So remember, Mark, if you think of us as a virtual insurance company for a moment, we are not the risk bearer. We never ever knowingly or unknowingly want to bear risk.

Knowing that then there are scenarios where carriers think that we can do it and we can prove to them that we can do it more efficiently. And in some instances then they may, or in a segment we may have more expertise than they, and so we are very very pleased with the entire platform.

It's not an Arrowhead comment, it's an entire Brown & Brown programs comment. So everything in Brown & Brown programs in Tampa, everything in the Midwest, all over the country, all of our programs put together we feel really good about.

If we think about over the next few quarters, are we likely to hear about another auto aftermarket or Everest program?

I'll tell you, that is a great question, Mark. And the answer is, I don't know. And so I don't mean to be funny, but I'm going to say this.

Those two scenarios were both very unusual. Very pleasantly unusual but very unusual. They are working out nicely for us and nicely for the risk bearer.

That does not mean that we won't talk to other people about that possibility but I wouldn't want you to budget anything or expect it. It's sort of like the question that we've gotten several quarters in a row that should we budget for another large acquisition?

And one a year because apparently we've got now we are trying to close the third one and it would be three in three years, and the answer is you can't budget that. We are just out looking to do traditional transactions that fit culturally and strategically add to our capabilities.

If you take that in mind, some of those, many of those are going to be in that $5 million to $10 million to $15 million to $20 million range and every once in a while there's going to be one that is bigger than we think fits culturally. So, no.

Very good. Thank you.

Dan Farrell, Stern Agee.

Hi and good morning. I just wanted to dig into the expenses a little bit more and a couple of things. In your 4.5% growth that you show for this quarter, that does include the step up in the non-cash stock compensation, which would seem to be about 1% impact and that continues for another quarter, but I am guessing would level off in the third and fourth quarter.

So if you adjust for that and then adjust for the $1 million, it looks like core expense growth might be closer to sub-3%. So I just want to compare that to your comments of 4% going forward if you think it can actually come down a bit more or if there might be other expenses that might be offsetting that as we go forward? Thank you.

All right, Dan, so you did a good job with your math overnight. Let me hit the first part of it.

Yes, there will be continued flow through of the non-cash stock, that was part of it. And you're right that will, therefore, be on a comparative basis in Q3 at that stage.

We did have some incremental in Q1 but it was nothing that was material in nature, and just to give you an idea it was less than $300,000 of impact. So it's actually pretty small inside of there.

The reason why we would say on the expenses is we are going to continue to try to manage those but should not expect that there is going to be an immediate bump in any of those, as Powell mentioned. We are going to continue to make sure that we are making appropriate investments in the business and scaling it as we need to as we go forward.

Okay, and then if you look at the margin improvement within your segments it actually seems like there is probably even more healthy expense control there in an underlying basis. I'm just wondering in corporate could you talk about the expenses there? Is there anything else maybe driving that besides the $1 million that you called out for the departure of Cory?

Dan, this is Powell. I would tell you that the answer is there is not one thing that screams out at it. That's the first comment.

However, what I would tell you is that as we are evolving from $1 billion to $2 billion company we are continuing to look at how we build not only our financial and accounting capabilities but our other capabilities of setting the platform up to be ready when we are $2 billion and beyond. And so I think there will be some continued investment there but I can't lay it all out right now because we are continuing to look for the right people.

Remember, we are always looking for the most talented athlete, or the best person as opposed to we are just trying to fill this position. We are actually trying to fill some positions but we are always looking for talented people. And so there is a little of that in there and there will be a little of that in the future, yes.

Okay, thank you. And just one last question.

The change -- the increase in the change in the acquisition are now payable this quarter. Is there one particular deal that is driving it more than others, or is it just overall performance of acquisitions that is moving that?

Yes, there is. There is one business, a binding authority business in Texas that has done really well. That is Texas Security, but, yes.

Okay. Thank you very much.

And by the way, we are really pleased about that. So they are doing well and we are happy for them. So that's good.

No, understand that. That's a good indicator of the underlying trend. Okay, thank you very much.

John Campbell, Stephens Incorporated.

Hey, guys. Good morning. I know you guys, I know that Beecher has started to shift this a bit, but could you guys just give maybe a rough breakdown of fee versus commission rev as it stands today and then as you factor in Wright, just expectations for the next several quarters?

Wait a minute. When you say that are you talking about as an organization, or a comment around Beecher?

Just overall, fee versus commission.

Yes, well, I would tell you this. I'd like to confirm that number. Andy, you don't have that number right there?

No, we don't. We will take that as a follow-up.

But I can tell you this, as you remember inside of the Beecher comments we had, in large accounts, we had $50 million of fee and $20 million of commissions. That I know for a fact off the top of my head.

As it relates to the fee business right off the top of my head internally in Brown & Brown I would have to go back and I would want to confirm that. In the middle market retail that number prior to our teammates joining at Beecher, it was roughly around 96%, 95% I thought, 96% commission.

So I would want to go back and check that, so I wouldn't quote me on that yet, but I'm pretty confident. So we have to think through that and we will follow-up with you.

Sounds good. And then just two quick housekeeping items.

Just one, just the annualized acquired rev in the quarter. And then two, I see that there is $16 million in the Sandy rev in 1Q 2013 but if you guys can this remind us if there was any of that Sandy-related rev that kind of rolled into 2Q 2013?

There is a little bit. Do we have that number right there?

Not on the Sandy piece in Q2. Again, we can do it as a follow-up but the number was pretty small in the second quarter but we will come back and reconfirm it.

Okay, and then the annualized acquired rev in the quarter (multiple speakers)

Yes, zero. We basically didn't do any acquisitions. We are waiting to try to close, as you know, Wright and we continue to talk with lots of other people about the possibility of investing in their business.

Got it. Thanks for taking our questions.

Ryan Byrnes, Janney Capital.

Great, thanks for taking my question, guys. Just had a quick question on the acquisition expenses.

They were kind of in-line with the acquired revenues. Just wanted to see if there are any, just dig a little deeper, what's in there and obviously is that a run rate going forward? Just wanted to get your thoughts on that.

Yes, let me take that one. Because I think at first blush it definitely looks like it is the revenue is basically the $27 million in expenses or $27 million.

Just to give you an idea of that $27 million of expenses, $17 million of that is related to Beecher Large. $10 million is non-Beecher Large.

So the rest of the acquisitions during the quarter are actually performing quite well. Again that will move back around but that is kind of the dynamic. So don't read into it that they are not performing.

Got you, no, perfect. Again, just trying to get a little granularity on the Beecher Large and just how it impacts underlying margins there within the retail segment.

Clearly it had a negative, or a downdraft in the third quarter of 2013. You guys said that there was some seasonality as well, some closing issues.

But then in the fourth quarter we were expecting it to spring forward a little bit, but the retail EBITDA margins didn't really move much. And just trying to think about, maybe you guys can help us get a little more granularity as to what those revenues were for the third and fourth quarter for Beecher large account business?

Wait a minute, I want to make sure -- remember, I think we are mixing apples and oranges there. As you know, Ryan, the internal growth of Beecher as an organization is not contemplated in the first 12 months.

So their performance, which was very good in Q4 and in Q1 and obviously we will wait to see in Q2, is not involved in that. Andy alluded to the fact that they had over double-digit growth organically in that segment for the quarter. And so from a standpoint of the seasonality -- can you just repeat the question, I apologize.

Sure. So the EBITDA margins in the retail segment, they were year over year in the third quarter of last year were lighter than third quarter of 2012. And again that was because the Beecher deal closed kind of late and some large account concerns.

And then you mentioned there is a seasonality in the second quarter and the fourth quarter but the fourth quarter the retail EBITDA margins didn't really improve much. So I'm just going to figure out how we should look at what the large account business was and I know that fourth quarter of 2013 overall retail organic was a little light. But just trying to get a little more granularity on what Beecher Large Account business was in the third and fourth quarters of 2013.

So let me attempt to address that. You are asking the question about margin expansion in Q4 where we effectively had 20 bps of organic growth in the retail segment.

Correct.

So the answer is, we had very nice results at Beecher but having said that I am talking about the core retail business. That said, from a standpoint of the EBITDA, as Andy referred to earlier, expanded in Q1 nicely. And I would have to go back and look, I don't have Q3 -- do you have Q3 right there in front of you?

No, we don't have Q3 because I think it is similar to this one. There's some moving parts underneath so we would have to look at that one. We don't want to quote a number without being exact on it.

Okay great. Moving on.

You guys have any -- obviously the earnouts were elevated, I guess it seemed like they were some of the highest I've seen in quite some time looking at my model. Should we be expecting that going forward or is that just again a one-time issue? I know we have talked about this before but just wanted to clarify that.

Yes, Ryan, as you know due to, from a GAAP standpoint, our accountants and everybody else wants us to estimate the ultimate cost to the best of our ability on a quarterly basis. And so I don't think you should draw a parallel between the performance of some businesses versus the performance of other businesses.

What we try to do every quarter is, based on the information at hand, it definitely -- every time we get to this I always sort of scratch my head because of how this works. But I understand why and so from a standpoint of a non-cash item in this adjustment and earnout liabilities, but don't read into the performance of what happened with let's say three businesses particularly that that can be imputed across to a bunch of other acquisitions that are currently in the mix. Don't do that.

Okay. Great, thanks for the answers, guys.

Josh Shanker.

Thank you. We've been around this every which way and I'll ask it again in a different way -- If we ask about revenues, what not.

Can we get the EPS impact in seasonality terms for 3Q and 4Q due to Beecher Carlson? So that puts an imprint -- obviously one year from today it won't matter because that will be the basis of how we think about 3Q 2014, 4Q 2014 and 1Q 2015.

Well, Josh, we will have to look into that. Because we don't have that right here. (multiple speakers)

Okay, so I would say the disclosure in the 1Q 2014 release is great. If we can just get it as a supplement that information backdated for the last couple of quarters, I think everyone's issue would be happily resolved.

Okay.

Thank you all. Good luck.

(Operator Instructions). It appears there are no further questions at this time.

Yes, Joseph we wanted to have -- Andy wanted to make one other comment before we wrap up.

I wanted to just circle back on the Wright and reclarify the revenue ranges on there just to make sure that we are all on the same page. We said $121 million for the full year.

If we were to close on a May 1, the range would be $82 million to $86 million. I know I told you a different number, so we pulled it from a wrong column, I just wanted to clarify that.

$82 million to $86 million. If it's on the June 1 it's $74 million to $77 million on there. The rest of my comments regarding EBITDA hold.

Okay, Joseph, thank you very much and we want to say thank you to everybody and we will talk to you next quarter.

That concludes today's conference. Thank you for your participation.