Brown & Brown Inc (BRO) 2014 Q4 法說會逐字稿

Good morning, and welcome to the Brown & Brown, Inc. 2014 fourth-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 the 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 fourth quarter of 2014 and are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the Company's determination as it finalizes its financial results for the fourth 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 and in the Company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Marquita. Good morning, everybody, and thanks for joining us for the fourth-quarter earnings call. It was another positive quarter for Brown & Brown as we delivered solid financial results on both the top and bottom line. So let's get right into it.

We delivered $393 million of revenue for the quarter, and growth of 14.6% with revenues growing 3.3% organically. We also delivered organic growth in each of our four divisions.

As part of our business strategy to exit the reinsurance brokerage space, we completed the sale of certain assets of Axiom Re business on December 31 with the associated loss having a $0.21 impact on earnings per share this quarter. Yesterday, we completed the sale of the Acumen RE business. Later, Andy will talk about the full-year impact of these sales; the loss on the Acumen sale was less than $500,000.

In addition to the loss on the Axiom sale, we had an adjustment for this quarter for non-cash stock compensation. Due to materiality of the loss on the sale of Axiom and the adjustment to the non-cash stock compensation, we will primarily focus our discussions on adjusted earnings as we believe that provides a more meaningful comparison of the result of our operations to the prior year.

We grew our adjusted earnings per share by 9.1% to $0.36, and we expanded our adjusted EBITDAC margin by 50 bps. Our GAAP reported earnings per share was $0.17. Andy will walk you through in more detail on the financials and these adjustments later in our discussion.

As a reminder, we completed a $50 million accelerated share repurchase program that was initiated in Q3, which was part of a $200 million plan approved by our Board of Directors in the second quarter of 2014. Lastly, during the course of 2014, we acquired businesses with annualized revenues of $160 million which is a record year for Brown & Brown. In summary, we are pleased to deliver another quarter of growth both organically and through acquisitions with modest margin expansion and solid earnings-per-share growth.

So now let's get a little deeper into our results. First, retail delivered 2.3% total revenue growth and 1.5% organic growth.

A couple observations about the middle market. Middle-market America is improving, and we are seeing pockets of expansion in the form of construction and some hiring. However, what we are not seeing yet is consistent growth throughout all of the United States.

Property renewal rates continue to be under pressure; the most pronounced are in coastal areas with E&S rates they can be down 5% to 20%. We expect property rates for both the admitted and E&S market to continue to be under pressure in 2015.

Employee benefits, especially for large groups, are experiencing some rate increases. Many of those are moderated with plan design changes that the employers are implementing.

Work comp rates are moving up or down based on the state in the industry segment. Payrolls are growing slightly, and we're primarily seeing that growth in areas of building and construction in those segments.

Carriers continue to look for rate on automobile and commercial auto but rates are generally flat. We are seeing flat to down 5%. It's all based on the claims experience.

National programs now makes up 24% of our Company. It grew 47% reflecting the addition of Wright. On an organic basis, this division grew 2% for the quarter.

We experienced good growth in personal property, automobile aftermarket, and sports and entertainment. Offsetting some of this growth was the performance of our force plays coverage business, Proctor, which has been down slightly as the economy improves.

We continue to see steady retention rates in most programs but we are experiencing some pressure on property terms and conditions. Wholesale had another great quarter posting organic revenue growth of 7.7% and total revenue growth of 12.3%. This division represents just under 15% of the total Company and continues to be the organic growth leader in the fourth-quarter and for the entire year of 2014.

Both our brokerage and binding businesses grew nicely for the quarter. While we're experiencing rates for large coastal property falling 5% to 20% as I said earlier, Florida leads the way with reductions on large coastal properties closer to that 20% down range.

Professional liability is flat to up slightly, and employment practices liability is continuing to see upward pressure. We are still seeing some accounts move from the E&S market back to the admitted market primarily within the G&L segment -- GL, I'm sorry, general liability segment.

Services division had another outstanding quarter with organic growth of 10.6%, and nearly all the businesses experienced organic growth in the quarter. The big winners were USIS, The Advocator Group, NewQuest, and Protocols. Overall, it was a great -- it was a good quarter for our Company.

Now I'd like to turn it over to Andy who will discuss our financial performance in more detail.

Great. Thank you, Powell, and good morning, everyone. Let me now discuss our financial highlights and talk about some of the key metrics for the quarter.

I'm on slide 6 which is our GAAP reported results for the quarter, which as Powell mentioned earlier reflects certain large items that make it difficult for a meaningful comparison to the prior year. So we won't spend too much time on this slide. However, I would like to highlight that we delivered $50 million of revenue growth in the quarter with 80% coming from our acquisitions and also had solid underlying organic growth of 2.3%.

Moving to slide 7, our total revenues grew 14.6% for the quarter and when you remove the revenue related to Wright, we grew the top line by 6.1%, split about evenly between organic growth and revenue from other acquired businesses. We show our results with and without a large acquisition such as Wright in order to provide a clearer picture of our comparative financial performance.

Our adjusted pretax income grew by 7.5% even with the increased interest cost related to our credit facility and bonds. If our interest costs were flat year on year, then our pretax income would have increased by about 15%.

We believe EBITDAC is the most appropriate measure for comparing our performance across periods as it is a close proxy for cash generation. Adjusted EBITDAC for the quarter was $121.6 million compared to $104.3 million, a growth of 16.6%. And excluding Wright, our EBITDAC growth was 8.5%.

Adjusted EBITDAC margins expanded 50 basis points to 30.9%. We are very pleased with this margin expansion and flow through for the quarter.

Adjusted net income for the period grew 10.4%. Our interest expense increased by $ 5.7million in the fourth quarter as compared to the prior year. This increased interest expense is associated with our credit facility and our bonds. A

s a reminder, our new credit facility and public bonds provide us with the capacity to draw upon for acquisitions when they become available, they extend our maturity ladder, and reduces our exposure to rising interest rates. By capitalizing on the favorable credit markets, our blended cost of debt is now 3.4%.

Partially offsetting the increased interest expense was a lower effective tax rate of 36.4% for the quarter. The lower rate in the fourth quarter was driven by the true up to our annual rate of 39.1%.

This annual rate is down from the prior year by 30 basis points driven by state apportionment and some permanent differences. Later, I'll talk about expectations for 2015. Our adjusted earnings per share increased to $0.36 for the fourth quarter, which was a $0.03 or 9.1% improvement over the prior year.

Moving to slide 8, I'd like to highlight the key components of our revenue performance for the quarter. Our total revenues increased by $50 million year over year or 14.6%. A large portion of this growth came from our net acquisitions and disposals. The largest component was the Wright acquisition.

We also realized a $4.1 million increase for contingents and guaranteed supplemental commissions, which were substantially related to our Proctor business that is in our national programs division. Proctor realized $3.3 million of incremental contingents in the fourth quarter as the carrier completed their calculations early.

These contingents historically have been received in the first quarter and have been in the range of $1.5 million to $2 million. Going forward, we expect to receive them in the fourth quarter, so please ensure you address your 2015 models.

Our as reported EBITDAC margin decreased to 20.4% from 30.4% in 2013. In order to arrive at comparative numbers, we've removed the loss on the sale of Axiom and the credit adjustment for non-cash stock-based compensation. This last item represents a credit of $5.9 million and a benefit to EBITDAC of 1.5%.

$4.5 million of the $5.9 million is related to the incentive adjustment for Arrowhead with the remainder related to the employee stock purchase plan expense true up. As it relates to Arrowhead, there is a three-year incentive plan for management. While the maximum incentive has not been achieved, we're very pleased with the overall performance of the business.

Moving to slide 9, let me now talk a little bit more detail about each of our divisions. First, our retail division delivered 2.3% growth partially driven by acquisitions completed within the last 12 months, and our underlying organic growth was 1.5%.

Our year-over-year as reported EBITDAC margin declined as a result of two office divestitures completed in the fourth quarter of this year, which accounts for a total loss of approximately $3.8 million or 140 basis points. The other half of the as reported margin decline is due to one-time gains on sales of books of businesses and a legal settlement in the prior year. Therefore with these items excluded, the year-over-year EBITDAC margin is essentially flat for the retail division.

Moving to slide 10, our national programs division revenues grew by 47% mainly due to the acquisition of Wright, and increased 2% organically. We are pleased with this result.

We realized strong EBITDAC margin expansion on an as reported and adjusted basis. Our adjusted EBITDAC margin improved by 240 basis points, which was driven by the additional contingent commission received by Proctor, the addition of revenue shifted from the third quarter to the fourth quarter for one of our public entity pools, which as you'll remember we mentioned last quarter, and the increase in allocation of certain overhead costs to the services division.

Moving to slide 11, our wholesale division had another great quarter reporting revenue growth of 12.1% and organic growth of 7.7%. This is the division that Axiom was a component of historically. So the loss associated with the sale really impacts the as reported numbers.

When the loss associated with the sale of Axiom is excluded, wholesale delivered EBITDAC margin improvement of 130 basis points. We expect continued investment in new brokers and underwriters so our margins for this business will continue to move up and down slightly over time.

Moving to the services division, we delivered impressive organic growth of 10.6% for the quarter. We realized strong growth in most all profit centers within services with the exception of our claims processing businesses that are dependent on weather events. When taken in consideration, increased expense allocation from the national programs division, the underlying margins would increase about 150 basis points year over year rather than down 70 basis points as presented on the slide. In summary, we are pleased with the performance of each division.

On slide 13, in the second quarter, we provided ranges of where we expect Wright to perform. We are pleased to report that the performance of the underlying businesses are in line with our expectations for the quarter.

As we mentioned in the second and third quarters, the original forecast included $7.5 million of revenue for weather events. For reference, this was based upon the 10-year average, excluding Hurricane Katrina and Superstorm Sandy.

As we mentioned, in some years the actual results will be higher or lower than average with 2014 being one of those years below the average due to no material storms. The shortfall in revenues and EPS is driven by lack of CAT revenues. Please note there is a small amount of CAT revenue included in the Q1 and Q2 2015 projections.

Moving to the next slide, we won't spend a lot of time on this, but we wanted to provide an adjusted view of our full-year results in order to help you with your models for 2015. Our GAAP earnings are presented in our press release.

From a revenue perspective, we grew almost $231 million or 17.2% with a little more than half coming from two large acquisitions, those being Wright and Beecher. Please note that we're only excluding the Beecher revenues for the first half of 2014 since Beecher was acquired effective July 1, 2013.

Organically, we grew by 3.5% which we were very pleased with. From an EBITDAC perspective, when we adjust for the Axiom loss, the credit for the non-cash stock compensation, our margins are flat year on year. Adjusting for the full-year effective Beecher and Wright, our underlying margins improved by 30 basis points.

Our earnings per share increased to $1.63, which is a 14% increase. If you normalize for the increased interest costs, our earnings per share would have grown another $0.05. In summary, we are pleased with the underlying performance of each division as they all grew organically and had good flow-through to the bottom line.

Next, I want to talk and give everybody a little bit of outlook for 2015 as we know everyone needs some guidance. Let me first start with employee compensation and benefits. These should continue to be in the range of 50% to 51% of commissions and fees.

You'll note in the fourth quarter that we were 53.3% of commissions and fees versus 52.9% of last year, and that represented an increase of about $1.5 million due to the increased performance for the fourth quarter but do not believe that that is an impact on a full-year basis and why we're giving range of 50% to 51%. Our non-cash stock-based compensation should be in the range of $7 million to $8 million per quarter. Interest expense for the fourth quarter should give you a good indication of our run rate.

Our effective tax rate for 2015 should be in the range of 39.4% to 39.5%. We expect some uptick over 2014 due to growth in higher tax rate states and a couple of states consolidating all legal entities for tax purposes.

We mentioned earlier about our disposed businesses. The total annualized revenue for these businesses equals $17.5 million, with $1.5 million being in retail, $9 million in programs, and $7 million in wholesale. Hopefully with this, it gives you a good indication for 2015.

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

Thank you, Andy. Great report. A couple comments in summary.

First of all, as I said the middle market economy continues to slowly improve as we are seeing it across different industries and geographic regions, but we are not seeing it across the entire board being up, number one. Number two, you will ask that how are the acquisitions and we have a good pipeline of acquisition candidates that may fit culturally, as you've heard me say before. When we close an acquisition, all depends on when the seller is ready and if we can come to financial terms and conditions that work for both parties.

We do expect continued pressure downward pressure on rates in 2015. Overall, standard market rates will either moderate on their increases or start to go slightly negative in 2015. The biggest push or biggest decline we see, as I've said, is on catastrophic property, particularly in properties that are right on the water.

So we are very pleased with our performance for Wright, and we're excited about our 2015 plan going forward. While we do have some uncertainty in the market, we feel each division is positioned for continued profitable growth.

So with that, I'd like to turn it back over to Marquita and we'll turn it open for questions.

Thank you.

(Operator Instructions)

Josh Shanker, Deutsche Bank.

I want to revisit was what Andy was saying about margins in the retail division. It says here in the presentation you have the 140 basis points of decline based on the loss on the disposal less than Colorado Springs and then there was an accrual. What was the other part of it that makes up the other half of the margin decline?

So if you look at it, the division down 280 basis points year over year. Half of that is for the sale of our Lexington and Colorado Springs. And then last year in the fourth quarter, we had sold a couple businesses as well as we had a legal settlement so we had some gains there. So if you neutralized both, that's how we get to flat margins.

So 30% plus is more normalized on what we should expect, not 31%, I guess.

Correct. Yes.

Okay. That's good. And two, on share repurchase and weighing that in the future, why doesn't Brown & Brown have an outstanding authorization that it can affect if the time is right? What's the downside of just being prepared, as the Boy Scouts say?

We have that actually. We were given an authorization last year of up to $200 million and of that, we exercised $50 million of it.

So you don't need to go to the Board. If you guys want to start buying tomorrow, you could.

That's correct.

Okay. That's good. And then three, in terms of the construction growth that you're seeing, you made the exception between coastal and non-coastal. Is the construction growth national or is that also regional?

I would tell you that we see pockets of it regionally. But as a general rule, we are starting to see more construction starts. So let me give you an example.

You might think, as an example, Phoenix which was an area that slowed down a lot, it started growing or seemingly growing more rapidly last year early in the year and the prior year. And I would tell you that Phoenix maybe got a little ahead of itself, meaning the metro area.

So they're not seeing as much growth as maybe you might have seen right out of the blocks. That doesn't mean that there's not growth, but that's an example. If you come to South Florida, there are so many cranes in the sky in Miami, it's kind of unbelievable.

So depending on the city and what they're building in certain areas, Josh, we're seeing more rental housing apartments being built than single-family homes. Those are just some broad statements.

Okay. And then one final thing. Andy said in the Wright forecast for the first half of 2015, there was a modest amount of CAT experience assumed in the revenue numbers. When we talk about Wright, I know it's a flood company, but in servicing claims and when you talk about putting CAT numbers up, is that for a wide variety of catastrophes? Like if the eastern seaboard got blanketed in a major snowstorm, would there be revenues to be mined out of that?

These are flood related claims.

Only flood related claims? So there needs to be some flooding that would restore you, I mean it's not like you put so much revenues in your forecast but flooding would be required to meet those forecasts, probably?

That's correct. Josh, just to give you an idea, it's about $0.5 million. The reason why we call it depends upon where it could end up impacting or rounding on EPS, but it's about $0.5 million.

Okay. Thank you very much and good luck in the new year.

Elyse Greenspan, Wells Fargo.

I was hoping just to talk more about what you're seeing in that retail segment in terms of organic growth.

Elyse, can you get closer to your microphone? We can't hear you.

Can you hear me now?

We can hear you perfectly.

I wanted to talk more about what you're seeing in terms of in the retail segment in terms of organic growth there. I know you pointed to a little bit of a continued slower improvement in the middle-market economy. The Q4 was obviously the lowest quarter we saw in the organic growth run in 2014.

And if you could just also point to what you might expect in 2015. Then just remind us what level of organic growth you would need in that retail segment to see your margins expand?

So good morning, Elyse. First off as you know, we don't give -- we have historically not given organic growth guidance. We gave organic growth guidance as an organization for 2014, and that was the one time we're going to do it. So whether it be retail or overall, our response will be the same. We will not be giving a number but we would say the business overall is a low to mid-single-digit organic growth business. That's number one.

Number two, the question relative to what we need to see, to see margin improvement is there's really one or two ways to think about that. We have said -- we don't say that if you grow X percent like some of the other firms that are publicly traded, then we get margin expansion.

It is all a function of the investment that we're making in our teammates. We ended the year as an organization with 7591 teammates. And so that's across all divisions.

The majority of those are in the retail segment. So as we add producers, many of them come from other industries with sales experience but no insurance experience. There is a ramp-up period in terms of getting them launched.

So we have not said and are not going to say, if we grow X percent then our margins increase Y. What we're basically saying is our intent is to invest in our business so we can grow organically and profitably.

Okay. Were you looking at the fourth quarter, the retail organic revenue did slow a little bit. Was there anything in that number that caused one-timers that we should think about when we're projecting forward?

No. There's nothing quite honestly, Elyse, that I'm going to point out. I know that it was based on your question, it was lower than your expectation. I would say that retail just like any of our segments can kind of go up or down slightly. But we overall had 2% growth for the year. And we are looking for that to continue to improve as the economy improves.

What is -- it seems like you pointed to a higher level of non-cash stock comp, about $7 million to $8 million. I think last quarter you had said $6 million to $7 million. What's driving the increase there?

Every year, Elyse, we normally have grants in the first quarter. Nothing unusual. And so that just represents the year-on-year increase.

Okay. And then one last question.

Just a reminder so I want to make sure anybody gets confused is in July 2013, we did the larger grant. What I just mentioned is not the case. We're not planning any large reloads or anything of that nature. This is just our annual grant that we do in the first of the year.

And those are people that have not -- did not participate in the 2013 grant who qualified for a grant now.

And some of those, as an example, would be some of our newer producers that have joined the team, new profit center leaders that are in new roles or other senior leaders inside the organization. So we only to those once a year, Elyse.

Okay. Perfect. And then in terms of on the share repurchase front, I know you guys completed that $50 million but that was more all towards the start of the fourth quarter. In terms of our thinking about how you might use that $150 million you have left under the authorization timeframe in 2015 and your thoughts on when we might see additional repurchases?

Okay, Elyse. We want to make sure that everybody knows we have the authorization but just because we have the authorization is not a foregone conclusion that we're going to repurchase $150 million of stock in the year. What I would say is this. We are thinking about how we best invest in our business and we can return or invest in that business one of three ways, as you know. We can hire new teammates of which we are doing constantly and consistently.

Number two, we can go out and acquire businesses, which we are doing and we had the highest year of total annualized revenue acquired last year. And then three, we returned to shareholders either in the form of dividend increases or through share repurchases,

So we're going to continue to look at and analyze what seems to be the best for our overall plan, but we are not saying that we have a stated repurchase plan on said X timeframe. We will make it very clear to everybody when and if we are going to do a new share repurchase, but until such time we will continue to evaluate all of our investment options, that being one consideration.

And to add that, I know, Elyse, when we looked through a lot of the analyst models in the fourth quarter, a number of folks had $100 million to $150 million of buyback in 2015. So with Powell's comments, just take that into consideration when you look at your models. Otherwise, you guys could end up having something over what we would do based upon how we are going to balance this.

And it depends on the opportunities that presented this year. So we will continue to evaluate and we constantly and consistently do that.

Okay. Thanks so much.

John Campbell, Stephens Inc.

Andy, I think you talked about this a little bit. Powell, I believe you did as well. Just headcount, long-term headcount goals last quarter. Just curious near to medium term, is that going to be more of a systematic process or does that come in waves?

And Andy I know you talked a little bit about that being kind of choppy in the wholesale space but just curious, you know, you guys have wrapped up your 2015 budget obviously. But did you guys pinpoint headcount target for the year? Is that something you maybe could shed some light on?

The short answer is no. We don't pinpoint it for a year. What I was -- I know Andy rolls his eyes at me when I say that. The answer was not to get everybody all worked up. The intent was to say that we're going to have to add a bunch of new teammates either hiring them or acquiring businesses that they are a part of to achieve our next intermediate goal of $2 billion.

How and when we get there will depend on the opportunities that are presented to us both on an acquisition front and on the hiring front. We are actively recruiting talented teammates across our system today in all segments of our business.

So having said that, there is not a systematic process whereby we have a room in Daytona Beach where there is a chart that says we must hire X number of people net this year. It's not like that, John, and I would caution you from trying to focus a lot on that.

I would actually say the message was intended to give color around how we think about our business, not to send a signal positive or negative around what we're doing. I would just tell you that like I said, 7591 teammates. That's a lot of folks. And so we're going to add some folks to the team, and we're always looking for talented people that can sell and service insurance.

John, and all of that is with the backdrop that we want to make sure that we can continue to grow the business and grow it profitably, over time. There were a lot of questions on the last call when Powell mentioned the 3000. Does that mean you're going to take your profitability down? No. That was not the signal at all. As I mentioned, our goal over the long term I want to be sure we continue to grow the business and we grow it profitably.

Great. That makes sense. Okay. And then Andy, you mentioned last quarter some of the pushed out bills. Did all those hit in 4Q as you expected and maybe if you could just quantify that?

Sorry. One more time on that, John? You said pushed out bills?

Pushed out bills. Some of the closings. Sounded like they got pushed out into the fourth quarter?

Oh, I think you were talking -- yes, that was the comment that I made. That was in the programs division. That was on one of our public entity pools. So we ended up -- that was just a renewal that did not come in the third quarter. It was in the fourth quarter, and I made the comment here that was part of what drove the increased margins this quarter and that's just a shift.

Got it. Thanks. That's helpful. Thanks, guys.

Mark Hughes, SunTrust.

Andy, did you give us an outlook for operating expense ratio, other operating expenses for 2015?

Yes, Mark. I would say it's probably in range with what we saw on the full-year basis. Wouldn't anticipate anything unusual there.

And then the total contingents and supplementals that you got pulled into the fourth quarter that we wouldn't expect in Q1, what was that total?

So we ended up pulling -- there was $3.3 million incremental for Proctor. The historical range has been about $1.5 million to $2 million. And so we normally have received those in the first quarter but with the carrier completing their calculations earlier, we got it in the fourth quarter.

We will not see that until the fourth quarter of 2015. That's why we want to make that note. Just ensure you get your model right. You need to pull that out in Q1 and move to Q4.

So $2 million would be that amount?

Yes. $1.5 million to $2 million is probably a reasonable estimate if we look back at history.

To be clear, that $3.8 million item within retail for the disposal of the two businesses, that was nothing that you broke out. That was just an expense that you incurred?

Yes. Exactly. The reason why we didn't break it out, Mark, is we ended up that was a loss there but we had a gain over in national programs. The two of them basically offset so we're just at a total level, it literally had no impact. That's why we didn't break it up that way.

Understood.

We did on the divisions just to help you guys better understand.

Powell, when you think about the two forces here, the improvement in the middle-market economy but the moderating rate environment, how do you think 2015 is starting out compared to how you might have looked at that environment in 2014, which might have featured a little more rate but a little less economy? How do you think the two when you put them together, how do we sit here today?

Well, Mark, if you look first at the results of the large standard carriers and you see what they're showing as their rate increases are moderating, we anticipated that happening throughout the year, particularly in light of no catastrophic -- big catastrophic events. And you've heard me say before that we believe that the economy and exposure units have the greatest impact on our business versus rates.

So as with rates, I could make the argument or we can make the argument that we think rates will be up modestly to probably down 5%, somewhere in that range over the 2015 calendar year. And so that in and of itself, we've always said is 25% to 33% of the exposure -- the overall organic growth number, two-thirds of it to three-quarters would be exposure rate increases.

So as we've said before, we are very middle-market exposure unit driven. And I think that like I said, your guess is as good as mine on the economy. But we are just trying to continue to grow our business organically. And if you're specifically talking about retail, that's where we see it the most flow through.

Thank you.

Meyer Shields, KBW.

Let me begin, can we talk a little bit about the improving organic growth in the services segment? Is that sustainable in the near term, do you think?

Well, we have been fortunate to grow that business through picking up a couple large clients. And those large clients year over year will lap, I believe it's right after the first quarter.

So we'll have that -- we anticipate a positive impact in Q1. We're not saying the full impact into what it would stay, but it laps after Q1. So to answer your question, another quarter and we think it's goes back to historic levels.

Okay. Thanks. That's helpful. Second, other than the timing issues that you mentioned earlier with regards to specific commission, is it reasonable to expect contingents and supplementals to basically grow in line with the core commission and fee growth?

We're always asked that and I think that that's not a fair statement. And why I say that is if you look at the results of insurance carriers, you could make the broad statement that when combined ratios go down, contingents and GSCs should go up, and when the combines go up, the payments should go down. That is a broad statement that is true.

Having said that, that does not necessarily true of our business and the reason I say that is, is remember we have all these different offices that have contracts with carriers, and if in fact in their individual offices, they sustained some unusual or unusually high losses which would prevent them from getting a profit sharing or contingency check, then ours could be down.

So there's not a way on our part that we have been able to come up with to estimate contingencies, and I know that that drives you crazy. I'm sorry about that. But we have not been able to figure that out.

That's fair enough. I completely understand. Last question, can you talk a little bit about the issues at Arrowhead that resulted in the credit this quarter? Is that something that's going to affect results going forward?

No. It's not. Let me make it simple. You remember we actually -- when we bought Arrowhead, we bought that business from some private equity owners. And in doing so, there was a significant portion of the amount paid up front and there was a small amount of a contingency built in, which they hit. That's the sellers.

Having said that, that was $5 million, as you may remember. There was not in that sale, a broad base of ownership among the leadership group. And so we put in an incentive for the leadership group to grow that business over the first three years. And so what you see there is over that period of time, we accrued an amount of anticipated expense and that is the release of the portion that they didn't qualify for.

The key there, though, is no. I don't think that's not a go forward expense. What I would also say though is Arrowhead, just like programs, just like all of our divisions, there are people on there that will now participate in traditional [SIP] grants which will bind them and their performances with those desired performances we are trying to seek as an organization.

So I'm not trying to be vague, Meyer. I'm trying to basically say we had an incentive plan which had to be outside the earn out. We made that decision because of the way we had to do that acquisition. We're psyched with the performance with Chris Walker and Steve Boyd and Steve Bouker and their whole team. And so it's a one-time only thing.

Meyer, you said problem. Just for clarity, there's no problem in that business. That business is doing really, really well for us. As Powell mentioned, this was a incremental that they did an earn on top of things but we are extremely pleased with the performance of that business.

Okay. Thanks for clearing it up. I appreciate it.

Sean Dargan, Macquarie.

I just wanted to follow up on a response to the question from I believe Elyse. Is the non-cash stock-based comp going to be just a 1Q event or will that impact the full year?

It actually impacts the full year and the reason why is while we grant them, in the first quarter, Sean, we advertise them over the vesting period. So it is a pro rata during the year and obviously going forward.

Okay. On share repurchase, I think in the past you committed to at least offsetting dilution from share creep through repurchase. Is that still the case?

That's correct.

Okay. And then around your thoughts of the common dividend, we may be in a scenario here where we are in a lower for longer interest rate environment. Have you given any thought to increasing the common dividend payout ratio?

We evaluate that with the Board throughout the year. And as you know, we've been very pleased to increase our dividends for the last 20 plus years. But what we've tried to do is pay what I would call a modest dividend and reinvest the additional earnings in our business or in acquisitions.

So the short answer to your question is, not extensively. We will review it again with the Board later this year as we consider evaluating moving that in the future, which we usually do at the end of the year.

All right. Thank you.

Kai Pan, Morgan Stanley.

Sorry, I was disconnected. If some of the questions have been asked, I apologize in advance. First question is on the acquisition. If you look at in the past 10 years, on average about 10% of your revenue growth and that run rate of 1.5 being total revenue now, you need to acquire annual revenue about $150 million each year.

So I just wondered like you probably need some bigger deals as you've been in recent years or do a lot of smaller deals? So just on that, could you elaborate a little more and also what you see in term of valuation on deals recently?

Okay. So if you look at the last, let's just say three years, you're correct in everything that you said. In the last three years, our average annual acquired revenue would be roughly $150 million in revenue. And as you know, each one of the last three years, we had one large transaction.

So the question is, do we have to do one large transaction in order to hit $100 million to $150 million of acquisitions? No, we don't. But typically there is one of size, and when you say a large acquisition, I'm talking about something that's probably $75 million and above. $25 million is a large acquisition too, but I'm saying in the definition of really starting to get towards the number you're talking about.

As you know, we don't budget acquisitions. And so we are always out talking to the agency community about the possibility of joining the team at Brown & Brown. And as you know, the average agency owner today is 57 years old, doesn't have a necessarily clear succession plan, doesn't necessarily want to retire, but they actually would like to take some chips off the table.

So if they fit culturally with us and we can come up with a financial terms and conditions that make sense for both parties, we want to do it. And so I would tell you that we are always talking to people. In terms of when and why people sell, those are different across the board.

We would say that pricing continues to, I would say, be on the higher end of the range. And on certain instances, we have seen acquisitions trade up in areas that financially we would not go to. And so we have a financial discipline that we employ when we evaluate acquisitions.

And so just as I said earlier, we think about our investment options as hiring new quality teammates, one. Two, acquisitions. Three, returning to shareholders through either dividends and/or share repurchases.

So as I said, we don't budget that. We think there are lots of opportunities to continue to make acquisitions. The question ultimately is, is would there be any further increase in the price of poker this year and that's yet to be determined.

Okay. That's great. Stand, Powell, in the past you've talked about, especially in the wintry weather like this in the northeast, you talked about nice weather in Florida, and growth potential down there. So I just want to drill down a bit more, I guess, this question to be asked on the retail organic growth. Like looks like we've grown 2% for the past two years.

That's because like middle market is set having growing but there's a lot of uncertainty. I just wonder how has the macroeconomic environment, is there anything internally in your control you can do in terms of broker incentives or other things you can do differently to promote growth in the retail segment?

Well, we believe that our incentive and reward plan, both with our commission and our stock incentive plans, directly align the interests of the Company and those with the producer. So at a very basic -- at the foundational level, we believe that we have the incentive plans in place to drive the desired performance.

Obviously, we can always do a better job of writing more new business, and yet I say that because we've written a lot of new business in the last year. And so we've been very pleased with that. And we have, just like anybody else, you do lose some clients sometimes.

One, it could be through an acquisition or a merger. Two, it could be something that we were perceived to do which we may or may not have done from a service standpoint where we lost the relationship or some combination of the above. But we are in a sales and service business, which is relationship based.

And so we continue to try to build and enhance those relationships across the performance. Long-winded answer of saying, no, there's not something else that we think or a lever that we could push that magically changes something.

Great. Lastly, very quick number question, probably for Andy. Thanks for the breakdown of the disposal in terms of revenue. What's the impact on the margin or on the bottom line?

All those businesses, Kai, were lower margin for us. If you look at, they would probably -- blended, would be probably about a 15% margin business as a total.

Great. Thank you so much for the answers.

Adam Klauber, William Blair.

Wholesale business clearly doing well, but you mentioned that obviously property prices are down. Do you know if EPI is going close to flat and then you're seeing more of a rotation back to the standard market. What's doing well? Is it really new business or what's driving that growth?

Well, it's a combination of one, we continue to hire and put in place new teammates which are growing. We're also getting more business to our existing client base, which are retail insurance agents, and then the third part is we are actually finding and working with new retail agents out there. So those are people that we don't currently do business with that we somehow get an introduction to, cold call or call upon, and go in and talk about our capabilities and then we get an opportunity to earn some of their business.

Okay. That makes sense. And then also I think you mentioned Proctor the business was moderating as the economy is improving so that means there are just less force placed insurance premiums going out. Is that correct? Just lower volumes?

Correct.

Has that trend been more recent like the last two quarters or has that been gradually occurring over the last couple quarters?

Well if you look back remember when the economy was really down, Proctor was at its largest. So if you want to take a kind of a macro view, it has come down over the last couple years. That said, to your point, year over year, if you want to talk about the last 12 months, we were down.

The year prior, I believe, and I'm looking at Andy, the year prior I think we were more flat to the prior year. So last 24 months, we're going to look at that and we can clarify that for you before the call is over. But this is more of the last 12 months type thing.

Okay. Okay. And then as far as investment business, I think you mentioned you've been adding some good people. Clearly that's having some positive impact in the wholesale. Are there other structural aspects that you're thinking about investing over the next couple years?

Nothing, Adam, different than how we've addressed it before inside of all four of our divisions. We're very pleased with all four of the divisions and the prospects going forward. And so no, not something structurally different.

Okay. Great. Thank you.

Ken Billingsley, Compass Point.

Just two quick questions. One regarding the Sandy claims and the New York investigation. Any update or exposure that you can talk about on any new developments?

Sorry. Can you repeat the question, please?

Essentially, any update of information you can provide regarding the investigation over Sandy claims? I know the claims themselves are old but regarding New York, New Jersey.

Sure. Ken, as you know, we don't talk about ongoing litigation if we are a party to something. So there's no additional updates.

Is there anything new that's been filed maybe is a better way to ask that question.

I'm not aware of that. But I'm not aware of that but I don't -- I'm not aware of anything that has been new that's filed, but I don't know.

Okay. The other question I have is this is regarding the retail section. You mentioned employee benefits and that there was an uptick in rates and some of that was the program design by some of the larger groups. Within employee benefits itself, is there growth within the existing customers as well? Are they just changing the product mix? Or is it a price change of existing business? Is this a source of growth that you think in 2015 and 2016 following the ACA or is this just a change in their own individual large groups?

Okay. So let's back up and say in the large groups, they might start with a rate increase of mid to high single-digits conceptually, as an example. And then through a change in the plan design, that would moderate it down into a much lower increase overall. That was the intent of the point that I was making. That's number one.

Number two, I would say that you've hit on an interesting point, which is we are not seeing that many people hire lots of new employees as a general statement. So to your question, we're seeing more people doing more with the same amount of employees or very cautiously adding new employees.

So I think there's also to your question about a growth area or not, I think that in the last year and probably in the future, this coming year, there's been a lot of transition as ACA impacts different employer groups in terms of size. And so some of the smaller firms are thinking about their options. I'm not saying that they are mandated to go to an exchange, but an exchange could be a private exchange like the private exchange that we use, and we have.

Or it could be a state run exchange of which you seen some press on those where the rates are going to start going up if they have not already gone up for 2015. They will in 2016 due to probably adverse loss experience.

And so what we're seeing is lots of discussion around one, plan design, two on larger groups, we're talking more about defined contributions in terms of, I call it the Domino's Pizza theory which is you give a person an amount of money and then they select what they want on their pizza. So how much do they want to allocate towards healthcare? How much do they want to allocate towards disability and life insurance and related other coverages?

But we do think that there's growth opportunity in that area. That's a $250 million business for us, and it's something that we are very interested in continuing to grow organically and making strategic acquisitions in that space.

And are the customer themselves, are they expanding those options? I imagine a lot of it started off with the ACA but are they seeing the value since they are not hiring or retaining their current employees by offering expanded benefits?

I would not say that the answer is expanded benefits. What I was referring to is there's kind of a cost shift that's going on and the cost shift would be more cost is being borne by the employees as a broad general statement.

Okay. But in general, typically it starts with the employer seeking out and finding that cafeteria plan of options that you end up with.

Absolutely. They have -- let's just say they have a traditional -- they have a plan with two or three options and those options are going up whatever the rate increases on those three options. And what they're trying to do is to moderate those increases but give their employees the right thing, a good choice. And so by doing that they modify those three existing plans, but they still go up in price and more of that price increase incrementally goes to the employee.

Great. Thank you.

(Operator Instructions)

Mark Hughes, SunTrust.

Just a quick question on The Advocator Group. You talked about incoming Social Security volume improving. Are more people getting injured or are you picking up share?

We're picking up share but remember, because and it's one of those things that I kind of roll my eyes at. I know that because of sequestration, there were a number of people that were either just through retirement, they basically are down several thousand people. So to process those claims, to get them through the pipe, they are sitting out there but there is a delay in the processing of them. And so we are picking up additional opportunities to process them but until the people there at the SSDI process them, we don't recognize the revenue.

Thank you.

Marquita, I want to come back and close off one of the questions from Adam. Adam, your question was how did Proctor perform in 2013. The business was down about 5% or 6%. And about the same range in 2014 so that's just, as Powell mentioned, each year we see it as the economy slowly starts to improve, the business is down countercyclical.

Any other questions?

It appears we have no further questions at this time.

Okay, Marquita. Thank you very much for your time and everyone and we wish you all a great first of the year and we look forward to talking to you next quarter.

One thing. I happened to look back since I wasn't on the team last year, I looked year I looked back at our transcript and last year there was a snowstorm in New York City on the day we had earnings, and there was one this year so I'm starting to think that New York City gets snowstorms when we announce earnings. So, maybe what we'll have to do is move them around for you guys up there.

Have a nice day. Thank you.

That does conclude today's conference. We appreciate your participation. You may now disconnect.