Brown & Brown Inc (BRO) 2015 Q1 法說會逐字稿

Good morning and welcome to the Brown & Brown Incorporated 2015 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 2015 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 risk 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 2015 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 in 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, Christi. Good morning, everyone, and thanks for joining us for our earnings call for Q1. We are pleased with our results for the quarter so let's get right into the key points.

On slide four, you will see we delivered $404.3 million of revenue for the quarter, growing 11.2% and 3.8% organically. Each of our four divisions delivered organic growth. The overall market conditions continue to improve with the exception of a few areas which we will cover on the next slide.

Our GAAP earnings per share were $0.39, growing 8.3% for the quarter. Excluding the change in estimated acquisition earn outs payable, we grew our earnings per share at 5.3% to $0.40 a share.

As part of our capital allocation plan, we initiated a $100 million accelerated share repurchase program during the quarter. This repurchase is part of the $200 million plan approved by our Board of Directors in the second quarter of 2014. We anticipate the completion of this repurchase during the second quarter of this year. Upon completion we will have then $50 million that still may be repurchased under the approved $200 million plan.

Lastly during the first quarter of 2015, during the first quarter of 2015, we acquired three agencies with annualized revenues of approximately $12.6 million. While there are lots of potential transactions out there, we continue to see aggressive pricing for acquisitions. We continue to be very disciplined in what we pay as we are looking for organizations that fit culturally and makes sense financially.

Slide five provides additional color on some noteworthy items impacting the market. We are seeing some areas with good economic improvement and associated exposure unit growth such as Indianapolis, Atlanta, Portland and numerous cities in Florida that are doing much better than a year ago. However, any communities with significant oil related businesses have slowed significantly.

We also experienced further uptake in our private exchange during the quarter but adoption continues to be slow. We continue to see small and medium-sized employers evaluate public exchanges, technology and plan design alternatives. Those may include partial self-insurance in order to manage cost.

With the excess capital in the market along with the prolonged period of limited weather events, coastal property rates remain under significant pressure. Also admitted property rates -- I am sorry -- also admitted rates continue to moderate downward. However, we are seeing commercial auto rates generally trending up. But that really depends on loss experience.

With all of the excess capital in the market and our large distribution network and capabilities, we continue to see interest in our various programs and wholesale offerings. With the lack of weather events, several of our claims processing businesses are operating at historical lows for revenues and operating profit.

In summary, we are pleased with our organic revenue and earnings per share growth for the quarter and this was all made possible through the hard work of our more than 7700 teammates.

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

Great. Thanks, Powell, and good morning, everyone. Before I get started, I wanted to let everyone know that we had some adjustment to prior year's divisional numbers in order to reflect our current year segmental structure. So if you are looking at last year's presentation from the first quarter, you will see a few immaterial changes within the divisions.

Let me go ahead and get started with our financial results and talk about some of the key metrics for the quarter.

On slide six, it shows our GAAP results. I would like to highlight that we delivered 11.2% revenue growth in the quarter and are very pleased with our 3.8% organic revenue growth. I will talk more about margins and key drivers on the next slide.

Our earnings per share grew 8.3% and our weighted average number of shares outstanding decreased by 1.3% year-over-year primarily driven by our share repurchases in the second half of last year.

Moving to slide seven and similar to previous quarters, what we tried to present on the slide is a better view of our underlying performance. The amounts presented are the as reported GAAP results which were then adjusted for the change in estimated acquisition earn out payables. On the right-hand side of this slide, we removed the results of Wright due to the large size of that acquisition and the lack of comparability with the prior year.

As we have previously discussed, the revenue associated with Wright is seasonal and the expenses have less variability. Consequently Q1 is the lowest revenue and margin period for the business. Overall the Wright acquisition is performing well across the three business lines. Later we will talk about the quarterly performance and outlook.

While our total revenues grew 11.2% when we separate the revenues related to Wright we grew the top line by 4.2%. Our adjusted pretax income grew by 2%. The additional interest cost associated with our credit facility and bonds impacted income before income tax by approximately 3 percentage points. We believe EBITDAC is the most appropriate measure for comparing our performance across periods as it is a close proxy for cash generation.

EBITDAC for the quarter was $131.8 million compared to $119.5 million last year, a growth of 10.3% and excluding Wright, our EBITDAC growth was 4.1% thereby growing in line with underlying revenues. Excluding Wright, our EBITDAC margin decreased by 10 basis points which was driven by lower contingents and lower gains on sales versus the prior year. We continue to seek EBITDAC margins in the 33% to 35% over the long-term.

Net income for the period grew 2.9% on an as reported basis and excluding Wright by 2.7%. This was primarily impacted by the incremental interest expense of $5.8 million in the first quarter as compared to the prior year. As a reminder, our credit facility and public bonds provide us with capacity to draw upon for acquisitions when they become available, they extend our maturity letter and reduce our exposure to rising interest rates.

By capitalizing on the favorable credit markets, our blended cost of debt is now 3.3%.

Partially offsetting the increased interest expense was a lower effective tax rate of 39.3% for the quarter compared to 39.6% for Q1 of last year. The lower rate for Q1 of 2015 was driven by some tax credits that will primarily only be realized in Q1 of this year. We anticipate our effective rate to be around 39.5% for the remainder of 2015 as we continue to model the impact of recent finalized state tax law changes primarily in New York State.

Adjusting earnings per share increased to $0.40 in the first quarter which was a $0.02 or 5.3% improvement over the prior year.

Moving to slide eight, I would like to highlight the key components of our revenue performance for the quarter. We have talked about our total revenue and when you look at the components, the largest driver was from net acquisitions delivering $36.1 million followed by organic growth of $12.2 million and then the changes in contingents and guaranteed supplemental commissions that declined $1.5 million and other revenue that declined by $1.1 million.

We realized a $1.5 million decrease for the contingent and GSCs which were substantially related to our Proctor business that is in our national programs division. Please remember that Proctor realized $3.3 million of incremental contingents in the fourth quarter of 2014 as the carrier completed their calculations early with about $2 million of this coming from the first quarter of this year which moved into the fourth quarter of last year. We expect Proctor's contingents to be realized in the fourth quarter of this year but had been informed from the carrier that they expect the amount to be materially below 2014 due to loss experience. Please take this into consideration when building your outlook for the remainder of the year as the growth for contingents and GSCs does not appear to be in line with organic revenue growth.

Moving to slide nine, let me talk about each of our divisions in a bit more detail. Our Retail division delivered 6.2% growth partially driven by acquisitions completed within the last 12 months and our underlying organic growth was 1.6%. Our year-over-year EBITDAC margin decreased by 90 basis points which I will talk more about in a moment.

Let's talk about revenue growth first as we know everyone is always interested in how Retail is doing. Well, there are three main factors that need to be considered when evaluating the performance of the Retail division for this quarter. First is that there has been a change in the state of Washington regarding the laws governing Association health plans. Last year the insurance commissioner changed the state's historical approach to [monefy] the Association. As a result, several of our Association health plans had to terminate. We've lost about $1 million of revenue in the first quarter of this year which impacted retail organic growth by about 60 basis points and EBITDAC margins by 25 basis points.

We expect our state of Washington Association health plan business to be down approximately $1 million each quarter for the remainder of 2015 and have an impact on margins.

Second is that CAT property rates continue to be under pressure as Powell mentioned earlier. While we are still seeing our Commercial lines businesses growing year-over-year, their growth has been impacted versus last year as CAT property rates are down 10% to 20% or in some cases even more. We are also experiencing rates for [admitted] lines of business further moderating downward with the exception of Commercial Auto.

Third is that we are continuing to see small and medium-sized employers evaluate public exchanges, technology and plan design alternatives to manage their cost.

As we stated on previous calls, it is not unusual for our reported quarterly EBITDAC margins to fluctuate as we make incremental investments in our businesses that will drive future results. Therefore, we expect divisional margins will ebb and flow as a result of this activity.

Moving to slide 10, our National Programs division; revenues grew by 29.9% mainly due to the acquisition of Wright. We continue to experience good growth in personal property, automobile aftermarket, sports and entertainment and we continue to see interest from carriers in leveraging our broad distribution platform. Offsetting some of this growth was our Florida Intracoastal Underwriters business which is experiencing intense pressure on rates which is also affecting contingents.

During Q1 of this year, we recognized about $1.4 million of deferred revenue at Proctor. Excluding this revenue, organic growth in the Programs division would have been approximately 2.1%. The primary drivers to the 270 basis point margin compression for the quarter are the seasonality of Wright, which we discussed earlier, and the impact of the shift in contingents for Proctor. Overall we are pleased with the performance of our Programs division for the quarter.

Onto slide 11, our Wholesale division had another great quarter reporting revenue growth of 3.6% and organic growth of 7.3%. This differential is related to the sale of Axiom Re that we completed in the fourth quarter of last year. The binding authority and brokerage businesses both contributed to the positive result for the first quarter and we continue to see growth across most business lines.

We are seeing more net new business and we are leveraging our deep carrier relationships to help provide innovative solutions for our customers even while facing major downward pressure on coastal property rates in the range of 10% to 20% or more. The Wholesale division delivered EBITDAC margin improvement of 290 basis points. Approximately 100 basis points of this improvement is associated with the disposal of Axiom Re. This business generated significant lower margin than the average for the Wholesale division.

Even with this item excluded, the margin improved by close to 200 basis points. Similar to last year, we do expect that margins will fluctuate on a quarterly basis due to investments so please do not model or expect this type of a margin expansion every quarter.

Onto slide 12 and to our Services division. We delivered impressive organic growth of 10.5% for the quarter. This growth was partially benefited by some nonrecurring revenue realized by one of our TPA businesses. Excluding this revenue, organic growth would still be approximately 8.5% which is very impressive.

We realized strong growth in most profit centers with the exception of our claims processing businesses that are dependent on weather events. The largest driver of organic growth is from our Social Security advocacy business. In addition, our workers compensation claims processing business continues to benefit from a large new client we won in the second quarter of 2014. Please keep this in mind when you are updating your models for the second quarter as the organic growth rate for services will probably be in the low single digits.

Our margin expanded for the second quarter as we continue to operate efficient claims processing businesses.

So in summary, we are pleased with the topline growth and flowthrough for each of our divisions.

Moving to slide 13. In the second quarter of last year, we provided ranges of where we expect Wright to perform for its first fiscal year which is the second quarter of last year through the second quarter of this year. The performance of the underlying business is in line with our expectations. As we mentioned previously in 2014, the original forecast included $7.5 million of revenues for weather events. For reference, this was based upon the 10-year average excluding Hurricane Katrina and Superstorm Sandy.

Due to the lack of storms, the first fiscal year for Wright is expected to be below this historical level. Please note there is a small amount of CAT revenue included in the projection for the second quarter.

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

Thank you, Andy, for a good report. I would like to conclude our remarks with two topics. One, acquisitions, and two, retail.

As you heard us say, we acquired $12.6 million of annualized revenues in Q1. We have looked at a number of acquisitions that did not fit culturally or we could not come to an agreement financially. Sellers are focused on many things but the money is the big one. As you know, we are disciplined buyers. In 2006, 4% of the announced transactions were done by private equity. In 2013 and 2014, private equity did 44% and 43% respectively.

There is a lot of activity in the acquisition space and some are willing to pay amounts we won't. This is not to say that we cannot do acquisitions but to give you a flavor of the acquisition landscape, we continue to think there are opportunities but they tend to come in waves.

Now onto retail. We have grown retail organically 12 quarters in a row. Retail internal growth for 2012 was 1.3%. For 2013, it was 1.3% and in 2014, it was 2%.

What are we doing? We have made incremental progress over time. If you take out our bottom five retail offices which represent 8% of the retail revenue, our internal growth would be 2.9%. The change in the Washington Association health plan is done. We were down $1 million in Q1 and expect it to be down $1 million in each of the following quarters in 2015 and that is by a law change. The other four offices we have an intense focus on to improve their performance.

In closing, we feel good about our overall performance for Q1 and each division is positioned for ongoing profitable growth. We are also continuing to evaluate internal investments, external acquisitions and returns to shareholders in the form of dividends and share repurchases all with the goal of long-term stock appreciation.

With that, I would like to turn it back over to Christi to open it up for questions.

(Operator Instructions). Elyse Greenspan, Wells Fargo.

Good morning. Just a few questions. The first, there has been some headlines recently concerning the National Flood Program and I know Brown & Brown obviously has a decent amount of exposure through the Wright acquisition. If you could just comment on what is going on there potential exposure and I guess your outlook on your continued -- Wright's continued involvement with the National Flood Program going forward.

Good morning, Elyse. First, we are committed to one, our policyholders, Wright Flood and our partnership with FEMA. This is a complicated situation but suffice it to say we are committed to working through the issues the best result for our policyholders. These events as you know occurred before we purchased Wright. It is our standing position not to comment on ongoing litigation but we are working through the issues to the best result of our policyholders.

Okay. Just one follow-up question on that. Did this happen before you guys completed the acquisition. Would you be kind of on the hook or is there some kind of -- you can push back if there was some kind of fine to Brown & Brown to the owner of Wright preceding you purchasing it?

We will be evaluating all forms of expense reimbursement.

Okay. A couple of other questions. In terms of -- it seems like the non stock based compensation was a bit lower in the quarter (inaudible) you had guided to for the year. Anything on that or that we should change in terms of making better models?

No, nothing unusual in nature. I think the range that we still gave somewhere around $7.5 million again, it will float a little bit by quarter but no unusual underlying changes there.

Okay. If we think about the retail segment and I appreciate the added color this quarter, obviously we know now the impact of the change in Washington but as we think on just going forward for the balance of 2015 just directionally putting everything together that you said, do you expect to see pickup in the overall level of growth from what we saw in the first quarter?

Like I said, we don't give specific organic growth guidance. We have said that retail business is a low to mid single-digit organic growth business.

Okay. On the margin front, I know you mentioned and I know you talked about some of the segments that internal investments that you guys have been making. Is there any way for us to better break out the overall impact these investments are having on your margins? Is there a way that you can kind of pinpoint that either by segment or just on a consolidated basis?

We have not come up with a way to do that yet, Elyse. Quite honestly we have been making internal investments in our business since the beginning of time. It is just we have articulated it to make sure that everybody understands that in order to continue to provide the services and capabilities to our clients, it is all around people and systems and capabilities. So we really haven't broken it out and it is something we are going to continue to do. We said in the past that we have allocated 1% of our total revenues annually to a people fund which is a way that we help defray some of the costs at the local office level when we are hiring people that are not originally in their budgets. But that is the full extent of which we have shared in the past.

Elyse, I would also add to it, if you remember last year we had a lot of conversations about wholesale during the first half of the year versus the second half and we were making investments in teammates and it kind of flows back and forth. I guess just kind of keep that as the backdrop as we continue to go through over time but utilize that 33% to 35% as the range that we are trying to seek to operate inside of on the EBITDAC margins. Okay?

Okay. Thanks so much and thanks for taking my questions.

Kai Pan, Morgan Stanley.

Good morning. Thank you for taking my call. The first question is on the acquisition side, you mentioned you are seeing increasing competition particularly coming from the private equity funds. What were you exactly talking about in terms of pricing differential? Is there quite a big gap between like from private equity can offer and [your winning] to offer?

Well, you have heard us talk about before that pricing -- and it all depends on what your definition of EBITDA is. So I always like to say the devil is in the details but when you hear about 8 and 9 and 10 times an EBITDA multiple, what EBITDA are you talking about? But at the end of the day when there are certain things that private equity for example may be willing to do in the short term that we would not be willing to do. So I am not going to say it is a multiple amount per se. It is just an amount that is in excess of what we think the asset would be worse. And so in the event that occurs, we pass.

We saw a situation recently where we were involved in one and it was not private equity, an insurance company bought something and this was a business that we thought there was a good cultural fit but it was not something that was to happen and sometimes you see insurance companies as you know buy businesses to augment their underwriting capabilities or to get more premium.

So every scenario is different but what I would just say as you know that in the private equity space, there is a lot of money that is washing around out there and they are looking to put it to work and at some point they will have to see if the amount they paid for those acquisitions will pan out or not.

That is great color. And then if you were just slowing down -- in terms that either market doesn't give you opportunity to do more acquisitions, will you achieve the capital deployment because you are building cash position more to shareholder returns?

As you have heard us say before, we constantly talk with our Board of Directors about the three buckets upon which we invest the cash we are in. One is internal investments. Two would be external acquisitions. And three, return to shareholders via either share repurchases or dividends or both. So that is a constant and ongoing discussion.

We have to constantly evaluate the opportunities that are presented to us. And as I have said in the past, acquisitions are somewhat lumpy and so they come in waves and so if the acquisition in your case, if the acquisition went on -- lack of acquisitions went on for a period of time then we would evaluate and look at some of those other options more closely. But having said that, one quarter for example does not make a trend in my mind in the acquisition space.

Okay. Last question is to the contingents and the lender place business. Could you clarify that in the fourth quarter your lender placed business pull forward, they have about $3.3 million of revenue and about $2 million of that coming -- pulled forward from the first quarter so that is why your contingent commission is lower?

Exactly, Kai, so Lloyds was able to complete their calculation in the fourth quarter of last year and we had higher contingency in the fourth quarter, about $1.3 million plus the $2 million from Q1 that pulled forward. That is where the $3.3 million came from and then the $2 million is why we are down for the first quarter.

Okay. You also mentioned I think this might be related, in the National Program you have one-off situation, about $1.4 million coming from this business as well?

It was, yes. We had some deferred revenue that we were able to recognize finally. That will not be anything that will recur in on nature so that is why we wanted to call it out as a one-time item.

Lastly, you mentioned, you said in 2015 from the lender placed business will be materially lower. Could you clarify that?

Yes, so that was on the contingents, Kai. So just as we recognized $3.3 million last year, right now expectations are that we will recognize the contingents from Lloyds in the fourth quarter of this year. But they have come back and told us that they are expecting for those to be materially lower this year because of loss experience. So we wanted to highlight just to make sure that you model it accordingly in the fourth quarter.

That is not relating to by pulling forward from the first quarter 2016?

No, that is about loss experience from the previous year now playing itself through in the calculation.

Got it. Thank you so much for the answers.

Josh Shanker, Deutsche Bank.

Good morning, everyone. Following up a little bit on the question of share repurchase and evaluating that. In the past you have said that you don't want to use your stock to do acquisitions that your stock is far too valuable but you have also said in the past that you didn't want to repurchase shares because I think that as Andy put it, it is like eating your young which kind of puts you in a conflict.

Given that you are buying back shares now, why not have a bigger authorization out there since it is not an obligation to buy? And how long would you sit on cash before you would do something with it? I guess there is a bunch of questions there but I want to hear a little bit about the philosophy, about how things have changed and Brown & Brown and I guess why you wouldn't just have a bigger potential appetite out there depending on what happens in the future?

So, Josh, you are correct in the comment about my father making the comment about eating your own or whatever. Having said that, that was also in a period of time where purchase price for acquisitions was in a much different place. So you have heard me say over a period of time that we don't like to use the term never or always.

Having said that, we continue as we've said to evaluate all of the options that we have and in light of some of the increased purchase price multiples on some of the transactions, we have looked at the value of our stock and the possibility of buying some of that back of which we have done. And we were given an authorization of $200 million last summer with no obligation to buy it as you know. Although some people in the investment community have made the assumption that we will use that entire authorization and we may or we may not. We have $50 million outstanding after we complete this current $100 million ASR.

But we will continue to talk to the Board about how we deploy our capital and if they see fit relative to giving us another authorization to repurchase in the future, then we will continue to weigh and measure that.

But, but, but what I like to say is this -- what you cannot anticipate, you -- the collective -- everyone on the phone call and what we cannot collectively anticipate at Brown & Brown is when we are going to have opportunities presented to us like an Arrowhead or a Beecher or a Wright. So we continue to like to be in a position to be able to do the transactions that come along when they come along.

So we will continue to evaluate the stock, I mean the stock repurchase and the cash that we have on hand and how we deploy that cash.

So right now you are generating probably about $350 million, $400 million of operating cash flow a year and it could be even higher than that. But you also are running with higher debt levers than you have in the past. You guys have tended to be like a low debt balance sheet. Is there any intention on your part that you have the low coupon on that debt that you would want to retire it for flexibility reasons or can you imagine that that is a low priority thing that you would do with cash?

That is a low priority of what we would do with cash. We actually set up our debt structure to provide us with flexibility which we believe that we have and we are very pleased with what the structure is that we have in place right now.

You are correct in saying that we had a lower debt to EBITDA leverage in the past and we as an organization have evolved relative to how we view that. I said publicly that we think that having a 1.5 to 2 times debt to EBITDA would be a comfortable area. Would we go above that for a specific transaction in the short term? We would consider it but we are continuing to evaluate all of those options but we are very pleased with our debt structure and that would be a low priority.

Thank you for all of the answers and good luck with the rest of the year.

Mark Hughes, SunTrust.

Thank you. Good morning. More broadly, within the benefits business, you've talked about the impact of the changes in Washington on your organic growth. How about just more generally speaking Healthcare Reform? I think, Andy, you have made some comments recently about how there has been a headwind on organic because of the changes in commission payouts within the benefits segment. How much of a headwind has that been, how far along are we in kind of working through that? How much longer will it be a drag on the business?

Let's make a broad statement first, Mark. Number one, ACA has created great uncertainty and with that we believe it creates great opportunity but in that it is somewhat still being defined. So it is an evolving process. So to your question specifically, we have had some of our small business, small business depending on the state might be defined as under 50 or under 100 or some variation thereof where they have gone from a commission level to a per head per month. You have heard us say that before.

Now that is driven more at a local and statewide basis rather than a national basis. So we have had a number of states that have gone through pieces and parts of that but there is still other states that haven't or they have not adopted it 100% across the board. That is number one.

Number two, I know you are very mindful of the changes that people are making in plan design. That plan design could be defined as a higher retention or deductible for an employee or a fixed amount of a contribution like a defined contribution amount and you can purchase whatever health plan you want, more like a 401(k) kind of scenario. But in the larger group, there continues to be all kinds of uncertainty which creates great opportunities for growth for us.

What I would tell you that we are seeing is in the smaller group there is lots of discussions about alternatives, alternatives meaning state exchanges, private exchanges, how can they continue to offer benefits to their employees? Some of which may opt out down the road over time and we continue to advise our clients as we come down with some of the very interesting regulations that have unintended consequences like the Cadillac tax for 2018.

So more to follow on that, Mark, but we continue. It is still a work in progress.

If you are a retail with low to mid single-digit organic, is benefits a drag on that?

It depends overall. In an office that has a lot of smaller stuff, it might be a slight drag or flat. On an office that has more the medium, large to larger accounts, it is growing.

On the Wright business when it rolls into organic growth, is it going to be accretive to organic growth? And I guess underlying that if we look at the volume in pricing within the flood insurance, you are sort of putting the claims business to the side in the underlying flood business. Is that growing on kind of a national basis, are you taking share? And what does that mean when it rolls into your organic growth base?

Mark, if you remember, Q1 is a small -- the smallest quarter so the big quarters for flood will be Q2 and Q3. And so it would be a little premature to answer that question relative to based on factual information. But what I would say is our teammates at Wright are out talking to retail agents across the country and working really hard to service and meet their service needs of their flood books and we are very pleased with the relationships that not only have they developed in the past but those that they are working on in the future.

So we have got to get into as I like to call it flood season which really starts in earnest in May.

Mark, probably another thing to keep in mind, we have had a couple of people ask us about pricing and should that as a result, drive incremental revenues in the business. I think what we would say right now based upon what we know is while the pricing will drive some upside, there is also a lot of remappings that are going on around the country, specifically just south of here, Broward County, they just remapped a lot of those that made them no longer required.

So we think it looks like it is about a push at this stage, we just don't know exactly until we start working through the details. So don't make anything into the model for upside on that one right now until we get through it, we think we've got a push there.

The other thing I want to just mention, we looked at a lot of everybody's models for the second quarter and just to remind everyone, we did this acquisition in May of last year so there is only one month of the second quarter that does not have comparative revenues. It looks like a lot of folks have put three months of incremental revenue in there. So there is basically a two-thirds double count so if you could just double check remodels on that one. We can also follow up after the call.

And then a quick final question, the share count for 2Q, do you have early thoughts on that, Andy?

If you were to take, when it comes out at the end of this month and you look at our footnote, that should be a pretty good indication for the second quarter. The only movement there will be the final settlement of the ASR. But that should not be a material number since most of those shares were pulled out late in the first quarter.

You don't happen to have that number, do you?

No, I don't have it with me right now.

Thank you.

Meyer Shields, Keefe, Bruyette & Woods.

Thanks. Good morning. If we adjust the first quarter contingents for the $2 million that got pushed forward, it is up about 1.5%. Does that seem like reasonable representation of what we should see besides the force placed business for the rest of 2015?

I think with our earlier comments is we just were giving some guidance to be a little bit conservative there. Specifically our FIU business, the Florida Intracoastal Underwriters, we are seeing quite a bit of pressure on contingents there just one off of the fact that rates are down and that will cause some pressure in the back end of the year.

But I would say probably our recommendation is don't model on organic growth rates because that is not what we are seeing right now.

Okay, that is helpful. A couple of years ago I guess there was the expectation that the aftermarket program in nonstandard auto, you were a little limited in terms of immediate margin expansion but that would alleviate over time. Can we get an update on that?

Sure. The answer is we are working towards that and we are pleased with the performance. You are correct in saying in the first 18 to 24 months we had a commitment relative to that and relative to the staffing levels and some other things. We are very pleased with the teammates that have come over and the performance so far.

We also have the capability now, we are expanding in certain instances based on working with our trading partner there on their technology platform. So we may not be out in the distribution broadly as quickly as we both had wanted but we are getting there. So we are, the margins are improving there, they are not yet at historical margins for the area but we are moving towards that.

Okay, and then one last question if I can. The Washington issue, does that reverse itself in 2016 or should we just assume that the plans are terminated, you feel the impact this year and they are just not relevant?

No, we don't see it reversing itself in 2016, Meyer. I think the issue as we can understand it and talking with our teammates out there is, this is not something that seems to be beneficial to the actual clients themselves. So down the road, could there be something else that would present an opportunity? I don't know but right now we are operating that we don't think there is a way to recoup that revenue in the form of the Association business that we currently have or is currently being terminated.

Okay, thank you very much. That is very helpful.

(Operator Instructions). Ryan Byrnes, Janney Capital.

Good morning, guys. Just wanted to drill down a little bit further on the employee benefit book. I kind of have a note here saying it was at about $250 million in annual revenue. But I was wondering if you guys could quantify the small business unit which is experiencing some pressure versus kind of the more medium to larger scale lives business which obviously has some opportunities going forward.

So good morning. If you remember, we basically said in the past it is about $150 million of health and about $100 million of ancillary lines. So let's start with that.

The second part is we have said about just over half of that 150 would be under 100 lives. That is how we have articulated it in the past. We have not broken it out in any other format relative to layers and slices and all of that other stuff. But suffice it to say that we are working very hard on solutions for both segments meaning the smaller group and the larger group. We believe that there continues to be an evolution on the small group where technology will I believe continue to play a bigger and bigger role. And depending on how and what state you are in, how you have viewed state exchanges versus national exchanges and subsidies, that may play a role into it as well. That does not diminish the fact that on our larger clients, technology is categorically a solution.

And so the discussion is more than just a discussion around healthcare costs, it is a discussion around ancillary benefits, it is a discussion around voluntary benefits, it is a discussion around wellness, it is a discussion around a bunch of things.

So just as you break it down, think $100 million of ancillaries, of the 150 left just over half of that is under 100 lives.

Great, that is great color. And then my second one was are these kind of, the changes in regulation in Washington, is that a unique program to Washington I guess or a unique change in the law or could that impact other states as well that would have any sort of impact to Brown?

Yes, to the best of our knowledge this is the only state -- well, let me back up. This is the only state where we have written associations like. This that is number one. Number two, we are not aware of a similar or related type of business inside of Brown & Brown that would be affected that comes right to mind by law change by an insurance commissioner. But as you know, all of our business continues to be subject to the ACA and the implementation and more importantly the changes and the interpretation I think is the important thing. The interpretation of the law is continuing to evolve and you would like and we would like so we are together on this. We are simpatico on this. We would like absolute clarity and transparency. There is not absolute clarity and transparency in ACA. Now that does create opportunities but it continues to create a lot of disruption.

Great. Thanks for the color, guys.

Adam Klauber, William Blair.

Good morning, thanks. In the wholesale division, how are submission levels compared to maybe six, nine months ago?

Submission levels are up.

Okay, so they are still pretty robust?

Yes, they are robust. What I would tell you, Adam, is this, you've got significant rate pressure on the cat property so that is in the brokerage side. Remember just under 60% of our overall business is binding authority and there is downward pressure on that property as well but not as much as the CAT property.

Okay. And then one of your competitors, Amlin, did the quota share to a quasi-alternative capital provider. Are you looking at similar transactions in that division?

We always look or are constantly looking at solutions and alternatives in both wholesale and our programs businesses. From a standpoint of what they have done and some other competitors, we have not done that in the history yet of Brown & Brown. I'm not saying that we would not consider it but at the present we have not considered it seriously.

Okay, thank you. And then sorry if you said this, what has gone on with workers' comp rates right now?

Depending on the state they could be flat, they could be up slightly, depends on the state. As I like to say, places like California, it is always the wild, wild west literally and figuratively. You look at places like Florida and other places around the country, it is a mixed bag up, down or flat.

Okay, thank you very much.

Charles Sebaski, BMO Capital Markets.

Good morning. I had a question on the Wright Flood program and some of the press reports we have read about what is going on with Congress in that program. And some of the politicians and I don't know if you think it is just politician speak but regarding the Wright Flood, the claims issues about potentially revoking National Flood Charter authorization and if you view that as at least a potential or has any legitimacy of potential outcome? And if so would you guys have any recourse back against alkaline partners in reps and warranties or anything else if for the worst case scenario you lost a charter for the Wright Flood insurance program?

Okay, so the answer to the question is we have our Wright Flood renewal that comes up annually in October. That is number one. Number two, this is as I said earlier, a complicated situation and there are lots of people who are working toward solutions for their constituents. And so there will continue to be a lot of we believe, a lot of discussion around this particular topic. We can only suffice it to say, are committed to number one, our partnership with FEMA. Two, to our policyholders and our teammates at Wright Flood and we are committed to work through the issues as they sit out there to the best result of those policyholders. Anything else would be pure speculation and we wouldn't want to speculate on that.

But would you have recourse back against alkaline or in the advent of something adverse happened?

Like I said, Charles, I would prefer not to speculate on that.

Thank you very much.

Thank you. That concludes today's question-and-answer session. Powell Brown, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you all very much and we look forward to talking to you after the Q2 release. You all have a nice day and thank you very much.

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