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Edited Transcript of BRO earnings conference call or presentation 28-Apr-20 12:00pm GMT

Q1 2020 Brown & Brown Inc Earnings Call

DAYTONA BEACH May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Brown & Brown Inc earnings conference call or presentation Tuesday, April 28, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Powell Brown

Brown & Brown, Inc. - CEO, President & Director

* R. Andrew Watts

Brown & Brown, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Elyse Beth Greenspan

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Meyer Shields

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Michael David Zaremski

Crédit Suisse AG, Research Division - Research Analyst

* Ronald David Bobman

Capital Returns Management, LLC - President

* Yaron Joseph Kinar

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Brown & Brown Inc., First Quarter Earnings Call. Today's call is being recorded. Please note that certain information discussed during today's 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 and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to matter of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company's determination as it finalizes its financial results for the first quarter 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 those 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. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at www.bbinsurance.com by clicking on Investor Relations and then Calendar of Events.

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

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [2]

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Thank you, Lisa. Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings call. Before we talk about our first quarter results, we at Brown & Brown would like to say our thoughts and prayers are with all of those people directly or indirectly affected by COVID-19. We also want to thank those -- all of those people on the front lines for everything they're doing during these challenging times. And finally, I'd like to thank all of our 10,000-plus teammates for everything they're doing for our customers and for successfully transitioning to a work from home environment. Today, we'll discuss our Q1 results and give you our thoughts on the next few quarters.

Here are a couple of key points for you to keep in mind. First, we had a very good quarter. In addition, we have a strong balance sheet, the highest cash conversion among our publicly traded peers and have access to approximately $1 billion of liquidity. Our conservative operating philosophy has and will continue to be indicative of how we run our business. We're focused on the long term and are a capital-light business that's focused on providing unique solutions to our customers every day. The first quarter was a tale of 2 cities. January and February were growing nicely, and then we hit early March when we started seeing the impact on our customers in the Pacific Northwest. As we've said before, we believe we are a proxy for the economy with an emphasis on the middle and upper middle market. We began seeing the impact on our customers around the country in mid-March. One of the many difficult things to assess today is what will the mitigation efforts from the U.S. government do for our customers through government support systems. During these very unusual times, we're focused on the safety and security of our teammates and their families. Many of our previous investments in technology have helped us transition 10,000-plus teammates to a work from home environment in a very short period of time.

Our customers have been and continue to search for solutions on everything from the CARES Act, SBA loans, insights on furloughs and layoffs to how you can use your personal vehicle to deliver meals from a restaurant or how to get certain supplies. We opened our B&B Relief Center to customers and others alike to take advantage of discounts on certain supplies. These actions, combined with the weekly updates for customers and prospects have been well received by our intended audience. In addition, I'm humbled by the determination, dedication and commitment of our teammates, what they have for our customers. Now let's transition to the results for the quarter.

I'm on Slide 4. For the first quarter, we delivered $698.5 million of revenue, growing 12.8% in total and 5.6% organically. We're very pleased with the strong organic revenue growth, and I'll get into more detail in a few minutes about the performance of each of our segment. Our EBITDAC margin was 34.6%, which is up 280 basis points versus the first quarter of '19. Our net income per share for the first quarter was $0.54, increasing 35% as compared to the same period in the prior year. On an adjusted basis, excluding the change in acquisition earnout payables, we delivered $0.51 of net income per share, growing 24.4% over the adjusted net income per share for 2019 Q1. During the quarter, we acquired another 5 businesses with annual revenues of approximately $39 million. In summary, we're very pleased how we grew the top line and bottom line this quarter. It was a great quarter after delivering a really strong 2019. Later in the presentation, Andy will discuss our financial results in more detail.

I'm now on Slide 5. The first quarter was an interesting one. Until early March, we saw the U.S. economy continue to grow, and most companies continued to hire employees and invest in their businesses, ultimately driving expansion of exposure units. Then in the middle of March, everything changed. Due to many stay-at-home or shelter-in-place mandates, we're now seeing companies either terminating employees or putting them on furlough and driving the GDP lower for the first quarter and beyond. We've said in the past that one of the primary drivers of our organic growth is exposure units. So we do expect an impact over the coming quarters, more on that later when we get to outlook.

From a rate perspective, we continue to see modest rate increase on -- rate increases on most lines of coverage as carriers continued to tighten underwriting standards. The increases were substantially in line with what we had expected for the first quarter and were similar to the last few quarters. Ultimately, the amount of rate increase was primarily driven by the loss experienced for a given account. Premium rates for low loss accounts in the admitted market generally increased 1% to 5%, excluding auto, which is up 5% to 10%.

From an E&S perspective, coastal property rates increased 5% to 15% versus the prior year. General property rates were 5% to 10%. Professional liability increased 5% to 10% and cyber was up about 10% to 15%. The impact of the pandemic on rates now and in the future is unknown. Regarding the M&A landscape, it remained very competitive. During the first quarter, we closed another 5 transactions with $39 million in estimated annual revenue. We continue to talk with lots of companies, but since the slowdown as sellers are trying to get a handle on how the pandemic will affect their businesses and, therefore, impact the valuation they receive.

I'm on Slide 6. Now let's talk about the performance of our 4 segments. Our retail segment delivered another strong quarter, with organic revenue growing 5.7% in Q1. Our organic revenue growth for retail would have been approximately 300 basis points higher, if not for a $10.5 million change in estimate related to future revenues resulting from the economic disruption associated with COVID-19. Andy will describe this in more detail later. Our growth for the first quarter was driven by improved retention, exposure unit expansion for existing customers, new business and rate improvement. We'd like to congratulate all of our teammates in the retail segment for delivering another great quarter.

National programs grew 11.8% organically, delivering another great quarter. The organic revenue growth this quarter was one of the highest we've ever delivered when you exclude the impact of flood claims. Our growth was driven by continued strong performance from a number of our programs, including our lender placed, our earthquake, our personal and commercial property as well as many of our other programs. In early January, we completed our first acquisition in Canada, Special Risk Insurance Managers. We're really pleased with this acquisition and the opportunities we believe it will present to us over the coming quarters and years. Overall, it was a great quarter for National Programs, and I wanted to say thank you to all of our teammates in that division.

Our Wholesale Brokerage segment delivered another solid quarter, with organic revenue growing 8.2%, driven by strong performance from both our Brokerage and Binding Authority businesses, this is even while we experienced some pullback from carriers writing California personal lines due to losses from wildfires last year. Thank you to all of our team for delivering another good quarter. The organic revenue for our Services segment decreased 13.1% for the quarter. We originally expected organic revenue to decline by 5% for the Services segment in the first half of the year, being driven by our Social Security Advocacy business and a terminated customer contract in one of our claims processing businesses. During the quarter, however, our organic revenue growth for the Services segment was further impacted due to lower weather-related and social security advocacy claims. As we've seen in the past, our Services segment can have more volatility in its revenues based on the volume and timing of claims activity.

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

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [3]

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Thank you, Powell, and good morning, everyone. Consistent with previous quarters, we're going to discuss our GAAP results, certain non-GAAP financial highlights and then our adjusted results, excluding the impact of the change in acquisition earn-outs.

I'm over on Slide #7. For the first quarter, we delivered total revenue growth of $79.2 million or 12.8%, an organic revenue growth of 5.6%. Our EBITDAC increased by 22.8%, growing faster than revenues due to leveraging our expense base with higher organic revenue growth, higher contingent commissions and the results from one of our acquisitions in the past year that recognizes substantially all of its revenue in the first quarter of each year. Our income before income tax increased by 38.2%, growing faster than EBITDAC due to the change in acquisition earn-out payables, which decreased by $12.2 million year-over-year based on our most recent projections. Our net income increased by $38.5 million or 33.8%, and our diluted net income per share increased by $0.14 or 35% to $0.54. Our effective tax rate for the first quarter was 25.7% compared to 23.3% in the first quarter of 2019. The higher effective tax rate was driven by lower state tax rates and adjustments in the prior year as well as the change in the market valuation of our company-owned life insurance related to our deferred compensation plan. Our weighted average number of shares were substantially flat compared to the prior year, and our dividend per share increased to $0.085 or 6.3% compared to the first quarter of 2019.

Moving over to Slide #8. This slide presents our results after removing the change in estimated acquisition earn-outs payable for both years. We believe this presentation provides a more comparable year-on-year basis. During the first quarter, we revised our estimated future financial performance and the corresponding estimated earn-out payables by $11 million for certain acquisitions we completed in the last 3 years, with $6 million of this adjustment related to the potential impact from COVID-19. Isolating the change in acquisition earn-outs in both years, our income before income taxes grew $44.6 million or 29.8%. Net income on an adjusted basis increased by $29.5 million or 25.7%. And our adjusted diluted net income per share was $0.51, increasing $0.10 or 24.4%. Overall, it was a really good quarter.

Over to Slide #9. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased 12.8%. Our contingent commissions and guaranteed supplemental commissions, or GSCs, increased by $8.9 million as compared to the first quarter of 2019 as the cash received during the first quarter of 2020 for contingents accrued as of December 31, 2019, was higher than anticipated as we qualify for certain contingents that we did not qualify for the past. Our organic revenues, which isolate the net impact of M&A activity, increased by 5.6% for the quarter.

Over to Slide #10. Our Retail segment delivered total revenue growth of 15%, driven by acquisition activity over the past 12 months and organic revenue growth of 5.7%, driven by growth across all lines of business. In accordance with ASC 606, we lowered our estimates for the revenues we expect to earn from existing employee benefits and workers' compensation policies, resulting in a reduction to revenue of $10.5 million. These estimates were revised after assessing the projected impact of COVID-19 on future levels of employment and payrolls of our customers during the remainder of their current policy periods. The adjustment lowered organic growth for retail for the quarter by almost 300 basis points. Our EBITDAC margin for the quarter increased by 220 basis points and EBITDAC grew 22.3% due to the phasing of profit from an acquisition we completed in the third quarter of last year, higher contingent commissions and leveraging our expense base with higher organic growth. The margin expansion was partially offset by higher noncash stock-based compensation cost, intercompany IT costs and the margin flow-through on the $10.5 million revenue adjustment we've mentioned earlier. We grew our EBITDAC faster than total revenues even when excluding the impact of the acquisition that recorded substantially all of its revenue in the first quarter of the year. Our income before income tax margin increased 470 basis points, primarily due to higher EBITDAC margin, adjustments to our earn-out liabilities of $7.1 million year-over-year and the lower percentage growth of intercompany interest charges. The adjustments to our earn-out liabilities were primarily driven by the potential impact of COVID-19 upon the future performance of acquisitions we completed in the last 3 years.

Moving over to Slide #11. Our National Programs segment increased total revenues by $18.8 million or 17.2% and organic revenue by 11.8% due to strong performance from a number of our programs. EBITDAC increased 25.2% and our margin increased by 210 basis points due to higher revenues, increased contingent commissions and the continued leveraging of our expense base. The margin expansion was partially offset by higher intercompany IT charges. It was another really good quarter for our National Programs segment, growing EBITDAC substantially faster than total revenues. Income before income taxes increased by $10.3 million or 53.4%, expanding 550 basis points due to EBITDAC margin expansion, lower intercompany interest expense and decreased estimated earnout payables that were impacted by the potential for lower future performance associated with COVID-19.

Over to Slide #12. Our Wholesale Brokerage segment delivered total revenue growth of 10.2% and organic growth of 8.2%. Total revenues grew faster than organic due to acquisitions we completed in the past 12 months, which was partially offset by lower contingent commissions. EBITDAC grew 8.5%, and the margin decreased by 40 basis points due to higher intercompany IT charges and lower contingent commissions that offset underlying margin expansion. Our income before income taxes grew 13.5% and the margin increased by 70 basis points due to lower amortization and a change in acquisition earn-out payables.

Over to Slide #13. Total revenues for our Services segment declined 10.1% and organic revenue decreased by 13.1%, with total revenues benefiting from a previous acquisition. Since organic revenue declined more than anticipated in the first quarter, we anticipate our organic growth for the first half of the year could be closer to a negative 10%, excluding any potential impact of COVID-19. For the quarter, EBITDAC declined by 16.9% and the margin declined by 180 basis points, driven by lower organic revenues and higher intercompany IT charges. Income before income taxes increased 9.8% and our income before income taxes margin increased by 410 basis points. This increase was driven by lowering our estimated acquisition earn-out payables.

Over to Slide #14. We want to make some comments regarding capital and liquidity. Our goal has been and will continue to be disciplined in our approach to allocating our capital with the goal of optimizing returns for our shareholders and maintaining a conservative leverage position. We've mentioned in the past the importance of having low leverage and a balanced debt maturity ladder in order to provide strength during times of economic uncertainty. We believe having the lowest leverage of the major public or PE-backed insurance brokers provides us with strong financial security and flexibility. Having a very strong balance sheet and the liquidity position will allow us to manage through the uncertainties of this pandemic, but also allows us to continue to invest.

At the end of March, we had over $385 million of cash and cash equivalents and $700 million of available capacity on our revolver. We anticipate borrowing approximately $250 million under our revolving line of credit before May 1. A portion of these proceeds are expected to be used in connection with the payment for our previously announced acquisition of Loan Protector Insurance Services that we anticipate will close in early May. The remainder of this borrowing will be used to further strengthen our financial position in order to mitigate the potential effects of the COVID-19 pandemic that may result from delays in payments from customers or carriers.

Moving over to Slide #15. One of the metrics we are proud of is our ability to convert revenues into free cash flow. We consistently convert 22% to 26% of our revenues into available capital due to our strong margins and rigorous management of working capital. Our industry-leading free cash flow conversion ratio is about 100% higher than the average of the other public brokers. That means we generate about the same amount of cash as compared to a company twice our size. That means we have a lot of capital to invest in our business. Depending upon the level of M&A activity, we generate significant capital in excess of our committed expenditures that include dividends, CapEx and debt service. We believe we are in a really strong position right now.

As a reminder, Q1 normally has a lower free cash flow conversion ratio due to ASC 606 as we accrue revenue primarily related to employee benefits policies with associated cash collected throughout the year. We also paid the majority of our annual performance bonuses earned in the prior year in the first quarter. Our free cash flow conversion ratio was about 2.5% for the first quarter of 2020 compared with a negative 2.9% for the first quarter of 2019. One thing that may affect free cash flow conversion would be customers delaying payments, either offered by carriers or mandated by states. We believe this scenario would delay our cash receipts, and this is why we anticipate drawing an additional capital on our revolver later this month. With that, let me turn it back over to Powell for closing comments.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [4]

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Thanks, Andy. Great report. Let's talk about how we're thinking about the outlook for the coming quarters. We expect the economy and employment are going to decline for at least the next 2 quarters and then potentially increase slightly into the fourth quarter. This assumption is based on reports from many economists within our banking partners that are projecting a 15% to 20% unemployment rate in the second quarter. Keep in mind that per the CARES Act, self-employed and gig workers are now eligible to file for unemployment. As these individuals are generally not covered by sponsored plans, they will be more than likely not impacting our employee benefits or workers' compensation lines of business. Also, keep in mind, there are many employees being furloughed that are filing for unemployment but are still benefit eligible. These are good examples of the complexities when comparing current unemployment figures to prior years and in estimating the potential impact on our business. These same economists are projecting GDP to decline 20% to 30% in the second quarter with growth starting to rebound in the third quarter, but they're not expecting a recovery until mid- to late 2021. Based on these assumptions, we believe the biggest impact on our financial performance will be in the third quarter, but anticipate our organic growth could be negative in the second quarter. This is due to the fact that higher unemployment will take about 60 days before we see it impact our numbers. We believe the largest impact will be to our employee benefits and workers' compensation lines of coverage as they are primarily driven by employment and payrolls.

In addition, we expect our overall P&C business to be impacted when companies reduce their exposure units. Another dynamic of the work from home mandate is that we're expecting our new business to slow but retention to increase. We do not know if these will offset each other. The unknown right now is how deep and for how long the impact of COVID will last. We hope that the CARES Act and the action by the Fed will start to take effect in the coming month or 2. Regarding rates, we think most rates will increase slightly in the second quarter, but it's unknown what will happen to rates in the second half of the year until more is known about the impact of COVID-19. Taking all these factors into consideration, our best estimate is that the full year organic growth could be slightly positive or down low to mid-single digits. This range is really unknown, as we've made assumptions based on limited actual data. We'll have better view over the coming quarter as to the depth and duration. Here's what we do know. We're a solutions provider. Therefore, we'll continue to stay focused on providing risk management solutions for our customers and prospects and developing new and creative ways of generating new business remotely. We continue to talk with acquisition candidates and may close a few deals in the second quarter. For the next few months at least, we expect there will be a slowdown in M&A activity due to the uncertainty around the future performance of businesses and what this might mean for sellers' valuation. We continue -- I'm sorry, I've mentioned earlier that we are continuing to innovate and serve our customers during these uncertain times. Out of necessity comes great creativity. We always try at Brown & Brown to deliver as many new solutions as possible for the benefits of our customers, our teammates, our carrier partners and our shareholders.

Lastly, as I started with comments about our teammates and their families, I want to close with the same focus. We are a company of dedicated and hard-working teammates focused on serving our customers. Therefore, it's our goal to always ensure they are safe and healthy. When we do this, it helps them to be great spouses, parents and teammates that focus on delivering innovative risk management solutions. With that, let me turn it back over to Lisa for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take the first question. It's from Greg Peters from Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [2]

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Thank you for the guidance regarding the outlook for the year, we appreciate that, and I was wondering if you could build upon that by commenting on your exposures to industries like the restaurant industry, the energy industry, et cetera? And then secondly, I know some of your peers have made comments about no layoff pledges. And I'm just curious if you anticipate the possibility of negative organic revenue growth, how you intend to manage your expense base during this crisis?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [3]

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Okay. Greg, a couple of things. First of all, as you know, we have a pretty diversified book of business. That does not mean that we don't have a lot of a lot of things, but it's just a broad spectrum across the United States. So I would tell you, there are industries, as you know, that are dramatically affected, things like gaming, hospitality, restaurants, movie theaters, sporting events, you said oil and gas, anything in the theme park, gyms, certain construction, transportation. And quite honestly, it's very difficult right now to determine the impact on each of those industries, we can make assumptions, and that would be our best estimate at the present time. So for example, you might ask, we do a lot of business in the automobile space and automobile could involve dealerships, new, both -- and RV. We do F&I business. We do a lot of things. So depending on where you are in the country, that business has been impacted widely. So for example, I mean in the Northeast, it is hit much harder than it is in the Mountain States, as an example. And so it's really, I think, too early to say, Greg. But from an industry standpoint, there is no one industry that we have such an enormous exposure to that we need to call it out. Like I said, I just used the auto industry because it's a unique one, and you read a lot about it, but we have lots of governmental entities and we have lots of nonprofits and we have lots of construction and we have -- so that's the first thing.

The second thing is relative to the $64,000 question, which everybody I expected would ask about, and let's talk about that for just a moment. Number one, at Brown & Brown, we have teammates. We don't have employees. And we are part of one big high-performing, we call it, athletic team. And each team at the local level is run by a leadership group which evaluates how to invest in that business on a daily, monthly, quarterly, yearly basis. So we are defined as an organization and locally by our customers, our capabilities and our carrier relationships. So when I say that, it is not our intent to have to have teammates get off the team during this period of time. That would be the last thing that we would be interested in. I will tell you this, those assessments, if that would happen, would occur at a very local level, not a broad dictate -- we would not be dictating from above. It would be a local level decision on how to best serve our customers. So we are very sensitive around that topic right now, as we always are, because we got a bunch of great teammates. And we believe that as these changes and whatever that means, because your guess is as good as ours, is we will be a stronger organization coming out the other side.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [4]

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Long answer. I appreciate it. Yes. In the comments you spoke about, and it was in the press release about the risk that cash receipts from customers might be delayed. And -- can you speak to if you've seen any evidence of that to date? And then perhaps use that and build upon the comment around the acquisition and how you are investing in the business at this point going forward?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [5]

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Okay. So number one, remember, it's absolutely happening because there are states that are mandating it, Greg. So there are states, as you know, where they are mandating a 60-day premium holiday or something to that. That's number one. Number two, we have, on a limited basis, certain customers, particularly smaller customers, but not exclusively, that are requesting rate relief because of exposure units going down. In some instances and some carriers are allowing us to adjust exposure units down midterm in anticipation of the impact on their overall business. Now you asked a question about acquisitions and how we think about our business. Let's talk about the reality of life. The reality of life is, number one, we announced a loan protector which we think is a very good business, and we were waiting for DOJ approval. And we anticipate that closing sometime in the second quarter. And we closed, as you know, several other transactions in Q1. And so -- we're an organization that's always talking to people. Okay? And at the end of the day, businesses are run by talented people. And so they can have the best revenue stream or earnings stream that you could come up with, but if it -- if there's not a cultural fit then it doesn't work. And we don't want to do that. And so the idea of consummating a transaction based on a video call where we've never met the people that -- I just have a very, very, very hard time seeing that. But having said that, we've been calling on lots of people for long, long periods of time. So the reason Andy talked about, and Andy and I have talked about this a lot, is -- the reason Andy talked about our liquidity is, I think, that's really darn important. And for those of you that were on the call 10 years ago, before the slowdown 10 years ago, some people used to get a little -- they used to criticize us for being conservative. And then we worked our way through that period of time, and now we continue to be conservative and I think we're in a good position where we can invest in our business whenever we want. That does not mean we're trying to go out and buy a bunch of businesses during the downturn. It means that we have the flexibility to invest when we want.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [6]

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Okay. And the final question would be in previous quarters, you and Andy have been willing to provide some perspective on what would happen to profit sharing and guaranteed supplemental commissions over the course of the year. And I'm wondering if you could use this opportunity based on really an uncertain outlook for the balance of the year, how you think that might ripple through and affect those 2 lines within your revenue?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [7]

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Okay, again, Greg, this is purely a guess. And so I'm going to take 2 whacks at that one. Number one, if you look at it, you could say you may have fewer losses because of automobiles and things like that not on the road for a period of time. So you could say maybe it goes up slightly. But in some of these, as you know, there are growth components to them. So you have to have -- you got to grow the business and have a certain performance. That's number one. Number two, I think many of our large carrier partners and other carriers are looking at ways to help their distribution partners. And what I mean by that is, again, how we run our business and how a smaller independent agency runs their business might be slightly different from a cash flow standpoint and some of that other stuff. And so I do believe that the carriers will be looking closely at how can they take into account these extraordinary circumstances and mitigate the potential negative side of that, meaning like if there's a growth component, do they decide to waive that for the year? I don't know. I haven't heard of anybody doing that yet. I'm just speculating. So it's very hard to tell, Greg. But if you press me, I would basically say, I think it would be down slightly.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [8]

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Yes. Greg, Andy here. Because we accrue for these on a go-forward basis now with ASC 606, it puts another level of complexity in. You saw that in our first quarter we picked up additional contingents based on those that we didn't qualify for last year. We wouldn't -- at least we would not anticipate as of right now that going forward. Hopefully, that will occur, but that would probably not be our expectation at this stage. We're going to need to really watch this closely over the next quarter or 2 and just see what trends look like. Feedback we're getting from carriers. Again, the lost comment is spot on. The other side of it, but if premium is down for them, it impacts their profitability, which impacts the contingents. So there's a lot of factors we're going to need to kind of monitor on the way through.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [9]

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Got it. And your ASC 606 adjustments that you referenced upfront, none of that related to the profit sharing and guaranteed supplemental commission component of your revenue or did some of that flow through there?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [10]

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No, it was very, very small. We didn't have a -- no basis.

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Operator [11]

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We will now take the next question from Mike Zaremski from Credit Suisse.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [12]

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First question on the revenue recognition. Just wanted to understand whether the impact this quarter impacted margins materially?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [13]

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Well, I don't know I would say materially on it, Mike, is what we disclosed as we made the $10.5 million revenue adjustment, and it had a profit impact of about $5.8 million. And as you've seen in the past, normally the adjustments that we make around ASC 606 normally move with higher margins than the overall business. So that's pretty consistent in how it works.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [14]

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Okay. Andy, to clarify that, did it improve -- help the margin by like $5 million to $6 million?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [15]

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No, it negatively impacted the margin, basically what it did is it basically flowed out at about a 58% margin. We don't have a 58% EBITDAC margin.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [16]

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Okay. Got it. And should we expect that to persist potentially in 2Q and 3Q, given your commentary?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [17]

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No. Let's see if we can do an example here to try to explain how this worked because what we had to do is we had to look at all current policies that are in effect through or in force through March 31 and do a look back on all of those. And of the adjustment of $10.5 million, about $7.5 million or so relates to policies that we bound in the first quarter and then the residual relates to policies that we bound back in 2019. Here's how you want to think about it, let's use worker's compensation. So if we were to bind a policy and the estimated payrolls for that policy said that we were going to earn $100 over the next 12 months, what would happen is, now at this stage, if we think that the payrolls are going to decrease and we're now going to earn $80, what we need to do is reverse the $20 that we recognized when we bound that policy. So in this example, we did that in January. We then turned around and backed up to $20 in March, okay? So that should represent all outstanding policies. What it doesn't account for, Mike, in the piece that we don't know and in the commentary we had is what exactly happens on renewal business over the coming quarters and the impact to the organic. That piece, we just don't know right now.

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Michael David Zaremski, Crédit Suisse AG, Research Division - Research Analyst [18]

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Understood and helpful. My last question is regarding potential business interruption claims. A lot of chatter out there. I'm not speaking to the regulatory front. I think that's something that unless you have an opinion, I'd love to hear it, but maybe is out of our control. Curious kind of what your clients -- what you're seeing from your clients and from the carriers in terms of the ability for there to be -- do you think there will be some business interruption claims paid out for your clients or most of them excluded?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [19]

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Okay, Mark (sic) [Mike] it's Powell. A couple of things. I'd like to first say that, as you know, business interruption is typically excluded or generally excluded due to pandemic. And then on top of that, there is a provision for a physical damage loss. So you got to keep that in the back of your mind. So I would tell you that in a very small number of policies out there, there are some sublimits. But I mean, very small as a percentage, less than 1%, if I had to guess. But having said that, again, we -- you would have to look at every single policy for every single customer. But if you're talking about, generally speaking, in the industry, of which our customers represent a good wide range of what's written in the industry, as I said, generally speaking, business interruption has a pandemic exclusion and it also necessitates physical damage loss, that's number one. That's it.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [20]

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Mike, I want to just come back and clarify one thing on your question, just to make sure that we've covered it with everybody because you'd asked about, would there be a go-forward impact? The adjustment that we made on the $10.5 million, again, that's our best estimate based upon what we think may happen with unemployment and payroll for those outstanding policies. If for some reason that turns out to be different than what we anticipate, could we have another adjustment in the second or third quarter, incremental? Yes, we could. We don't know right now. Again, we made our best estimate at this stage.

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Operator [21]

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We will now take the next question from Elyse Greenspan from Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [22]

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My first question, just a couple of quick things on the quarter, and then I have a bigger picture question. Is there about $6.4 million of EBITDAC that didn't go through the segments that might have gone through corporate? And if there was, what did that -- what was the corporate benefit coming from in the quarter?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [23]

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Yes, Elyse, there are a couple of things. We mentioned this during our commentary on the incremental -- the higher IT costs down in the divisions. That was really a -- just a shift from corporate down to the divisions versus how we reported it last year. So that was a portion of it. And then also during the first quarter, we did make some adjustments to our SIP based upon estimated payout for those -- the 3 grants that are outstanding. So those were the primary drivers in the corporate that made up the $6 million. As it relates to SIP, again, we monitor that on a regular basis, as you know, and we'll make adjustments up and down over the coming quarters based upon what we think the payouts will be both on organic and the earnings per share.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [24]

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Okay. That's helpful. And then in your prepared remarks, you guys had called out some good growth in your lender-placed business. Was that just good growth on client sticking to recessionary pressures from COVID-19 or was it growth that you would have seen regardless what happened with COVID?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [25]

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Yes, Elyse, that was a few different dynamics going on there. That was almost primarily all driven by new business and we've solved that. They had a great 2018, they had a good '19. We'd lost a couple of customers last year through M&A, but we had picked them up, covered most of that through new business. They're continuing that same trend. The dynamic right now in that space, and you see a number of mandates regarding inability to foreclose on properties. So we're not seeing a lot of incremental placements right now. But the thing that we like about that space is that it gives us a nice buoy around the organic growth because as the economy does go down, those businesses take off, which is really good.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [26]

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Okay. That's helpful. And then I appreciate the outlook and obviously, we all understand that there is a lot of uncertainty in terms of GDP and unemployment projection as well as how long some of these stay at home orders are going to persist. But as you guys think about this kind of slightly positive to kind of down organic for the year, how do you see the different segments? And I recognize this is very fluid. But as you run through different scenarios, it seems like programs could kind of still perform pretty well even in a downward scenario. Can you kind of just high-level walk us through the different segments and what could perform better and what might see more pressures as the economy trends downward.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [27]

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So Elyse, it's Powell. And the answer is, as you know, historically, we have not given guidance, and we're not going to give guidance on the divisions this time. We've done our best to give you an overall view based upon our best guesstimate today. And if and when we have better information, we would be able to give you a better answer. But at the present time, we've said what we're going to say on that.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [28]

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Yes, the only segment that we had additional color on this quarter, Elyse, was the Services segment just because of what we're seeing on underlying claims activity.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [29]

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Okay. That's helpful. And then in the past, you said like 2/3 to 3/4, right, of organic growth was driven off of exposure units, with the remainder being driven off of price, does that kind of ballpark assumptions still apply right now given some changes that we've seen within your book of business?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [30]

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I think that, that's correct, Elyse. Here's the thing that, I think, is very important for everybody to consider on this telephone call. When the -- in 2008 through 2011, you had a period of time where exposure units were going down and rates were going down. Today, you have a different dynamic. You have exposure units going down and rates going up. Okay? And so there is -- there are a couple of things you got to think about. There is, one, that dynamic when people are strapped for cash, and in an event that you are trying to -- if you were in the bunker mentality, which is I just want to fight another day, I got to get through this, then do you buy -- and we haven't seen this yet, but I'm saying, do you buy a slightly lower umbrella, do you buy a lower limit on your earthquake cover, do you buy less of a wind limit? What do you do out of necessity to enable you to get to that another day. And so let's not forget that. That's really important. And I'm not aware of any way for you or anybody else on this call to model that because we don't know. We're just telling you our sense of it and talking to customers ourselves and talking with people in our organization. That's a big thing for me. I want to know how our customers are doing financially and how can we help them. We want them to be an ongoing concern.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [31]

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Yes, Elyse, this is -- we talked about this in our last couple of calls that you can't always make a direct correlation that, as an example, if property rates are up 5%, then as a result, organic growth is up 5% because of how companies are thinking about deductibles. And again, 5% might not be the trigger mark, but if, for some reason, you lay of 10%, 15% or 20% on somebody because of their loss experience, they might change their deductibles. And so those are some of the dynamics that kind of play into the actual revenues and then the weightings.

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Operator [32]

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We will now take the next question from Mark Hughes from SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

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Andy, if organic is kind of taking the midpoint, flat or down just a little bit, what does that do to EBITDAC profitability for the full year?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [34]

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Mark, I think that's probably still one of the unknowns for us right now. As you've seen in the past, there's not always a direct correlation between our organic growth and our margins. We've had quarters when the 2 of them move in tandem. We've had quarters where it moves back and forth. We -- as you know, we try to manage the business and lead the business on a long-term basis, not a quarter-over-quarter. Is there a potential for some interim margin impact? Potentially, because how quickly this came at everybody through all of it. But we try to really stay on top of all of this every day. It's why we have the margins that we have in our business. But wouldn't be surprising if there's some downward pressure on the margins on the full year. As it relates to the quarters, boy, we don't have a good view at this stage just because we're struggling to get our arms around the revenues in all honesty, there's minimal actual data today for us to base any of our assumptions around that, that's what our struggle is.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

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How about the distinction kind of smaller accounts versus middle-sized or large accounts? How much of a difference are you seeing in their behavior?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [36]

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Well, Mark, it's Powell. I would tell you that we write a lot of all of it. And so a lot of our small customers, a number of them don't have the financial resources to weather 6 weeks working from home or as I say, when I go home and see the ingenuity that has come out and the transition or transformation of particularly some small businesses to an alternative delivery model of value, whatever it is that they're, whether it's take-out service at a restaurant to something else, I think that there are people that are just getting by, in some instances, more so in the small businesses or if they have received some sort of financial assistance or its forthcoming. They're just trying to get to where we crank back up again. Many of the medium and larger businesses, barring those that are highly leveraged -- so -- and there are a lot of those, too, but they are typically better equipped. And a common response would be when we went into this -- into the piece of it, we can make it for a couple of months, but we got to get this thing crank back up first part of the summer or middle of the summer because they had managed their balance sheet and their cash position pretty conservatively. So it's kind of all over the board.

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Operator [37]

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We will now take the next question from Yaron Kinar from Goldman Sachs.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division - Research Analyst [38]

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First question, circling back to margins a second. In the scenarios where organic growth actually turns negative for the year and you're not really looking to shrink headcount here, can you maybe talk about the other measures that you have at your disposal to keep margins relatively stable? And maybe in a broader sense, what portion of your costs are variable?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [39]

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Yaron, as you know, we've got a fair amount of levers inside the organization on variable cost and those are just -- those are going to float up and down accordingly from anything that we pay on the commissions front, anything we can look at, at the right time on compensation, we will do. But again, we'll figure out how to step through that at the right time. And as we said in our commentary, that's going to really come down to the leaders in those individual businesses because how each of our businesses navigate through this uncertainty is going to be different, and we're going to really rely upon our leaders locally to make the right calls inside of there. They do an excellent job of leading their businesses today. They have in the past. We've got all the confidence that they will continue to do that in the future in order to balance off the needs with our customers and carrier partners with all of our teammates.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division - Research Analyst [40]

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Okay. And then if I look back at the global financial crisis, I think the company's organic growth is under pressure for a relatively long period of time in the recovery period. I think a lot of that had to do with just a greater orientation relating to smaller businesses. Can you maybe talk about what has changed since 2009 to 2012? Maybe you can give us a sense of what the average account size is or average commissions or anything else you could share with us in terms of how you think about the impact on both the crisis now and the recovery?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [41]

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Yaron, it's Powell. Number one, I'd caution you or anybody else to try to draw parallels between this event and any other subsequent event that has occurred -- any event that occurred historically because that is purely a guess. I just want to make sure that upfront. Number two, if you think about our business, just at a very high level, just think about this for just a moment. We've had Arrowhead, Beecher Carlson, Wright. We've had Hays. We've had all kinds of other really high-quality organizations that span the entire size spectrum, and a lot of that has been upper middle market and even into some large accounts businesses. Having said that, I think another important distinction is, if we're just talking about retail for a moment, the reliance upon the state of Florida as a percentage of revenue then as it is today. So if you overall as a company, it's about 20% of our overall revenue emanates from Florida, but that's misleading because, let's say, almost 6% of that revenue is in a program that's outside of Florida for the most part. So all of a sudden, you have a more diversified, as Andy might say, portfolio of companies.

I actually would tell you that we are not economists. And by the way, we are optimists by nature. We are simple salespeople who live by the sea. And we understand our numbers and we reinvest it for the long term. And so what I would say is this is not a V but whether it's U or an L or whatever that is, we don't know. But what we do know is, in light of all of that, I want everybody to understand that we're really pleased with the first quarter. And that's -- our 3 biggest divisions had great quarters, and we are writing a lot of new business. And we are going to be there for our customers and so I actually think its -- I would be very cautious of trying to draw a parallel between then and now because there are no similarities in my opinion. That was a short -- that was a long downward slide over, let's say, 16 to 18 months and a very slow crawl out. This was an elevator drop down which included financial panic for many people. And we -- so you had a demand drop for services and consumable goods and you have the financial institutions in much stronger point of view. So I wish we could give you more on that, Yaron, because it would help us too, but I'm just saying, I think it's different. And if 68% of GDP is the customer, then -- and that's going to impact demand, then how does the customer feel if they're unemployed, getting an unemployment check or they're furloughed for what? And we don't know. They don't feel good. I know that.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [42]

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Yaron, and the other thing, just to make sure you keep in mind, you probably recall this, the whole citizens effect that we went through during that time period. So you've got that dynamic going on.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [43]

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2007.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [44]

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Exactly. So you've got that impact. So that's what drove it down. But if you look at commercial lines rates, and you probably, again, have went back and looked at this, but you've got '06, '07, '08, '09 and '10 during that time period, all commercial lines were also down. So those are some of the dynamics. You had construction significantly impacted. That's why we think this feels like a very, very different event to us. Maybe in some aspects, it feels like kind of taking that '08 through '10 period and compacting it down into about a 3- or 4-week period, at least that's how it feels right now. That's kind of some of the unknowns to us.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division - Research Analyst [45]

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Right. I appreciate that. And it's exactly trying to understand the difference. So that is where I was at. And then maybe one final one. Pricing, can you maybe talk about the momentum you saw in April from a pricing perspective?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [46]

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It's kind of same. I mean, like I said, I don't want you to get too caught up in, is it going to go up more so or down. I think the carriers, obviously, are very sensitive around limits that they put up and certain lines of coverage where they think there might be some potential exposure, and I'm not talking about a BI claim. I'm just talking about other lines of coverage that might have an exposure and how they underwrite that, D&O, professional liabilities, et cetera.

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Operator [47]

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We will now take the next question from Ron Bobman from Capital Returns.

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Ronald David Bobman, Capital Returns Management, LLC - President [48]

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We always care about your well-being. So we sure hope that neither of you were on those beach pictures that we saw a couple of weeks ago.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [49]

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We weren't.

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Ronald David Bobman, Capital Returns Management, LLC - President [50]

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Great. Great. I had a question about the -- your wholesale business, which obviously had a really strong quarter. And I'm curious, I know it's very, very early days, but I'm curious what you're seeing as far as sort of the flow of activity, sort of traditional wholesale business of late, carriers quoting activity, pushing more business into that channel or are not visible as of yet or no change?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [51]

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Well, let's talk about just Q1 again and the answer is, I think it's similar to the prior quarters. But I would tell you that there continues to be a lot of activity. So I think the activity is same, let's say, Q4 to Q1, but there's just a lot of activity in wholesale. And so remember, depending on the agent that we're doing business with, some of those agents have not been able to transition to a work from home environment as easily as, let's say, we did or maybe someone else.

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Ronald David Bobman, Capital Returns Management, LLC - President [52]

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So your point being despite that, it's still quite active. Is that the emphasis you're placing?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [53]

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Yes. Yes, that's it. That's correct. That's how I want you to think about it.

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Operator [54]

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We will now take the next question from Meyer Shields from ABW (sic) [KBW].

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [55]

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Andy, I was hoping you could help us frame the $10.5 million ASC 606 adjustment in terms of maybe what's the denominator of like annual revenues or what sort of employment or payroll decrease is contemplated in that in and out?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [56]

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Yes, Meyer, so maybe a couple of ways to think about that is, again, we looked at outstanding policy. So again, it doesn't -- it's not that it's applying to all policies for the entire year. And the reason why it's got more weighting in the first part of the year as any policies that we placed last year they would have upwards to 11 months that they've already had the previous exposure just kind of underpinning them inside of there. What we tried to do in our commentary that we mentioned is we leveraged a lot off of what all the economists are saying either our banking partners or other information that we can get and utilize that to potentially -- at least project what unemployment could look like. Here's the variable, is we don't know what furloughing will do. So that's an unknown. The data that is out there is from about 3 weeks ago, and so that's a piece. We don't know exactly what COBRA effect is going to do on the employee benefits business. So that's also kind of an unknown. And then this question about how many of those previous individuals that are now able to file for unemployment claims, i.e., independent contractors or gig workers. Again, it's going to inflate the number that is reported, but we'll have, more than likely, almost no impact on our employee benefits or our work comp businesses. So those are kind of the dynamics that we were juggling around in order to come up with an estimate.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [57]

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Okay. Understood. That's very helpful. Does ASC 606 mean that if your estimate is correct, then the historical impact of premium audits doesn't show up the segment?

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [58]

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So let's see here is on -- as it relates to work comp and employee benefits is, yes, that would be true in your statement. If everything worked out perfectly, which, by the way, it's not going to work out perfectly. But yes, that would be the case. The item that we don't know about right now is for other policies that we place. If it starts to become evident that there are the likelihood for significant return premiums in out periods, yes, we are going to need to take a look at those, absolutely. But again, we have no data at this stage to give us any indication that it's there. So we need to watch that one again. Wish we could be more specific. Man, there are so many unknowns in this current environment at this stage.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division - MD [59]

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No. Understood. And definitely appreciate all the help. One last question, if I can. You're hearing a lot of rumblings about, particularly in the small enterprise space about insurers that are shocked to hear that their business interruption claims aren't covered. I was hoping you could take us through the Brown & Brown sort of policies, procedures and maybe no cover against claims from people that had that disappointment?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [60]

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Well, remember, as I said before, generally speaking, there is a pandemic exclusion in business interruption and it usually mandates a physical damage loss. And so we are talking to our customers, obviously, relative to how it is written in their policies. And in instances that there needs to be some clarification, we may be obviously talking with our carrier partners on that. And in some instances, there have actually been claims filed. So it depends very much so on the customer and the policy.

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Operator [61]

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We have 2 additional follow-up questions in the queue. The first one from Elyse Greenspan from Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [62]

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I just have a follow-up. Just had one quick additional question. Have you guys commented on how much transportation and entertainment is as a percent of your expenses because my assumption is just given travel ban restrictions, there could potentially be a benefit from lower cumulative expenses in the second and potentially in the third quarter.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [63]

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The answer is -- you were breaking up, Elyse, there. So if I don't answer your question exactly, you may have to rephrase it. But what I got out of that was the potential positive on reduction in T&E expense in the organization and the answer is yes. We do believe there could be a slight benefit in Q2 and Q3 relative to travel. Obviously, we are encouraging our teammates to talk with our clients, the best would be on video conference, just like all the other millions of people that are out there trying to do that or on the telephone. And then as and when states reopen and we believe that it would be safe for teammates to go out and see our customers, we would -- they'll be traveling there. I do think it will be a cautious open from our standpoint. And what I mean by that is, I think it's going to be a lot of driving in cars as opposed to jumping on planes right away. But yes, we do believe there could be a slight positive impact in Q2 and Q3.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [64]

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Have you said how much T&E is as a percent of your expenses?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [65]

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No, Elyse, we haven't disclosed that in the past.

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Operator [66]

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The next call is from Mark Hughes from SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [67]

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Powell, you had mentioned we're selling a lot of new business. Can you comment on April new business trends, if you think about April compared to what it might have been in January, February, just on a run rate?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [68]

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Yes. So let me -- remember, this is a purely speculative anecdotal statement because I don't -- we're not giving forward-looking information. And I would tell you that, remember, we work 60, 80, 120, 150 days out. So remember, we had inventory in the pipe that was April, May, June, things that we're working on. So I would tell you, and I think this is an important distinction, I think that when you start to see the potential impact on new business and the reduction in exposure units for our existing customer base is May. So I want you to think about that statement for just a moment. If somebody has gotten through April, and we are working with them, and they say, we think, let's say, their annual revenues are $12 million a year, $1 million a month, and, let's say, for 3 months that the revenues were next to 0 or 10% of the regular and they adjust that down, then that would flow through in May and June and into July and everything. And that's why we believe Q3 will have a potential bigger downdraft because you'll have 3 full months of exposure changes versus potentially 2 months.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [69]

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Mark, just one other piece on that one is, the other dynamic is carriers are probably being more receptive to midterm exposure unit adjustments right now than potentially what they would normally -- that they would say, well, we'll catch it on audit. So that's just another dynamic that will probably play out during this time period.

It depends on the carrier. It depends on how they -- but we would rather make the adjustments to best indicate what the exposure units are now and so with the customer.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [70]

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To that point, how good do you think your -- not how good is your information, but how timely is the information you've got? How much of a lag is there in this process? Presumably, a lot of business owners are engaged in other activities that may not have gotten around to adjusting or thinking about the insurance impact, do you think is there just some natural lag? Or how timely is the...

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [71]

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As I said, it's going to depend on the customer, but I want to make sure that you know that pretty much every business owner thought about insurance. So that's number one. And number two, they've also thought about cash flow. So I call it the going concern theory, which is, if you think about it, if the carrier takes the position to just keep paying in the normal payments and we'll catch you at the audit, I would encourage -- I would say that's not that good because the client is thinking I don't know if I'm going to be around, in some instances, when the audit comes around. So I have to manage my cash flow today and next week and next month and next quarter to get there. So I believe there is a slight delay, Mark, but not that much. So to the extent that our carrier partners will allow us to make those adjustments midterm, we are encouraging that and working with our customers to do that to help them get through this period of time.

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R. Andrew Watts, Brown & Brown, Inc. - Executive VP, CFO & Treasurer [72]

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Lisa, I think we're going to probably go ahead because we're at about an hour and 20 minutes. If there's anybody else who has another follow-up call, they can give us a ring. We'll go ahead and wrap up the call today. Powell's got some closing comments.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President & Director [73]

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Thank you, Andy. As we conclude, I just want to remind everybody of a couple of key themes. We had a really good quarter. And although some people may put that to the side in light of the recent events, I want to make sure that everybody understands that we don't. And we're really proud of our teammates and how they have delivered for our customers time and time again in, what I would call, difficult environments, number one. Number two, and we don't take this lightly, we have a strong balance sheet, and we're proud of it. We deliver the highest cash conversion among our publicly traded peers, and we have access to $1 billion-plus in liquidity. So we think about things long term. And so could it be a little bit bumpy in the next quarter or 2 and beyond? Yes, sure. But I'll tell you one thing, we got our hands on the wheel and we're navigating through this situation and trying to work to deliver for our customers business solutions so they can live to carry on their businesses again. So with that, I wish each of you the best of health, and we look forward to talking to you again next quarter. Good day, and good luck.

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Operator [74]

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This concludes today's call. Thank you for your participation. You may now disconnect.