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Edited Transcript of BRO earnings conference call or presentation 18-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Brown & Brown Inc Earnings Call

DAYTONA BEACH May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Brown & Brown Inc earnings conference call or presentation Tuesday, April 18, 2017 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 and Director

* R. Andrew Watts

Brown & Brown, Inc. - CFO, EVP and Treasurer

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Conference Call Participants

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* Adam Klauber

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology

* Elyse Beth Greenspan

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* Joshua David Shanker

Deutsche Bank AG, Research Division - Research Analyst

* Kai Pan

Morgan Stanley, Research Division - Executive Director

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

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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 of 2017 Quarter Earnings Conference 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 2017 and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include: the company's determination as it finalizes its financial results for the first quarter of 2017; that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday; other factors that the company may not have currently identified or quantified; and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission.

We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

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

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Thank you, Shannon, and good morning, everyone. Thank you for joining us for our First Quarter 2017 Earnings Call.

I'm on Slide 4. For the first quarter, we delivered $465.1 million of revenue, growing 9.6% in total and 3.5% organically. Our total revenue growth includes a $20 million legal settlement that we had with AssuredPartners for the first quarter of this year.

Our EBITDAC margin increased 10 basis points from Q1 of '16 on an as-reported basis. Our adjusted EBITDAC margin decreased 270 basis points from the prior year when excluding the net amount of $18.8 million associated with the legal settlement. Andy will go into more of this later.

As our reported earnings per share for the quarter increased to $0.49 for the first quarter -- or as-reported earnings increased to $0.49 for 2017 from $0.44 in the first quarter of '16. When excluding the change in estimated acquisition earn-out payables from both years along with the net legal settlement and adjusting for prior -- the prior year for the impact of adopting the new GAAP guidelines -- or guidance for stock-based compensation, our earnings per share decreased 4.4% to $0.43 on an adjusted basis.

Overall, we feel Q1 was a good quarter as our organic revenues growth improved nicely and we continue to invest in our business, which will help drive further organic growth and margin expansion in the future.

I want to take a moment to thank all of our teammates as a result -- as these results would not be possible without all of their tough hard efforts.

I'm now on Slide 5. The first quarter was an interesting one as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued, some of this optimism has slowed and now companies are more cautious or skeptical about what shape some of the programs, including tax reform, infrastructure projects and ACA reform, will take and when they might actually take effect, if at all.

With that said, we did see the economy continue to expand across most communities in the past quarter. There are a number of geographies that are doing well as evidenced by construction starts while communities that are tied to oil and gas have leveled out. As we mentioned before, increases in exposure units are the primary driver of growth in our customer base. Similar to previous quarters, the amount of capital and appetite to deploy this capital has not slowed. All risk bearers are looking for creative ways to retain their renewals.

Over the past few years, we've generally been experiencing consecutive decreases in premium rates across most lines. We would say that in the first quarter, coastal property rates are not down as much as they were last year. The rates were decreasing between 5% and 25%, but slowed in the first quarter of this year and are decreasing between 2% and 10%.

We've also talked about -- in previous quarters about rate increases for commercial auto, which are being driven primarily by frequency of claims and distracted drivers. Well, that trend continued in the first quarter with rates generally flat to up 5% with most accounts closer to plus 5%.

In all other lines of coverage, rates are generally flat to down 5% with the exception, as I mentioned earlier, of commercial auto and coastal property.

One of the biggest -- or one of the bigger topics during the quarter was what the impacts would be if there was any reform with the Affordable Care Act. This was in addition to the continual topic of cost containment for health care plans. With the material increases to premium rates for most state exchanges or decreases in the number of providers or both, we did see customers continue to manage plan design. Creativity around plan options is at the forefront. We continue to believe that this uncertainty and need for creativity is a positive for Brown & Brown as it positions us well as a trusted adviser to bring alternative options to customers that best address the needs of their company and their employee base.

I'm going to switch gears now and talk about the performance of our 4 divisions. From a Retail perspective, we had a really nice quarter and grew 4% organically as compared to 70 basis points for the first quarter of last year. We realized continued improvement in our momentum that we created in 2016. We did have about 100 basis points of benefit this quarter from timing-related items. Underlying, our organic growth was closer to 3%, which we view as a really good improvement. The performance in the first quarter was driven by: one, solid new business; two, higher retention as we had fewer insureds that were acquired as we did in the first quarter of last year where we were seeing increased exposure units, as I referred to earlier and, in some cases, flattening of premium rate decreases. We realized solid improvement across almost all lines of business with our employee benefits and large account businesses performing the best this quarter.

Last quarter, we talked about the approval by the Florida Department of Insurance to increase workers' compensation rates by 14.5% effective December 1, 2016, for all new policies and upon renewal, for all existing policies. The rate increases are taking effect for some customers, but we also have customers trying to manage their payrolls in order to best manage the cost increases. We believe that if the rate increases remain in effect, the impact on our entire Retail division will not be material as the annualized benefit would only be in the range of $1.5 million to $2 million in Florida, and you combine that with a number of other states that have decreased their workers' compensation rates for 2017, therefore, we do not expect any material benefit or detriment to Retail in 2017.

Shannon, I was going to ask, I hear a clicking in the background, I don't know if there's something on your end. I just want to bring that to your attention.

Since we know everyone is going to ask us, we wanted to share with you our new 5 for 5 -- how our new 5 for 5 Incentive program is working. As a reminder, this program will pay a producer an incremental 5% if a book of business grows organically 5% for the full year in 2017. The initial reaction from our producers has been really good and they're all very focused on retaining business and bringing in new accounts. It's still very early in the year to determine how the program will ultimately drive performance. However, we do believe that a small portion of our increased performance for the quarter was driven by the new program.

The performance of our National Programs division was right in line with our expectations for the first quarter. We anticipated that the carrier changes for a couple of our programs will impact our revenue retention during the transition period. As we mentioned previously, this is common during carrier changes. Then, once the new carrier is in place, the revenue will stabilize and we'll have the opportunity to grow. We highlighted last quarter that these changes will result in a decrease of revenues for National Programs in 2017 of approximately $5 million to $7 million for the full year versus 2016. Also during the quarter, we felt the year-on-year impact of premium rate decreases on our coastal property programs.

The decline from the carrier changes and the coastal property programs offset the solid performance from a number of our other programs. During the quarter, our lender-placed program, our commercial and residential DIC program and our flood program did well, just to name a few.

Our Wholesale business had a really good quarter, growing 7.4%. This is a great performance. During the quarter, we realized growth across almost all lines of coverage and most businesses. Our Binding Authority business and our personal lines businesses performed really well again this quarter, and our brokerage businesses improved nicely as we wrote more new business and rate decreases were less than in the prior year.

The Services division experienced good organic growth for the quarter at 4.9%. This was driven primarily by claim activity related to the spring storms in Texas and also our Social Security advocacy business performed well during the quarter.

In summary, we are very pleased with the performance of our 4 divisions for the first quarter of '17.

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

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [3]

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Great. Thanks, Powell. Good morning, everyone.

I'm over on Slide #6, this shows our GAAP reported results for the quarter. In the first quarter, we delivered total revenue growth of 9.6% and organic growth of 3.5%. Our income before income taxes grew by 8.2%, and our diluted earnings per share increased by 11.4% to $0.49 versus $0.44 in the first quarter of last year. Our weighted average number of shares increased by 1.5% mainly due to shares issued as part of our long-term equity plan and our employee stock purchase program. Our goal each year is to minimize the impact of these share programs via periodic stock repurchases throughout the year. And lastly, our dividends increased just over 10% for the quarter.

Due to the impact of the legal settlement we received, we're going to spend most of our time discussing our financial performance on an adjusted basis.

On Slide #7, this presents our adjusted numbers after removing the impact of the cash proceeds and the associated legal costs related to the legal settlement, the change in the acquisition earn-out liabilities and the new ASU related to the accounting for stock-based compensation.

During the quarter, we received $20 million and incurred about $1.2 million of legal costs for a net benefit of $18.8 million related to the aforementioned legal settlement. Excluding these items, our revenues increased by 4.9%, our income before income taxes decreased by 5.5% and our EBITDAC declined by 3.6%, with net income declining 3.3%. In a few slides, we're going to talk through the primary drivers of the changes in our margins, which are primarily one time in nature or were recorded last year.

Moving over to Slide #8, we're going to go through the key components of our revenue performance for the quarter. Starting with total revenues, our other income increased by $18.9 million, driven by the legal settlement we mentioned previously. Our contingent commissions in GSCs are down about $1.4 million as compared to the first quarter of the prior year. This is really driven primarily by increased loss ratios from some carriers and we had a couple of carriers change from guaranteed supplemental commission plans to contingent commission plans within our Retail division.

Our core commissions and fees increased by 6.2% year-over-year. Isolating the net impact of our M&A activity, our organic revenue growth was 3.5% for the quarter.

We want to caution everyone not to assume that our future quarters this year will be at the same level as we have the year-on-year impact of storm claim revenues we recognized in the second half of 2016 and we have the carrier changes within National Programs. Both of these are going to put downward pressure on our top line year-over-year.

Due to all the moving parts in the first quarter, we thought it'd be helpful to include a walk of our EBITDAC margins from last year to this year, and we're on Slide #9 now. We do not anticipate providing this level of detail in future quarters unless it's beneficial to the understanding of our numbers.

On an as-reported basis, our margins increased by 10 basis points, but as you'll see there are a number of components. The largest impact was from the net legal settlement that improved margins by 270 basis points. Then, we had the premium tax refunds and SIP credits we recorded in the first quarter of last year that each contributed 70 basis points of margin. Then, we had a $2 million gain on the sale of a book of business in 2016 that increased the prior year margins by 50 basis points. We view these first 4 items as one time in nature or they only impacted the prior year.

For the quarter, the impact of our investment in technology was about 40 basis points. As it relates to the investment in technology, the programs are progressing along as we had expected.

Next is the impact from the new 5 for 5 Incentive Plan within Retail. As Powell mentioned, this program is still in the early days, but it's performing financially how we thought it would based upon the results in the first quarter. As a reminder, we anticipate this program will impact our margins for 2017 and 2018 and then we'll recover the decline in margins in 2019.

Within other is the net effect of the lower contingents and guaranteed supplemental commissions and the impact of leveraging our revenues. We want to continue to reiterate that we believe our business can operate at 33% to 35% EBITDAC margins, but we might be outside of this range at certain times based upon investments in our business or our top line growth.

We move over to Slide #10, we'll take a look at the performance of each of our divisions a little more closely. We're going to start with Retail. For the first quarter, our Retail division delivered 4% organic revenue growth, which was driven by improved performance across all lines of business. We had a lower reduction in lost business as we had fewer customers that were acquired through M&A. Then also we had about 100 basis points of benefit from the timing of revenues. The timing came from transactions that were not recognized in the fourth quarter of last year or some incentives that were realized in the first quarter of this year.

Our income before income taxes was down $1.6 million due to higher acquisition earn-out adjustments of $4.8 million year-over-year, partially offset by lower intercompany interest charges, and again, a $2 million on a sale of book of business last year.

Retail's year-over-year reported EBITDAC margin decreased by 60 basis points, primarily due to the lower contingent in GSC commissions, the gain on the sale of a book of business and, to a lesser extent, the expense associated with the 5 for 5 Incentive program.

We're going to move over to Slide #11. Our National Programs division delivered revenues consistent with the prior year, which is in line with our expectations for the reasons that Powell mentioned earlier. As a reminder, we expect there to be downward pressure in the second half of this year on organic revenue growth as we had storm claim revenues in the second half of 2016 and we had the carrier changes we mentioned earlier.

For the quarter, income before income taxes, as a percentage of revenue, decreased from 13.6% to 12.4%, due primarily to our flood insurance program receiving onetime premium tax refunds of approximately $3 million during the first quarter of 2016 and this was partially offset by lower intercompany interest expense charges.

Our EBITDAC margin decreased by 400 basis points due to the aforementioned onetime premium tax refund and the loss of revenue associated with the programs that are changing carriers and the decline in our coastal property programs.

On to Slide #12, this is our Wholesale division. For the quarter, Wholesale delivered -- the division delivered total revenue growth of 22.1%, driven by acquisitions, and organic revenue growth of 7.4%.

Income before income taxes decreased by 380 basis points to 23.5%. This was driven by: the impact of lower margins associated with certain acquisitions; our business mix, which is really the result of higher transaction volumes at lower premium prices; and the increase in intercompany interest expense.

Our EBITDAC margins are 31.3% for the quarter versus 33.3% in the prior year. This decline was driven by the same factors we just mentioned, but excludes the impact of intercompany interest charges.

Over to Slide #13. Our Services division had another good quarter and delivered total revenue growth of 7.4% and organic growth of 4.9%. For the quarter, our EBITDAC margin increased by 60 basis points, primarily due to higher claim volumes, managing our cost and the acquisition of a higher-margin business in the first quarter of 2016. The incremental increase in income before income taxes as a percentage of revenue was driven by lower intercompany interest expense.

A few additional comments for the quarter. During the first quarter, we adopted ASU 2016-09, which relates to the accounting for stock-based compensation awards. This ASU requires that upon vesting of stock-based compensation, any tax implications be treated as a discrete credit to income tax expense in the quarter of vesting. The prior treatment required that the tax implication be treated as a reduction and additional paid-in capital.

During the first quarter, we recognized about $3 million of tax credit, which decreased our effective tax rate to just below 37% versus about 39.5% in the prior year. Based on our vesting schedules, the majority of the tax benefits will be in the first quarter of each year. We continue to estimate that our full year effective tax rate will be in the range of 39% to 39.3%.

Regarding technology, we want to note that the incremental margin impact will be in the range of 40 to 50 basis points as compared to 2016. We expect the costs within the Retail segment to continue to increase as the year progresses.

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 and Director [4]

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Thank you, Andy, great report. As we move into Q2, we watch the potential for ACA reform and tax reform with great interest, as I know you do. Rates overall are flat to down slightly. One quarter does not make a trend. Cat property rates saw declines of 10% or less.

A word of caution. There are lots of large property schedules that renew in Q2, so we'll see how rates hold or decrease in Q2.

The M&A environment continues to be very competitive. We continue to search for firms that fit culturally and make sense financially. In the current environment, we've seen a number of deals that do not make sense to us financially.

In closing, we enter Q2 with cautious optimism about the year -- what the year might look like. We have lots of great activity going on throughout our company and are making progress on many of our initiatives to drive the business forward.

With that, let me turn it back over to Shannon for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Elyse Greenspan of Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [2]

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First off, I was hoping to just get -- tie together some comments you guys made. Powell, you mentioned cautious and optimistic, I guess, commentary about the economy and then you guys did point to the improvement in Retail. So backing out the onetimer, as you said, at around 3%, I mean, how do you envision the back 3 quarters of '17? I mean, I know Q1 '16 was the easiest comp for that business last year. So how do you envision the growth trajectory given the economy that we're sitting in today, kind of the organic? Should it pick up from the 3% in the remaining 3 quarters of the year? Or how do you kind of see that playing out?

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

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Okay. Elyse, I appreciate the question, and as you know, we don't give organic growth guidance. So we're going to say that it's somewhere between 0 and mid-single digits. And so having said that, we watch the economy as closely as you and everybody else does. But as I've said, one quarter doesn't make a trend.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [4]

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Okay. And then in terms of the margins for the quarter, if you back out the onetimers from last year in the tech spend and the Retail program, your -- the margins were about flat on an overall basis. How do you envision margins playing out through the remaining 3 quarters? I know there is some headwind given the lack of flood business in the back half of the year. But how do you envision the margin trajectory, I guess, ex the tech and the Retail costs for the balance of the year?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [5]

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And, Elyse, if I could clarify, you're talking at the total company level, correct?

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [6]

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Yes.

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [7]

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Yes, what we'd say on those is we would expect that the tech and the 5 for 5 program will continue to put some pressure on margins in the back end of the year. And then also, just a reminder, we did have some of the tax premium refunds in the second quarter of last year that will also put some pressure on those. And then, with the carrier changes in National Programs, again that will put some pressure on the margin at the back end of the year.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [8]

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Okay. And then on the tech side, you mentioned 40 to 50 basis points. It had been 35 to 40, so are you increasing, I guess, the spend that you're expecting for '17 from your comments today?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [9]

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Yes, a little bit on there, Elyse. I think as we get better visibility to the programs and as they gain momentum, we just -- we're able to kind of tighten up our range a little bit. So not any major movements, but that's kind of the ballpark we see right now.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [10]

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Okay. And then you didn't say -- I'm assuming you guys didn't repurchase any stock in the quarter. As you do have some cash on the legal settlement and given, I guess, where you see acquisitions prices today, has anything changed on your just view in terms of capital management and allocation in terms of share repurchase?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [11]

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Nothing's changed, Elyse. We continue to evaluate it and we talk to our board about it when we're together, but there's no change in the way we look at capital allocation.

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Operator [12]

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(Operator Instructions) Our next question will come from Kai Pan of Morgan Stanley.

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Kai Pan, Morgan Stanley, Research Division - Executive Director [13]

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Just follow-up on the sort of 5 for 5 program and it looks like you pay additional -- like close to $2 million of additional compensation accrual for the quarter, which kind of implies 5% additional, like $35 million of commissions. I just want to make sure my math is right, and how do you accrue for this incentive program?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [14]

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Yes, so let's see if I can clarify a little bit on it, Kai. So the way the program works is that anybody that is able to grow the book over 5% for the full year 2017 will get that. As we mentioned when we rolled this plan out at the beginning of the year and we talked about on the year-end call, is there's going to be some of our producers that are already over 5%. So you do have -- it's not that you've got your full year because I think what you're trying to do is presume that if you take your 2%, kind of divide it all the way out, you got an incremental $35 million. It wouldn't actually work that way.

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Kai Pan, Morgan Stanley, Research Division - Executive Director [15]

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Okay. And will that be accrued throughout the year? Every quarter, you will have additional accrual depending on the performance?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [16]

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Yes. Depending upon performance, correct, yes.

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Kai Pan, Morgan Stanley, Research Division - Executive Director [17]

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Okay. So -- and then the -- on the margin side, is that the 40 basis points from tech and the 40 basis points from the incentive program, assuming they will continue, would that be sort of like the basic run rate basis?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [18]

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Well, on tech, we said it was going to be 40 to 50 basis points. And we can't say yet on the 5 for 5 accrual because we have to watch it every quarter.

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [19]

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Yes. And listen, if we can, let's clarify on the technology spend is it can be up and down during the year, and let's explain what we mean by that. It's because we started into the programs during last year and the spend started picking up in the back end of the year, we're going to have, at times, a higher impact in the first half of this year. Then, as we start to lap the expenses, the impact will be less. So you probably don't want to take it into a straight line across the border. You will probably expect that the second quarter will be a little bit higher.

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Kai Pan, Morgan Stanley, Research Division - Executive Director [20]

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Okay, that's great. And lastly, your cash balance now reached close to $550 million, the highest probably in the company history. So just wonder how much cash you need to keep on the balance sheet to run your day-to-day operations. And what's your -- like what level of the excess capital or cash you would keep on balance sheet for an extended period of time? And how do you plan to deploy it?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [21]

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Yes, Kai, we haven't disclosed what we think the required working capital is in the company. We've got a sufficient amount of cash as well as access to whatever capital that we need. So...

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [22]

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And then I'd like to address the second point, which I think is the most important. Kai, I believe that I said this last time, but if I didn't, I'll clarify it for everybody. We have been very clear that we are deploying our capital in 3 ways: one, through hiring new teammates and growing our business organically; two, by acquisitions; and three, to return it to shareholders through either dividends or share repurchases or some combination thereof. We're going to pay out about $70 million in dividends this year to our shareholders.

So having said that, I have been asked that what happens if, in fact, acquisitions were very, very expensive going forward for a protracted period of time and if we evaluated our stock price and we thought the stock price was fully valued at the time. And the answer to the question is that we're going to stockpile cash on our balance sheet. And so if anybody wants to criticize somebody at Brown & Brown, you can criticize me. But we're not going -- we do not have a hole burning in our pocket, and I know you know that, and we look very, very closely at our acquisitions and how we deploy that capital and we'll continue to do so.

It's interesting because, as I alluded to in my prepared remarks, some of the acquisitions that we see out there, we know that the numbers don't make sense, but we're a forever company and those companies are going to be flipped in 3 to 5 to 7 years and they don't build cultures in that period of time. We've only been doing this for 77 years and we think we really have a strong culture and we'll continue to maintain that. So I anticipate that we will have opportunities to deploy our capital fine over the intermediate to longer term, but it's very possible we could continue to stockpile cash on the balance sheet. As you know, last year, I believe that we added $72 million to the cash on hand year-over-year. The prior year, we paid out about all of the cash that we earned. So that's it.

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Operator [23]

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And our next question will come from Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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The Social Security advocacy business, you've had good success there. Any color you can provide on whether that's new clients, more claims coming from existing clients or you're just having more success getting those benefits for your clients?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [25]

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Well, remember, there's 2 clarifications. We work on behalf of insurance company partners to get these settled and sometimes -- well, I shouldn't say sometimes, it is very highly dependent on the way those claims are processed with the federal government. So when I say that, Mark, sometimes things seem to be going in a good pace and a flow and we get a lot processed and then there are some times, i.e., when there's a question about funding for the federal government when things slow down and we've talked about that in the past. So I would basically say that we continue to enjoy and work really hard on behalf -- or working for our carrier partners on this in this regard, and I think that success breeds success. When you do a good job, then you have the opportunity to earn more business from those partners. But there's not one thing that's just sticking out that's saying this is happening, which is dramatically changing our results there.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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Right. So at least from your perspective, the process is working smoothly, you might say, in Washington on this topic?

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

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Well, I don't know if I'd say that. I think that you might have been a little bit overly zealous in your response there. I would say that, today, things are still being processed. And if you could give us more clarity on what's happening in Washington, we would all like to know. But I am cautious about saying something that broadly.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Right. On the -- Andy, you've talked about the -- you've got some tough comps on the storm claim business. Is there kind of an elevated revenue or revenue number above trend that you have in mind when you think about kind of the potential pressure in the second half?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [29]

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Yes, Mark. So we had called out, we said we had about $9 million of incremental storm claim revenue last year over 2015, which almost all primarily fell in the second half of the year. So during our calls, last year we had called out about $4 million in the third quarter and about $3 million in the fourth quarter and then there's a little bit kind of in the first and second quarter, but the big chunks are back end of the year.

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Operator [30]

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And our next question will come from Josh Shanker of Deutsche Bank.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [31]

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You guys reiterated that 33% to 35% EBITDAC margin is your expected normal and obviously, you're below that right now. When you're talking about the Wholesale business, you had big growth but huge decline in operating leverage due to a change in business mix. Isn't a change in business mix kind of a permanent sort of thing that permanently affects the long-term margins of the business? How do we get back to 33% to 35%?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [32]

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Okay. Well, let me talk broadly about the business and then I'll talk specifics in terms of division. Number one, obviously, as you know, that we had a decrease in profit sharing for the quarter. So that in and of itself has a significant impact, number one. Number two, in the -- specifically, in the Wholesale segment, the Wholesale segment of our business, we have -- we did an acquisition last year that has lower-than-historic margins, which we have to move up over time, which we are doing. We also seemed to have more flow of activity, but the compression in rates is making that more costly to service is probably the way to say it. And so that's -- and our profit sharing overall has been down in Wholesale to the prior year. If you look inside of programs, we've articulated that we have several programs that are actually changing carriers, which is going to have a revenue impact of, we've stated, $5 million to $7 million. We also have said that in our coastal property programs, rates have been going down and continuing to go down so that has compressed our margins in those particular programs as well.

And in Retail, as we've said, we had a very good quarter, but we continue to invest in the business, i.e., hiring people. And we had a good quarter also in Services. So when you put all that together, I would say that's the clearest I think we can make it in terms of the pressure points on the business kind of across the way. Andy, you've got anything else to add on that?

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R. Andrew Watts, Brown & Brown, Inc. - CFO, EVP and Treasurer [33]

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Yes. And, Josh, when we give the ranges, we're not saying that we're going to be there in 2017. That's kind of what we call our -- what should be the interim range and we can be above, just as we talked about our organic, we should be in the low to mid-single digits in kind of a normal stable economy. Well, that's different things going on with rates, et cetera. That's where we do believe we can operate the business. We have been able to do that over the last 10 and 20 years as we've grown the business substantially. You might see outside of that every now and then, but we think we've got the right operating framework.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [34]

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Should we be there in 2019?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [35]

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There's too much speculation. I mean, we don't know what the economy is going to be doing, what rates are going to be doing or any of that. What we're trying to do is we're trying to grow the business organically and add with good acquisitions where we can find them and obviously, grow the profit sharing. And the profit sharing's been under pressure because of losses and rate decreases.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [36]

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That makes sense. And one other question about the 5 for 5. In your experience, is there any difference in the stickiness of business acquired via standard procedure versus acquired during an incentive plan?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [37]

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No, not that we're aware of.

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Operator [38]

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(Operator Instructions) Our next question will come from Adam Klauber of William Blair.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology [39]

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Wholesale business was very strong. I guess, what was the level of submissions? And do you think you're taking market share in that business?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [40]

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Well, I'm not trying to be funny, Adam, but we had a lot of submissions, but I'm not going to say that we -- I think the important thing that you know is, one, we have a lot of activity in Wholesale. So as Tony Strianese said, you've got to flip a lot of hamburgers particularly in Binding Authority and personal lines, number one. Number two, we referenced that the cat property, the large transactional wholesale, rates were not down as much as we anticipated. I also caution you to say that one quarter doesn't make a trend. We were very pleased with the performance in Q1 of Wholesale, and I would say that I'm only speaking on behalf of myself, but I was pleasantly surprised because I anticipated further rate pressure in cat property.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology [41]

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Okay, that's helpful. And then as far as Wright, are you -- is that business expanding? I know it's grown, but are you expanding the distribution? Or you'd just be able to grow that business?

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [42]

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Well, I think that it's a combination of both. Remember, we're servicing retail agents across the country, so we can service existing agents and we can make -- we can work with new agents who are writing new policies on behalf of existing or new agents. So we think that there are growth opportunities in a bunch of different ways there and we're very pleased with how Wright Flood is doing.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services and Technology [43]

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Okay. And on the benefit, I know you don't break that out or give exact, but has that grown in the range of the overall Retail? Better, worse or just some idea how that business has grown, some ballpark idea would be helpful.

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J. Powell Brown, Brown & Brown, Inc. - CEO, President and Director [44]

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It's growing nicely. I don't mean to be flippant, but we don't give the exact number. But I'm very pleased with where we are for employee benefits.

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Operator [45]

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And it does appear we have no further questions at this time.

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

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Okay. Well, thank you all very much and have a wonderful day. We look forward to talking to you at the end of Q2. Thank you. Bye-bye.

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Operator [47]

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That does conclude today's teleconference. Thank you all for your participation.