Powell Brown - President and Chief Executive Officer Andrew Watts - Executive Vice President, Treasurer and Chief Financial Officer.

Elyse Greenspan - Wells Fargo Dan Farrell - Sterne, Agee John Campbell - Stephens Inc. Kai Pan - Morgan Stanley Meyer Shields - KBW Mark Hughes - SunTrust Adam Klauber - William Blair Ken Billingsley - Compass Point Sean Dargan - Macquarie Mark Dwelle - RBC Capital Markets Josh Shanker - Deutsche Bank.

Good morning and welcome to the Brown & Brown Inc. 2014 third quarter earnings call. Today's call is being recorded.

Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature.

Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the third quarter of 2014 and are intended to fall within the Safe Harbor provisions of the securities laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors.

Such factors include the company's determination as it finalizes its financial results for the second quarter of 2014 that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday.

Other factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission.

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

We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin..

Thanks, Dianna. Good morning, everybody, and thanks for joining us for our Q3 earnings call. In the third quarter we delivered $421 million of revenue for the quarter with growth about 17.3%. Our organic growth in that was 2.9%. We did deliver organic growth in each of our four divisions.

We grew our earnings per share at 20.5% versus the prior year to $0.47. Taking out the Wright Insurance Group acquisition, which we acquired in May, our adjusted EPS would be $0.44 versus $0.39 for a 7.7% increase. We are pleased with the performance of Wright and its underlying businesses.

We'll talk more about the cat events and their impact on Wright, later in the presentation. From an EBITDAC perspective our margins improved to 35.1% from 33.7%, reflecting a 140 basis point improvement. Excluding Wright, the adjusted EBITDAC margin is 34% flat, reflecting a 30 basis point improvement over 2013.

As we've said previously, our goal is to grow our business organically and profitably. We've delivered another quarter of strong cash conversion. We are very pleased with the $500 million of investment grade rated bonds that we issued in the third quarter.

Andy will talk more about the bonds and the evolution of our capital structure later in the presentation. We also initiated a $50 million accelerated share repurchase program that is part of the $200 million plan, approved by our board, at the end of the second quarter, and Andy will talk more about this later in his presentation as well.

Lastly, we're continuing to strive for a 4% organic growth this year. However, it is going to be challenging, because a few of our businesses are being impacted by the lack of weather-related events, and we continue to watch as the market softens relative to rates. On Slide 5, I'd like to dig a little deeper into our results.

As you know, Retail is just over 50% of our total company today, and they delivered 5.1% growth and 2.1% of that was organic. Observations about Retail, we are seeing middle-market America continues to remain choppy or a little inconsistent, depending on where you are in the country.

Property renewal rates, including coastal areas, are down 5% to 20% or more, with E&S markets targeting the best catastrophic risks. Employee benefits, especially large groups, continue to see increases of up to 10%. Workers compensation rates are moving up, as few industry segment payrolls are growing slightly.

We're seeing the frequency of losses decline, but the loss severity is rising. Carriers are looking for rate on commercial auto, but they are generally flat. However, companies with good claims histories are seeing decreases of 5% to 15%.

In our National Programs area we're experiencing growth in personal property, automobile, aftermarket and earthquake. Our retention rates are steady in most programs, but we are continuing to see pressure on property terms and conditions.

From Wholesale standpoint, I will tell you that Wholesale had another great quarter, posting organic revenue of 7.7%. Our binding authority business is continuing to grow nicely. We're seeing rates for large broker property falling, as I said earlier, 5% to 20%, depending on the location.

Florida is closer to 20% than 5% in most cases, due to the coastal nature of our state. Professional liability is flat, but employment practices liability is continuing to see upward pressure. We're seeing some accounts move from the E&S market back to the standard market, those are GL accounts.

In the Services area, the division had a good quarter with organic growth of 2.1%. Considering there were no weather-related events to drive claims processing revenues, we believe that this is a good result. Within our Services businesses, we realized solid growth from new work claims clients.

This was partially offset, because we're seeing backlogs within our social security advocacy business, and this has had a direct impact on revenues in that business. Now, I'll turn it over to Andy, who will discuss our financial performance in more detail..

Thanks, Powell. Good morning, everyone. Now, let me talk about our financial highlights and some of the key metrics for the quarter. Our total revenues grew 17.3%, and when we remove the revenue related to Wright, we grew the topline by 6.6%.

We believe showing our results without an acquired company provides a clear picture of the comparative financial performance. Our pre-tax income, excluding Wright, grew by 7.1%, even with the increased interest cost related to the bonds. I'll talk more about our run rate on debt, later in my presentation.

Our employee compensation and benefit cost as a percentage of revenue are running slightly below 50%. As a reminder, in the third quarter of last year, we recognized $1.3 million of one-time cost associated with a large acquisition that did not occur. And this year we had a true-up of our healthcare reserve that resulted in a benefit of $1.1 million.

These two combined, resulted in a $2.4 million swing year-on-year. If both items were removed from the applicable year, our margins would be substantially flat year-over-year. We have a very disciplined approach to profitable revenue growth.

And so from an EBITDAC perspective, we delivered good flow-through with an increase of 7.5% versus the 6.6% revenue increase. Our earnings per share increased to $0.47 in the third quarter, which was a $0.04 or 7.7% improvement over the prior year, when Wright is excluded.

With our share repurchases in the second and third quarters, we've been able to keep our weighted average shares constant, so there was no dilution. In the fourth quarter we'll get the full effect of the $50 million accelerated share repurchase program we commenced in Q3 and finalizing Q4.

As we said previously, not every quarter will show margin expansion, as we'll make investments at certain times to help grow the business. Our goal is to grow our business organically and profitably. Moving over to Slide 7, I'd like to highlight the key components of our revenue performance for the quarter.

Our total revenue increased by $62 million year-over-year or 17.3%. A large portion of this growth came from the net acquisitions and dispositions. The largest component was the Wright acquisition.

We also realized $1.2 million increase related to contingence and guaranteed supplemental commissions, which were primarily driven by our Wholesale division. Our as-reported EBITDAC margin increased to 35.1% from 33.7% in 2013. So similar to the organic revenue analysis, we adjusted for Wright in order to arrive at comparative numbers.

On an adjusted basis, our EBITDAC margin improved 30 basis points from 33.7% in 2013 to 34% in 2014. Moving to Slide 8. Let me now talk a little bit more detail about each of our divisions. Our Retail division delivered 5.1% growth, partially driven by acquisitions completed within the last 12 months, and our underlying organic growth was 2.1%.

Our year-over-year EBITDAC margin declined slightly by 30 basis points, which was driven by the investment and new teammates, these we mentioned during the second quarter, and non-recurring facility lease exit cost. Excluding the lease exit cost, our margins would be substantially flat for the quarter.

On Page 9, our National Programs division, revenues grew by 49.7%, mainly due to the acquisition of Wright and increased 2% organically. We are continuing to see improvements in the marketplace and more carriers are interested on our niche programs, as an alternative approach to addressing market needs.

During the quarter, we also had some renewals for certain programs that moved to the fourth quarter. If these were renewed in the third quarter, our organic growth rate would have been slightly over 3%. We realized good margin expansion on an as-reported basis, with a 250 basis point improvement, mainly related to Wright.

When adjusting for the effective Wright, the adjusted EBITDAC margin decreased by 20 basis points. The slight decrease is related to the timing of the renewals, I previously noted.

Please note that the 20.1% decrease in pre-tax margin is related to the inter-company interest charges and the increased amortization and depreciation related to the Wright acquisition. As a reminder, inter-company interest charges are eliminated in our consolidated numbers. Moving to Page 10.

Our Wholesale division had another strong quarter, reporting revenue growth of 12.6% and organic growth of 7.7%. The EBITDAC margin decreased slightly, driven by the investment in new teammates along with year-over-year unfavorable movement in foreign currency translation related to Decus, our London broker.

We've realized FX gains or losses in previous quarters and years, when there has been a material movement in the sterling to dollar rates. Excluding the FX impact, margins for this division would be up slightly. For the Service division, on Page 11, we delivered organic growth of 2.1%.

We realized growth from our USIS and NewQuest businesses, as both businesses have added new customers over the past year. We also experienced a decline in our claims processing businesses of Colonial and ICA, as there were no significant weather-related events to create processing revenues.

We also continue to face headwinds within our social security and disability advocacy business. While we have good incoming volumes, there has been a continued slowdown in processing by the federal government.

From income before income taxes and EBITDAC perspective, it really comes down to the lack of significant weather-related events and their impact on several of our GPAs. Moving over to Page 12. Now, we've reviewed the financials. Let me shift gears and talk a little bit more about our capital evolution.

The issuance of our bonds with the next phase in our debt structure, after establishing our credit facility in the second quarter, we're proud to report that the inaugural 10-year public bonds we issued during the quarter received investment grade ratings from S&P and Moody's. We're very pleased with the results and the corresponding coupon of 4.2%.

The proceeds of the bonds were used to payoff the $475 million we had drawn on our revolving credit facility. This results in our revised weighted average cost of debt to be approximately 3%. Our new quarterly run rate for interest expense will be approximately $10 million, barring any future use of the revolver. Moving to Slide 13.

In transitioning to the equity component of our capital structure, we initiated a $50 million accelerated share repurchase program during the quarter, as part of the $200 million plan announced early in the third quarter. A total of approximately 1.3 million shares were purchased at the time of commencing the program.

This initial program was completed in October, with the final share settlement of approximately 240,000, for a total program purchase of 1.5 million shares. We will get the full impact of these purchases in the fourth quarter's weighted average share calculation.

Looking at the possibility of future purchases, these will be assessed and evaluated against internal and external investments, with our objective around our capital deployment strategy to be the optimization of shareholder returns.

We do expect continued purchasing of shares, in order to minimize the impact of share creep related to our stock incentive plans. On Slide 14, in the second quarter we provided ranges of where we expect Wright to perform. We're very pleased to report that the performance of each of the businesses are in line with our expectations for the quarter.

As a reminder, in the second quarter, we mentioned that the forecast included $7.5 million of revenues related to catastrophic events. This was based upon the 10-year average, excluding Hurricane Katrina and Superstorm Sandy. As we mentioned, in some years the actual results will be higher or lower than the average.

So unless there is an unusual storm, it looks like 2014 will be one of those years that will be below the average. We want to let you know that this estimated revenue is budgeted to hit substantially in the fourth quarter, due to the historical timing of when the significant events occur, which is normally in the third quarter.

Given the fact, there have been no significant events during the peak hurricane season, cat revenues were more than likely decreased about $6 million in the fourth quarter, and this will equate to about $0.02 impact on earnings per share. So please take this into consideration when updating your Q4 models.

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

Thanks, Andy, for a great report. In closing, we have a good pipeline of acquisitions and we look forward to continuing those discussions with all of them. And we're pleased with the strategic positioning across all of our divisions and continue to add new teammates that will drive the business forward.

Now, with that, I'd like to turn it back over to Dianna, and we'll open it up to questions..

(Operator Instructions) We'll go first to Elyse Greenspan with Wells Fargo..

I was hoping to first start, I guess, spending a little bit more time on the organic revenue growth target of 4%. And what really changed I guess this quarter to cause you to think that you might not hit that target for the full year. I mean, I know, just the combination of the rating environment and the slower pickup in the middle-market economy.

But is that something that you saw that specifically changed in the third quarter or just maybe a build up throughout the whole year? Just some more details on what you're seeing there that caused you to become a little bit, I guess, more pessimistic this quarter?.

Elyse, I would tell you, I think really the thing I would point to is, what we see or anticipate is the lack of significant weather event related revenue in the fourth quarter. We watch with interest, as the markets softens or whatever its doing, and we obviously are kind of a reflection of the middle-market economy.

But if you're really asking, if you ask Andy or myself, the first thing that we point to would be that, that revenue which I think Andy said, when we look at some of these claims administration businesses, we have historically looked at them on six or 10 year averages, most of the time the 10-year averages, excluding significant events like Sandy and Katrina.

And so that's the thing that I would point to, as Andy called out in his report. We continue to see certain areas of the country that are doing really well and you mirror that with other areas, they are not doing as well.

An example would be, if you go to Miami right now, there is an unbelievable number of cranes in the air, building new condo towers, and you go 80 or 90 miles across the state in Naples and it's very slow from an economic standpoint. So that's what we point to, Elyse..

And then, so in terms of I guess the slowdown or the lower weather-related revenues, does it really have an impact on the Retail segment as much; so that when you say, I guess, be about 2%, 2.1% growth you saw this quarter that's about tracking with where you had in mind or is that also a little bit slower?.

Well, remember, we haven't given organic growth guidance on Retail. We've said that we think it's a low-to-mid single-digit organic growth business, and we are always striving to grow our business organically more.

And so I think that as we've said historically, there will be quarters where there will be ups and/or conversely there could be slight downs, but I don't think that one quarter create a trend.

And so if you think about it we've had a little movement in that space over the year, but we are continuing to work on growing it more quickly as we move forward..

And then in terms of the acquisition, just on the deal front, we've seen a little bit of a slowdown as of late. Is that more of a function of the size of deals in the market, the potential price associated, multiples associated with deals? And then, just in terms of how you balance on your capital with the $200 million repurchase program.

Could we potentially see repurchases pickup, if in fact, we continue to see a slowdown on the acquisition front?.

one is, internal investment in new teammates and growing the business organically; two; external investments; and three; returning the shareholders, which is historically true, either one, dividend increases, which we've been very pleased about and/or share repurchase, which we've done, the $25 million plus the $50 million, so far this year.

So we'll continue to keep our eyes on that, but we are not saying categorically that it's going to happen. We will continue to evaluate the options that exist in the other two buckets to see if and/or when we might do something like that..

We'll take our next question from Dan Farrell of Sterne, Agee..

Just a question on expenses and margins, I think you said that if you adjusted for Wright and also some comparison issues in both quarters, they will be closer to a flattish margin. And I guess my question is you've talked about step investments that you might be making into various parts of the business.

I wonder if there is any particular ones that you might be able to highlight this quarter? And then as we think longer-term I think you have talked about still wanting to be able to show moderate margin growth, even as you do these investments.

Is that something that you still think is achievable at the current organic growth rates?.

Let me take the first one around the expenses. If you recall, in the second quarter, we talked about areas where we were investing in new teammates, and we had called such as our new cyber security practice, our MNA, our Zoom product within Wholesale. Tony Strianese has been adding new teammates in there to grow the investment.

So those are the areas where we're primarily investing, right now internally, at this stage. With those though, when we bring on new teammates, they don't' payoff in the first quarter. You got to bring them on board, they need a chance to start to build a book.

So we'll see those in the out quarters, on flow-through from both revenue and down the operating profit..

Let me take the first one around the expenses. If you recall, in the second quarter, we talked about areas where we were investing in new teammates, and we had called such as our new cyber security practice, our MNA, our Zoom product within Wholesale. Tony Strianese has been adding new teammates in there to grow the investment.

So those are the areas where we're primarily investing, right now internally, at this stage. With those though, when we bring on new teammates, they don't' payoff in the first quarter. You got to bring them on board, they need a chance to start to build a book.

So we'll see those in the out quarters, on flow-through from both revenue and down the operating profit..

And so, Dan, to the second question about growth in margins or organic growth, and I know that you and others have wanted us to say, at what point do you have margin expansion, when you have organic growth.

And what we've said is, when we have organic growth, we can have margin expansion that is dependent upon the investments that we're making in the business. And so I want everybody to understand that I'm very comfortable of where we are relative to the profitability of our company.

And what I mean by that is, we are trying to have a healthy balance between organic growth and profitability. As you know, we have the industry-leading margins and free cash generation on those dollars generated; something that we're really proud of. So I'm not trying to be vague so much, as to say that we have 7,700 teammates at Brown & Brown.

And in order to get to our $2 billion goal, we believe we're going to have to hire or acquire roughly 3,000 additional teammates. And we are doing this, as you know, for the long term. So we are thinking around, when we find somebody that we think is that talented, we've got to get them on our team.

And there might be a short-term impact for a long-term gain. That's the way we're looking at it..

And so, Dan, to the second question about growth in margins or organic growth, and I know that you and others have wanted us to say, at what point do you have margin expansion, when you have organic growth.

And what we've said is, when we have organic growth, we can have margin expansion that is dependent upon the investments that we're making in the business. And so I want everybody to understand that I'm very comfortable of where we are relative to the profitability of our company.

And what I mean by that is, we are trying to have a healthy balance between organic growth and profitability. As you know, we have the industry-leading margins and free cash generation on those dollars generated; something that we're really proud of. So I'm not trying to be vague so much, as to say that we have 7,700 teammates at Brown & Brown.

And in order to get to our $2 billion goal, we believe we're going to have to hire or acquire roughly 3,000 additional teammates. And we are doing this, as you know, for the long term. So we are thinking around, when we find somebody that we think is that talented, we've got to get them on our team.

And there might be a short-term impact for a long-term gain. That's the way we're looking at it..

And Dan, for a clarification on that, the $2 billion that Powell talks about, that's our intermediate goal, but doesn't mean that's our endpoint..

We'll take our next question from John Campbell of Stephens Inc..

If you guys could just run back through foreign exchange risk or just exposure in Wholesale, just want to make sure we got a good grip on that going forward?.

John, our Decus operations over there are U.S. dollar denominated. So whenever there is any change in FX, all that flows to our P&L. A lot of it depends upon the materiality and rate changes on a quarterly basis. In this case, we had a fair movement in the dollar to sterling. Last year we had it in Q1. So it does kind of ebb and flow back and forth..

That was a positive, the last year..

No. Q1 of last year was a negative. It was $800,000 of negative in Q1 of last year. So it does move back and forth. And the last couple of quarters, it hasn't been that material to us. This one just, we had a little bit more of a spike in the rate..

And then maybe could you just kind of walk through what the rate environment looks like for Wholesale in the U.K.?.

Well, you're talking about domestic. Our international business in London is actually writing North American business primarily. So when we talk about the wholesale rates, when we talk about cat property, we talk about liability and professional lines, that would include that..

And then on contingent commissions, just the losses this year.

Could you guys just kind of point us in a direction where you can expect that to go throughout the next two or three quarters?.

Well, remember, we recognized in Q1 of this year, the FIU contingency. So we don't believe that there will be any contingencies. We are checking on that. So let's be careful of that. There might be some, but we don't think that's the case.

And so -- do you have an estimate on Q4 contingencies from a historic perspective?.

Well, we had FIU in Q3 of last year. So I mean, on this one John, I think we've talked about this on previous quarters is around the Contingents and GSCs. It's not something that we have or that we give any guidance for into the future, just because not all of those we can control, because there are some loss activity..

We'll go next to Kai Pan of Morgan Stanley..

Just to go down little bit on the organic growth on the two segments; the first on National Programs. So it looks like 2% or 3% dependent on the timing, so just wondering underneath that, do you have breakdown what's Arrowhead is growing at.

And how do you think sort of what's the business going forward, essentially in term of organic growth? I believe before, like a part of this Arrowhead was growing like 5% to 6% and does it mean that the business is slowing down to like a low-single digit as well?.

So we don't breakout now the growth specifically related to Arrowhead. So as we said last quarter, effective July 1, all of the programs across the country now report to Chris Walker. And there are team of leaders that are there, not only in San Diego, but around the country that run those businesses in the program space.

We've not specifically said relative to the growth of Arrowhead or to the program space. We haven't given that growth guidance, but we have said that there is, as an organization, we believe our business grows at low-to-mid single digits.

And so some programs, as you know, will be performing well at sometimes, and other times there will be programs that will be slow or being impacted by something with another competitor in that particular space over that period of time.

We're very pleased with how our programs division is performing and specifically the leaders that run those businesses, which enable us to either expand the existing programs or create new programs going forward..

Then on the Wholesale side, it looks like your market commentary, it looks like pricing is flat to down, yet the organic growth is pretty strong and close to 8%.

Could you talk little bit more about that, as you're gaining accounts or gaining shares?.

Sure. So remember we have two sides of our brokerage, or our Wholesale business, as you know; the binding authority business, and those are premiums that might average $3,000 to $4,000 in premium. So the individual production underwriters and that part of the space are writing lots and lots and lots and lots of accounts.

And then in the brokerage space, whether it'd be property liability or professional liability, let's just use property since we're here in Florida. When you see that, you have, as we've talked about, there is a lot of interest in large catastrophic property accounts and the bigger the account, the more attention it gains.

And so carriers are very focused on trying to write some of those bigger accounts, so there is more pricing pressure on those. And so what we're trying to do as either in the binding authority space or the brokerage space, it to be the solution provider of choice to our clients.

And so what that means is we've got all kinds of inventory that we're trying to manage for our retail clients all over the place, and in that we are writing a lot of that business.

So as you've seen, the organic growth rate is down slightly from the prior quarter in that space, I do think that that's as a result of continued downward pressure on rates. It's something that we watched carefully, but that space has grown very nicely over the last several quarters.

I will point out to the Wholesale arena, is an arena where you have more, I would say, vicious swings typically on rates, and so there could be high or low and that impacts higher or much higher or much lower than maybe the overall retail market, which in turn exacerbates organic growth, either growth or shrinkage, when it gets really competitive.

So that's how we see it..

Then lastly on the, sort of like, if you just step back a little bit, to think about the pricing cycle we're in right now.

And is this environment is basically, like for the broker competition, do you think there will be more competition or like actually good for you, because that the market is sort of curious, it need to access to the market or get business?.

So what I would say is this, number one, there is about $680 billion of surplus now in a marketplace that writes less than $500 billion of premium. So that is in and of itself, in my mind, means there is basically simply stated, there is more surplus than premium, so therefore there is going to continue to be downward pressure on rates.

We're seeing rate increases either moderate or flatten.

I think that if you want to speculate a little bit, I think that rates into next year across the board, if I were to give an indication of kind of what I've heard in talking with our carrier partners, and just the gut instinct, I think we are going to see rates slightly negative in '15, particularly depending on second half of the year with catastrophic events, meaning if there is not hurricane that occurs somewhere in the costal areas of the United States that will probably also make that speed up a little bit, but I am saying maybe zero to five.

Also, as you know, at the end of every year there are some companies that become overly aggressive in the fourth quarter, I do not anticipate this year to be any different.

So as people are looking at their goals and their premium commitments, depending on how they are looking at their business, some may get more aggressive than others in the fourth quarter. All of that in my mind is a positive for our clients, because as you know, we're trying to provide the best coverage for the most competitive price for our clients.

Having said that, I watch and we watch carefully the economy and the rates. And so I tell people that we have seen scenarios where rates are down 3%, 5%, 7%, 9% before, and we can grow the business organically slightly, but organically, but we're not to that level yet, and we'll watch with great interest then we'll see..

We'll go next to Meyer Shields of KBW..

Just a couple of small-ish detailed question, I guess. Powell you mentioned that you need to add about 3,000 new teammates.

Do you have a timeframe for that? And can you give us an update in terms of how many of those have already been added to be roster?.

No. We haven't set a specific timeframe. If our only goal was to get to $2 billion in revenue, which is not, but if that were the goal, we could have done that last week, last month or last year. That would not have been the appropriate thing to do on behalf of our shareholders and we wouldn't do that.

Having said that, the number that I gave you, right now our total number of teammates is about 77 and changed. I think it's like 7,762 is the last number I saw. When I said 3,000 teammates, I usually have said that around 7,600 teammates. So I think we're going to probably have somewhere between 10,500 and 10,700.

It's not something where we are keeping track necessarily of so called the teammates-specific, it's more as a result of the revenue whether as we grow it organically or we acquire it along the way.

So I wouldn't want to you to focus so much on the teammates-piece, which is the most important piece, but the number of teammates -- rather you be focused on and you're going to know about it when we get there. But when we get to our intermediate goal of $2 billion in revenue, then we're going to set another goal and we'll go forward from there..

Meyer, I'll probably add to that, that the backdrop, and you've probably heard in comments from both Powell and myself is, our goal is we want to make sure we grow the business profitably and organically.

And so we're going to feather in those, the new teammates, as most appropriate for each of the businesses, and so we're going to monitor those very closely. We will look at every one of our investments. We look at the markets that we play in, the rates and the opportunity.

So I think keep that as your backdrop as to how you think about on our investment and the people..

And I think, Andy, you mentioned that there is a $1.1 million medical reserve adjustment.

Which segments or segments was that in?.

Now, that's across the board. That's for all of our teammates, Meyer. And what we did in the third quarter was we had some true-up with our outside actuaries, and we do this generally on the regular basis, normally once a year, just making sure where we are on loss runs and everything. But that's just spread across all groups.

In this case, we recorded at the corporate level for the quarter..

And then lastly, the timing issues with regard to the program revenues, are the expenses also sort of, I don't know if deferred is the right word, but are those especially were in the fourth quarter or those were there in the third quarter?.

No. They were there in third quarter. These were again, just a group of accounts that we're schedule to renew in the third quarter, and for budgeting reasons they want to move into the fourth quarter. So it's just a shifting of revenue. The cost is still the same where it was. And that's why as I mentioned the impact on the margins..

We'll take our next question from Mark Hughes of SunTrust..

The $6 million, $0.02 in EPS, Andy, how did you frame that? Was that relative to the long-term trend in terms of claims or was that relative to last year, how do we think about that?.

Yes, Mark. So good way to think about it is, we said we had $7.5 million in our forecast originally for revenues related to weather events, and that was our 10-year average, when we excluded Hurricane Katrina as well as Superstorm Sandy.

When we look at the fact, there's been no storms during the third quarter that takes out a significant portion of that in the backend of the year, so that's $7.5 million will drop by just about $6 million somewhere right in that range, and the flow-through affect on it will be about $0.02 on EPS..

And is that to say, most of that -- all of that would have been expected in the fourth quarter?.

Yes, almost of it in the fourth quarter. Just historically the way it works, Mark, is hurricane season is June through November, but kind of the prime season is third quarter.

And there is normally kind of a 60 to 90 day lag from when the storm occurs and when revenues flow, so you will normally see kind of a spike, if we're ever going to have in the fourth quarter..

And then one of the question.

Anyway to quantify how much growth you've seen in the backlog in the social security disability applications? Is the merit of those applications or quality of the application you think is good as what you've seen historically? And then any outlook for the pace of the government panel -- the government handle those, is that going to pick up any time soon.

What do you think?.

So Mark, what I would say is, we believe that the quality of the opportunities are as good as we've had in the past, so the analogy that I will give you is kind of an unusual one, but if you have a visual of a large snake eating a wild bore, you know that it is barely getting it through the mouth, and there is a place in, as its trying to digest this animal to get into the flow, so there is this place, which is holding up that animal from passing through for a period of time.

That's how we describe it internally relative to the government. And so there is this hold up, so apparently as history would have it, this goes in kind of waves, and so some people would say, well, sequestration impacted the business, and so therefore -- meaning the government, and so therefore they didn't hire. They had people retiring.

They didn't hire a number of people back, i.e. 2,000 to 3,000 people. And until they hire those people back, they won't be able to process the same number of claims at the same pace. I would say that that sounds nice, but I don't believe until I see it. I think it's more a trend.

And so we have not seen anything at the present time that would lead us to believe that they're going to be processing more claims in the near-term. But once again, the way I look at it is, if you remember the analogy, if you think of the wild boar in the mouth of the snake, at some point that starts to break down, starts to pass along in the snake.

And so we feel good about the opportunities that it presents, but it also -- we continue to have to service it, incur costs on the front-end without receiving revenue, the corresponding revenue on the front end. So there is a backlog of that.

And I wish we had better transparency for it, and I could say, categorically, but unfortunately, it's our government model of efficiency relative to that particular thing..

Mark, to your question about quality incoming is, no, we're not seeing any changes in the quality of that. And maybe your question is going to, is that the reason why the revenues down, they're not being approved? No, that's not the case. This is only how much can we get through the funnel, right now..

The snake..

Yes. Or also known as the snake..

The snake, yes..

Thank you. I appreciate the snake analogy..

I thought you'd like that, Mark..

We'll go next to Adam Klauber of William Blair..

Couple of different questions.

In the retail, how's Beecher doing?.

Well, our Retail business, it's all Brown and Brown, and everybody is doing fine. We'd like to, like as I said, sometimes we grow it as quickly as we want and sometimes we don't. And like I said, we are pleased with the overall performance of all of our retail operations..

On the programs side, excluding obviously some of the other transactions last year, is the drop in organic, is that mainly property-related would you say?.

There is a component of that is property-related, but I would say it is not exclusive to that..

Could you give us just some idea, I guess, what the other -- just generally, not looking for exact numbers, but generally what are some of the other factors that are, I guess, impacting that?.

So just think about the same concept, Adam, that we talked to you about earlier relative to some of the questions on the market.

If you have a standard markets, admitted markets on one-off basis, or as rates maybe mitigate or even go negative periodically, you might get a market in a particular area in a class of business that would become as competitive or even potentially more competitive than an existing program for a short period of time.

And so what I mean by that is it's conceivable whether you have a social services account or you have a professional liability account or you have an earthquake account or you have a wind account, a property account with wind, anyone of those programs could actually have an individual one-off account that would become more competitive than the program, and so that retail agent could be placing it directly with one of their markets.

Their commission, retain commission would be higher. Usually it will be 15% rather than maybe 10% retained. But usually when the market goes below the programs for an extended period of time, there will be a correction.

So this is not something that's new, it's just maybe a little bit exacerbated by the fact that we've talked about the surplus to premium ratio, and specifically, we're getting into the second half of the year and some carriers some times get a little more aggressive in the second half, most notably in the fourth quarter..

And then on the service of claims area, will the lack of cats in the third quarter, will that impact the fourth quarter also for that division?.

That actually is what Andy is talking about, that $6 million..

That's for that, okay..

Yes. That's the fourth quarter. So yes, the answer is yes..

And Adam on that, the $6 million is on the cat component. And we'll see also affects within our colonial claims business and probably a bitten side of our other ICA and NACM. So there is a ripple effect through the business, primary it would be over in right..

And then how's the benefit business doing? Could you just give us some idea compared to overall retail, is that doing better or worse?.

We don't breakout the organic growth of employee benefits. As you know, Adam, it's a $250 million business roughly for us, now. And we write from small group all the way to very, very large group. We continue to see as some of the mandates come down, interesting opportunities that are created there.

We are writing lots of new business in our benefits operations. And part of that is our ability to navigate and clearly articulate the nuances of ACA, but we don't break it out rather than our retail. It's just part of the Retail division..

We'll take our next question from Ken Billingsley of Compass Point..

Just had a few follow-up questions to some earlier answers. Regarding M&A deals and what you're looking at, has your appetite for deal size changed at all, again, largely versus smaller deals given where you think premium rates are moving towards.

And then also how you look at funding them? Has that changed given the low interest rate environment?.

Ken, relative to what we're looking at, no, our view hasn't changed relative to those businesses that fit culturally that we can come to a financial transaction that we can agree to.

So we're looking to do fold-ins into existing offices, we're looking to do standalone operations, and periodically we've been given the opportunity to buy a larger operation, whether it would be Arrowhead, Beecher or Wright.

I would tell you this, that if there is a so called difference, I know, we've been asked this question a number of times over the quarters, the only difference really in our mind is we have considered and subsequently done these three larger acquisitions.

The analysis of the people there, the way they work with -- the sellers, the way they treat their teammates, the way they treat their clients, how they interface with their carrier partners has not changed, and so we are looking to invest across the spectrum.

As I said before, the price of poker, particularly on larger transactions, continues to have upward pressure on it and so there is a point at which it doesn't make financial sense. So I would say that is a first part.

The second part of your question was, again?.

So Ken, this was around terms or structuring of the deals and the financing of those. Just what we have seen over, I guess, the recent past is the terms of the deals are becoming probably more aggressive than what they historically have been.

That's really due to the fact that many of the businesses, they have some sort of advisor wrapped around, maybe they've got a business advisor, they've got an investments banker, financial advisor, whatever, and so they are helping to influence that price of poker that Powell talks about in there.

And I think what we see now is there is more pressure to ask for more money upfront, than what we have in the past. We used to -- we try to balance that off with earn-outs on the backend. But at the end of the day, we're going to still make sure that we do the right trade-off, we're not paying a $1 on the dollar upfront.

We won't take on that type of risk. We balance these through all of them, but we haven't fundamentally changed how we do our deals, how we structure them, or how we pay for them. We like to pay for things in cash. We don't pay for things in stock. We think we've got adequate capital out there, when and if the right deal comes along..

And so to be specific, the opportunity could be; one, financed through cash from operations, as we look at it, we generate our free cash; and two, we use our revolver, which is now paid down to zero, which is $800 million..

And on that, given the low interest rate environment, do you see yourself using that revolver and whether it's for stock buybacks or deals whichever become available and are attractive? And then, essentially paying that revolver down, so you can reload it?.

Yes. We don't look at the revolver as a permanent source of financing. I think it's a, pay it down, once we use it..

Hold on a second, Ken, I want to clarify something, because you asked about would we use the revolver for stock buybacks. And we wouldn't say, never, but that would be extremely, extremely unlikely that we would do a leverage stock buyback in all of it.

Our goal is to make sure that when we're evaluating the deployment of our capital, we do the right thing for our shareholders, which includes all of us as teammates and balancing off of there, and we do want to make sure it's got good cash flow.

As Powell said, we want to use that as a spring up and down, but not permanent capital for the organization..

One other question I have is on the pricing commentary and given where you're expected to go.

From a growth standpoint, how many of your customers would you say are under-insured at this point in the cycle, and that they may use any continued price weakness to maybe buy more coverage that they may have given up over prior years?.

Well, Ken, I think that under-insured would be in the eye -- it might be different in the eyes of the purchaser and us. So what I would say is this, remember, we're in the solutions business, so we're trying to present our clients with solutions to the risk that they have. Some of those they may decide to self-insure.

And as long as they're comfortable and knowledgeable, that they have that exposure, that's a separate issue as opposed to not recognizing the exposure, and then potentially having an uncovered loss, and they weren't even aware of it. So as it relates to where I think you're going, uptick and purchasing, we talk about that carefully, internally.

And I reason I say that is this, when we're talking to our clients, we're thinking about property and causality, we're thinking about employee benefits, we're thinking about personal lines, and so we may only handle one of those three for a client at the present time, so whether the market cycle is up, down or sideways, we're always trying to think about how we can continue to sell more products and services to our client to benefit them.

I wouldn't say, its like more uptake, I just think it's more filling out needs that they may have that we maybe capable of solving for them..

Another way to ask that, based on your answer is how many of them that's self-insured, some of that risk that you've identified, how lower pricing have to go before, it may makes sense for some of them to go back and not fell into risk?.

So I would say, I don't know the answer. And it's more because it's client-by-client, and we don't have a track towards that says, we have 8,000 clients that don't buy umbrellas, that on a very local level our leaders and our sales teammates are talking with clients all the time, but I can't quantify the question as you've asked it..

The last question I have, and this is just to clarify your comment on the employee numbers, and you may hate that you actually gave that number out. The question is you're thinking about 7,700 employees now, and just annualized revenue number is about $1.6 billion.

And you see, you're going to need approximately 3,000 more to get to the $2 billion in revenue. So can you explain, I may have missed it, essentially you're going to need to increase almost 50% just to get another, $400 million revenue.

Am I reading that right?.

Well, what I would say is this, if you think about it we right now are in the trailing, we are generating about $200,000 of revenue per employee, right, over that, let's just say roughly.

And if you look at the larger firms that might be somewhere in terms of business mix, that number typically looks around 185,000 to 200,000 per employee, and so if you want to be technical, if you take $2 billion and you divide by 185,000, a 190,000, that's probably the number of people in steady state environment that will needed $2 billion of revenue.

Having said that, there maybe some businesses that we are in that need more people and there maybe some that need less peoples. So that's how I would say it..

And, Ken, I think just when you think about that, and when Powell talks about that 30,000 or so, that's a gross basis. That's how many new teammates we need to attract to bring into the organization over the coming years. We will have retirements out in the organization, we'll have attrition inside of there.

So that gets back to -- we're going to look at it from a net basis and make sure that we're growing the business profitably. But it does give you an idea of how many new teammates we have to attract..

Let me make one comment, Ken, so we know. I just used that number, because it shows, I believe, to you and everybody else, the order of magnitude that we're talking about.

And so we think of our business, we're not just thinking about next quarter or next year, we're thinking about what it looks like when we have 10,000 employed teammates or when we have 15,000 teammates. And so it's something that we are trying to get our arms around in a way that would be meaningful. And so that's how we came up with that number.

That is not a science. I haven't figured. I haven't come up with that and said specifically. Here it is, by the way. That was sort of a gut-feel based on kind of knowing what I know about our business..

We'll go next to Sean Dargan of Macquarie..

I have one housekeeping question about non-cash stock-based comp. I think last quarter you suggested that it would be in a range of $6 million to $7 million going forward. It was a little light of that this quarter.

How should we think of that going forward?.

That run rate, and we talked about this back at the second quarter earnings, Sean, is that really drives based upon the number of participates that we have in the plan. That run rate right now is still probably a pretty good run rate at this stage. We normally will grant new equity in Q1 for any new teammates.

And so we'd expect to see an uptick in that, next year a little bit, historical flow..

And remember, I just want to clarify one thing, the last large grant that we gave across the board was in July of last year. And so that it seemed to -- and recollection seemed to catch some people off guard, and we will continue to give good clarity around when and if we're going to do another large grant.

So when Andy said that the new people, we're not talking about a full scale reload of everybody. That's not we're talking about. We're talking about people that qualify to get into the program. That's a separate issue. So just to distinction there, because it is very important..

The January of '15 would probably be very similar to our January of '14 on call it a BAU approach..

We'll go next to Mark Dwelle of RBC Capital Markets..

Just one small clarification, on the guidance you gave related to the quarterly interest run rate, when I multiply back 3.07% through the amount of debt that you've got outstanding right now, I get a little bit lower run rate, closer to more like $9 million.

Did you factor in some amortization or other, just something else, that's in that figure?.

No. I mean we can follow-up afterwards, just to make sure. But on that blended, we should be right around $10 million on run rate. Right now, we're running just shy of $10 million on it, Mark..

We can follow-up offline..

You can follow-up offline. Just make sure that the math stinks. But we go through it, we track it by every one of the issuances that are out there. We know exactly what it is. And it's a good number..

We'll go next to Josh Shanker of Deutsche Bank..

I noticed, obviously, that some of your peers or maybe you don't think of them as your peers are growing faster than you are, but you have much better margins.

If you thought about the entire pool of available commission fees out there that's in your wheelhouse, is the margin on the overall business staying the same, getting greater or getting smaller? And does your growth in that situation mean over the long-term, for you to sustain your margin, implies you will not grow as fast as your competitors?.

Well, let's go back. The first part of the question is this; ultimately, one of the reasons that we believe that we had a different margin profile, and thus free cash flow generation profile is because of a disciplined operating approach that we run our business by for years and years and years, really started by my father, number one.

That does not mean that there aren't other firms that run good margin businesses that are typically private that you might not have direct visibility into yourself. And we would only, when we probably have a chance to buy them or talk them seriously about that.

But if you look at it, to your point Josh, we have been typically a slightly slower growth business on the topline, but our margin has been sometimes more than a 100% higher than the publicly traded peers, and everybody has a different profile, but if you're putting us in with the other publicly traded brokers.

And so we think about it from a standpoint of how can we continue to generate more free cash to reinvest in our three segments of the business that we talked about earlier. And so we want to grow our business organically and profitably. And we're not going to sacrifice and do something that has a very low margin in the short-term or the long-term.

To do that, we're built to last company and we're focused on that..

Josh, if I can, let me see, if I can clarify a couple of other things. One of the things that I guess is probably worth everybody taking a look at is, definition around organic growth. And there's I think a few of us in the marketplace that laid out quite clearly exactly how we calculate organic, and that's probably good for apples-to-apples.

And then when you look at it, it's important if you to take which businesses are inside of there. And as an example, I think when Gallagher reports their brokerage revenue, they combine Retail and Wholesale together, right. So we've had that question in the past as well, why is it your Retail growing as fast as their as well.

Put all this together, now you've got apples-to-apples. So I'd leave that one for you. Two, is I think BB&T just came out with their earnings last week, and reported I think about 9.5% of what they call, like sales.

What's hard to tell underneath of there and you guys can do your research on it is, if that's true organic, the way that the rest of us define it, don't know. That we'll leave it for you guys that are out there.

But what we do know is there are a couple of acquisitions that they made during the second quarter, and it's not clear how they're broken out. So I just want to caution you that when we do this or when you guys ask the question, please make sure it's non-comparative, if you would..

Well, that sounds very reasonable.

And just coming back to the next one, do you think if you compare the industry to where it was five years ago, the margin profile of this industry is similar to where it was or has anything really changed?.

I think that I would say that as a general statement, as a general statement that businesses across the board are better run as a whole today than they were five and 10 years ago. So I might say that we have seen an uptick in the overall operating efficiency.

That said, that is very firm specific, and it could be location specific within the firm specific. So you could have offices in one area of the country, an office in the other, and they might have a difference margin profile, even though they do the same type of business.

So overall, I think they're a little bit better run relative to overall efficiency, but it depends on an organization and it depends on location..

And our next question comes from Elyse Greenspan of Wells Fargo..

I just had one quick follow-up numbers question. In terms of the Wright, I know you guys pointed out that some of that cat processing claims about $6 million and $0.02 per share might come off in the Q4, I guess, for what you had previously projected.

So we are looking at where you breakdown by the quarterly EPS impact that you expect form Wright, I guess, on Slide 14. Now, that says $0.02 in the fourth quarter. So assuming that we lose about that $6 million of revenue, you're assuming that Wright will be about breakeven in the fourth quarter.

Is that the right way to look at it?.

I just had one quick follow-up numbers question. In terms of the Wright, I know you guys pointed out that some of that cat processing claims about $6 million and $0.02 per share might come off in the Q4, I guess, for what you had previously projected.

So we are looking at where you breakdown by the quarterly EPS impact that you expect form Wright, I guess, on Slide 14. Now, that says $0.02 in the fourth quarter. So assuming that we lose about that $6 million of revenue, you're assuming that Wright will be about breakeven in the fourth quarter.

Is that the right way to look at it?.

It is. Yes. A good way to look at it, Elyse..

It is. Yes. A good way to look at it, Elyse..

And then just one last question, in terms of, I know you guys do use the Liazon platform for your private healthcare exchange offering for some of your clients.

Can you, I guess, provide us some more of an update? Have you seen more of your clients choose that offering over the past year? Has anything kind of changed? I know Towers Watson did acquire Liazon earlier this year.

Has anything changed with that relationship? And just kind of, if you want to update us on anything that's going on, on that front?.

And then just one last question, in terms of, I know you guys do use the Liazon platform for your private healthcare exchange offering for some of your clients.

Can you, I guess, provide us some more of an update? Have you seen more of your clients choose that offering over the past year? Has anything kind of changed? I know Towers Watson did acquire Liazon earlier this year.

Has anything changed with that relationship? And just kind of, if you want to update us on anything that's going on, on that front?.

Yes, Elyse. Number one, there are more clients that are looking at it as an option. I will tell you that we do have an arrangement with Liazon, but we do also work with some other platforms as well, depending on the area, the country or the office. But I would tell you that that is we believe the private exchange option is an option.

That's exactly what it is. It's not necessarily, the solution, it is a solution. And so we're talking all the time with our clients about the possibility of some type of private exchange, as they manage their healthcare cost and their offerings to their individual teammates. So we think it's going well.

And the idea that Towers bought them is, they have assured us that they will keep the information separate. And they've assured their other clients that they are going to do the same thing, and we believe them and we have a contract stating as such. But in the event that something change, then we'd have to evaluate that, but we don't anticipate that..

Thank you. We have no further questions..

Thank you, Dianna, and thank you everyone for your time today. And we hope that you have a wonderful week and a good quarter. And we'll talk to you next time. Good day..

Thank you, Dianna, and thank you everyone for your time today. And we hope that you have a wonderful week and a good quarter. And we'll talk to you next time. Good day..

Thank you..

Thank you..

This does conclude today's conference. Thank you for your participation..