Powell Brown - President and CEO Andy Watts - EVP, Treasurer and CFO.

Josh Shanker - Deutsche Bank Elyse Greenspan - Wells Fargo Securities John Campbell - Stephens Mark Hughes - SunTrust Robinson Humphrey Meyer Shields - KBW Sean Dargan - Macquarie Kai Pan - Morgan Stanley Adam Klauber - William Blair Ken Billingsley - Compass Point Research.

Good morning and welcome to the Brown & Brown Inc. 2014 Fourth Quarter Earnings Call. Today’s call is being recorded.

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

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

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

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

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

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

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

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

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

As part of our business strategy to exit the reinsurance brokerage space, we completed the sale of certain assets of Axiom Re business on December 31st with the associated loss having a $0.21 impact on earnings per share this quarter. Yesterday we completed the sale of the Acumen RE business.

Later, Andy will talk about the full year impact of these sales, the loss on the Acumen sale was less than $500,000. In addition to the loss on the Axiom sale, we had an adjustment for this quarter for non-cash stock compensation.

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

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

As a reminder, we completed a $50 million accelerated share repurchase program that was initiated in Q3, which was part of a $200 million plan approved by our Board of Directors in the second quarter of '14. Lastly, during the course of the '14, we acquired businesses with annualized revenues of 160 million which is a record year for Brown & Brown.

In summary, we’re pleased to deliver another quarter of growth, both organically and through acquisitions with modest margin expansion and solid earnings per share growth. So now let’s get a little deeper into our results. First, Retail delivered 2.3% total revenue growth and 1.5% organic growth.

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

Property renewal rates continue to be under pressure, the most pronounced are in coastal areas with E&S rates they can be down 5% to 20%. We expect property rates for both the Admitted and E&S market to continue to be under pressure in 2015. Employee Benefits especially for large groups are experiencing some rate increases.

Many of those are moderated with plan design changes that the employers are implementing. Where comp rates are moving up or down based on the state and the industry segment, payrolls are growing slightly and we’re primarily seeing that growth in areas of building and construction in those segments.

Carriers continue to look for rate on Automobile and Commercial Auto, but rates are generally flat. We are seeing flat to down 5%. It’s all based on the claims experienced. National Programs now makes up 24% of our Company, it grew 47% reflecting the addition of Wright. On an organic basis, this division grew 2% for the quarter.

We experienced good growth in Personal Property, Automobile aftermarket and Sports and Entertainment. Offsetting some of this growth was the performance of our Force Plate Coverage business Proctor, which has been down slightly as the economy improves.

We continue to see steady retention rates in most programs, but we’re experiencing some pressure on property terms and conditions. Wholesale had another great quarter, posting organic revenue growth of 7.7 and total revenue growth of 12.3.

This division represents just under 15% of the total Company and continues to be the organic growth leader in the fourth quarter and for the entire year of 2014. Both our Brokerage and Binding businesses grew nicely for the quarter.

While we are experiencing rates for large coastal property falling 5% to 20% as I said earlier, Florida leads the way with reductions on large coastal properties closer to that 20% down range. Professional Liability is flat to up slightly and Employment Practices Liability is continuing to see upward pressure.

We are still seeing some accounts move from the E&S market back to the Admitted market, primarily within the GL segment, General Liability segment. Services division had another outstanding quarter with organic growth of 10.6% and nearly all the businesses experienced organic growth in the quarter.

The big winners were the USIS, The Advocator Group, NuQuest and Protocols. Overall, it was a good quarter for our Company. Now I’d like to turn it over to Andy, who’ll discuss our financial performance in more detail..

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

I am on Slide 6 which is our GAAP reported results for the quarter, which as Powell mentioned earlier, reflects certain large items that make it difficult for a meaningful comparison to the prior year, so we won’t spend too much time on this slide.

However, I would like to highlight that we delivered 50 million of revenue growth in the quarter, with 80% coming from our acquisitions and also had solid underlying organic growth of 3.3%. Moving to Slide 7, our total revenues grew 14.6% for the quarter and when you remove the revenue related to Wright, we grew the top-line by 6.1%.

Split up evenly between organic growth and revenue from other acquired businesses. We show our results with and without a large acquisition, such as Wright in order to provide a clear picture of our compared financial performance. Our adjusted pre-tax income grew by 7.5%, even with the increased interest cost related to our credit facility and bonds.

If our interest costs were flat year-on-year, then our pre-tax income would have increased by about 15%. We believe EBITDAC is the most appropriate measure for comparing our performance across periods, as it is a close proxy for cash generation. Adjusted EBITDAC for the quarter was 121.6 million compared to 104.3 million, a growth of 16.6%.

And excluding Wright, our EBITDAC growth was 8.5%. Adjusted EBITDAC margins expanded 50 basis points to 30.9%. We’re very pleased with this margin expansion and flow through for the quarter. Adjusted net income for the period grew 10.4% our interest expense increased by 5.7 million in the fourth quarter as compared to the prior year.

This increased interest expense is associated with our credit facility and our bonds. As a reminder, our new credit facility and public bonds provide us with the capacity to draw upon for acquisitions when they became available, they extend our maturity ladder and reduces our exposure to rising interest rates.

By capitalizing on the favorable credit markets our blended cost of debt is now 3.4%. Partially offsetting the increased interest expense was a lower effective tax rate of 36.4% for the quarter. The lower rate in the fourth quarter was driven by the true-up to our annual rate of 3.9 or 39.1%.

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

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

We also realized a 4.1 million increase for Contingents and Guaranteed Supplemental Commissions, which was substantially related to our Proctor business that is in our National Programs donation. Proctor realized 2.3 million of incremental contingents in the fourth quarter as the carrier completed their calculations fairly.

These contingents historically have been received in the first quarter and have been in the range of $1.5 million to $2 million. Going forward, we expect to receive them in the fourth quarter, so please ensure before you adjust your 2015 models. Our as reported EBITAC margin decreased to 20.4% from 30.4% in 2013.

In order to arrive at comparative numbers, we removed a loss on the sale of Axiom and the credit adjustment for non-cash stock-based compensation. This last item represents a credit of 5.9 million and a benefit to EBITAC of 1.5%.

The 4.5 million of the 5.9 million is related to the incentive adjustment for Arrowhead, with the reminder related to the employee stock purchase plan expense true-up.

As it relates to Arrowhead, there is a three-year incentive plan for management while the maximum incentive has not been achieved we’re very pleased with the overall performance of the business. Moving to Slide 9 let me now talk a little bit more of detail about each of our divisions.

First, our Retail divisions delivered 2.3% growth, partially driven by acquisitions completed within the last 12 months and our underlying organic growth was 1.5%.

Our year-over-year as reported EBITDAC margin declined as a result of two office divestures completed in the fourth quarter of this year, which accounts for a total loss of approximately 3.8 million or 140 basis points.

The other half of the as reported margin decline is due to one-time gains on sales of books of businesses in a legal settlement in the prior year. Therefore these items excluded, the year-over-year EBITDAC margin is essentially flat for the Retail division. Moving to Slide 10, our National Programs division.

Revenues grew by 47% mainly due to the acquisition of Wright and increased 2% organically. We’re pleased with this result. We realized strong EBITDAC margin expansion on an as reported and adjusted basis.

Our adjusted EBITDAC margin improved by 240 basis points, which was driven by the additional Contingent Commission received by Proctor, the addition of revenue shifted from the third quarter to the fourth quarter for one of our public entity pools, which as you’ll remember we mentioned last quarter, and the increase in allocation of certain overhead cost to the Services division.

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

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

Moving to the Services division, we delivered impressive organic growth of 10.6% for the quarter. We realized strong growth in this for all profit centers within Services and with the exception of our Claims Processing businesses that are dependent on weather events.

When taking in consideration the increased expense allocation within National Programs division, the underlying margins would increase about 150 basis points year-over-year rather than down 70 basis points as presented on this slide. In summary, we’re pleased with the performance of each division.

On Slide 13, in the second quarter we provided ranges of where we expected Wright to perform. We’re pleased to report that the performance of the underlying businesses are in line with our expectations for the quarter. As we mentioned in the second and third quarters, the original forecast included 7.5 million of revenue for weather events.

For reference, this was based upon the 10 year average, excluding the hurricane Katrina and super storm Sandy. As we mentioned, in some years the actual results will be higher or lower than the average, with 2014 being one of those years below the average due to no material storms.

The shortfall in the revenues and EPS is driven by lack of CAT revenues. Please note, there is a small amount of CAT revenue included in the Q1 and Q2 2015 projections. Moving to the next slide, we won’t spend a lot of time on this, but we wanted to provide an adjusted view of our full year results in order to help you with your models for 2015.

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

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

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

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

You’ll note in the fourth quarter that we were 53.3% of commissions and fees versus 52.9% last year and that represented an increase of about $1.5 million due to the increased performance for the fourth quarter, but do not believe that that is an impact on a full year basis and why we’re giving range of 50 to 51.

Our non-cash stock-based compensation should be in the range of $7 million to $8 million per quarter. Interest expense for the fourth quarter should give you a good indication of our run rate. Our effective tax rate for 2015 should be in the range of 39.4% to 39.5%.

We expect some uptick over 2014 due to growth in higher tax rates states and couple of states consolidating all legal entities for tax purposes. We mentioned earlier about our disposed businesses.

The total annualized revenue for these businesses equaled $17.5 million with $1.5 million being in Retail, $9 million in Programs and $7 million in Wholesale. Hopefully with this it gives you a good indication for 2015. With that, let me turn it back over to Powell for closing comments..

Thank you, Andy, great report. A couple comments in summary, first of all as I said, the middle-market economy continues to slowly improve as we’re seeing it across different industries and geographic regions, but we are not seeing it across the entire board being up, number one.

Number two, you will ask that how are the acquisitions and we have a good pipeline of acquisition candidates that may fit culturally and as you’ve heard me say before, when we close an acquisition all depends on when the seller is ready and if we can come to financial terms and conditions that work for both parties.

We do expect continued pressure, downward pressure on rates in 2015. Overall standard market rates with either moderate on their increases or start to go slightly negative. In '15 the biggest push or biggest decline we see as I’ve said is on catastrophic property particularly in properties that are right on the water.

So, we are very pleased with our performance for Wright and we’re excited about our 2015 plan going forward. While we do have some uncertainty in the market, we feel each division is positioned for continued profitable growth. So with that, I’d like to turn it back over to Marquida and we’ll turn it open for questions..

Question-and:.

Thank you. (Operator Instructions) We will take our first question from Josh Shanker with Deutsche Bank..

So I wanted to revisit what Andy was saying about margins in the Retail division.

As it says here in the presentation you have the 140 basis points of decline based on the loss on the disposal Lexington in Colorado Springs and then there was an accrual, what was the other part of it that makes up the other half of the margin decline?.

So if you look at it the division is down 280 basis points year-over-year half of that is for the sale of our Lexington in Colorado Springs. And then last year in the fourth quarter, we had sold a couple of businesses as well as we had a legal settlement so we had two, we had some gains there.

So if you neutralize both that's how we get to flat margins..

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

Correct, yes..

And two, on the share repurchase and weighing them in the future, why doesn't Brown & Brown have an outstanding authorization that it can effect if the time is right.

What’s the downside of just being prepared as the Boy Scouts say?.

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

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

That's correct, right..

And then three, in terms of the construction growth that you are seeing you made the exceptions between coastal, non-coastal, is the construction growth national or is that also regional?.

I would tell you that we see pockets of it regionally, but as a general rule we're starting to see more construction starts.

So let me give you an example, you might think as an example Phoenix, which was an area that slowed down a lot it started growing or seemingly growing more rapidly last year early in the year and the prior year and I would tell you that Phoenix it maybe got a little ahead of itself, meaning the metro area, so they are not seeing as much growth as maybe you might have seen right out of the blocks that doesn't mean that is not growth, but that's an example.

If you come to South Florida there are so many cranes in the sky in Miami it's kind of unbelievable. So depending on the city and what they are building in certain areas Josh we're seeing more rental housing apartments being built than single-family homes, those are just some broad statements..

Okay. And then one final thing Andy said in the Wright forecast for the first half of 2015 there was a modest amount of CAT experience assumed in the revenue numbers.

When we talk about Wright I mean we know it's a flood company, but in servicing claims and when you talk about putting CAT numbers up, is that for a wide variety of catastrophes like you’ve had the Eastern Seaboard got blanketed in the major snowstorm would there be revenues to be mined out of that?.

These are flood related claims..

Only flood related claims, so there need to be some flooding so that that would restore you -- I mean it’s like you put so much revenues in your forecast, but flooding would be required to meet those forecasts properly?.

That's correct..

And Josh just to give you an idea, it's about a $0.5 million, the reason why we call it depends upon where it could end up enough impacting or rounding on EPS, but it’s about [indiscernible]..

We’ll take our next question from Elyse Greenspan with Wells Fargo..

I was hoping if you could just talk more about what you are seeing in the Retail segment in terms of organic growth there, I know you….

Hey Elyse, can you get closer to your microphone we can't hear you..

Okay.

Can you hear me now?.

Yes, we can hear you perfectly..

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

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

And first-off as you know we don't give, we have historically not given organic growth guidance. We gave organic growth guidance as an organization for 2014 and that was the one-time we're going to do it.

So whether it be Retail or overall, our response will be the same, we will not be giving a number but we would say the business overall is a low to mid single-digit organic growth business, and that's number one. Number two, the question relative to what we need to see to see margin improvement is there is really one or two ways to think about that.

We have said, we don't say that if you grow X percent like some of the other firms that are publically traded then we get margin expansion. It is all a function of the investment that we’re making in our teammates. We ended the year as an organization with 7,591 teammates.

And so that’s across all divisions, the majority of those are in the Retail segment. So as we add producers, many of them come from other industries with sales experience, but no insurance experience, there is a ramp-up period in terms of getting them launched.

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

Okay.

Well I guess looking at the fourth quarter, the Retail organic revenue did slow a little bit was there anything in that number that caused just one-timers that we should think about when we’re kind of projecting forward?.

No there is nothing quite honestly Elyse that I might have point out. I know that it was, based on your question it was lower than your expectation.

I would say that Retail just like any of our segments can kind of go up or down slightly, but overall we have 2% growth for the year and we’re looking for that to continue to improve as the economy improves..

What is -- it seems like you pointed to on higher level of non-cash stock comp about 7 million to 8 million. I think last quarter you had just 6 million to 7 million.

What’s driving the increase there?.

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

Okay and then one last question..

Yes just a reminder, so I want to make sure anybody doesn’t gets confused, is in July '13 when we did the larger grant, what I just mentioned was it is not the case we’re not planning any large reloads or anything of that nature. This is just our annual grant that we do in the first of the year..

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

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

And then in terms of on the share repurchase part.

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

Okay Elyse, we want to make sure that everybody knows we have the authorization. But just because we have the authorization it’s not a foregone conclusion that we’re going to repurchase 150 million of stock in the year.

What I would say is this, we are thinking about how we best invest in our business and we can return or invest in that business one of three ways as you know. We can hire new teammates of which we are doing constantly and consistently.

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

So we’re going to continue to look at and annualize what seems to be the best for our overall plan. But we are not saying that we have a stated repurchase plan on set X timeframe.

We will make it very clear to everybody when and if we are going to do a new share repurchase, but until such time we will continue doing that and we will evaluate all of our investment options that being one consideration..

And add to that I know Elyse and we looked through a lot of the analysts models in the fourth quarter. A number of folks had kind of 100 million or 150 million of buyback in the fourth quarter or excuse me in 2015.

So with Powell’s comments just take that into consideration when you will look at your models, otherwise you guys could end up having something over what we do based upon how we’re in balances..

And depends on the opportunities that were presented this year, so we will continue to evaluate and we constantly and consistently do that..

We’ll take our next question from John Campbell with Stephens Inc..

Andy I think you talked about this a little bit and Powell I believe you did as well just from I guess long-term headcount goals last quarter, so just curious over the just kind of a near to medium term is that going to be more of a systematic process or is that come in waves.

And Andy I know you talked a little bit about that being kind of choppy in the Wholesale space.

But just curious you guys have wrapped up your 2015 budgeting obviously, but did you guys pinpoint headcount target for the year is that something you could maybe shed some light on?.

The short answer is, no we don’t pinpoint it for a year. What I was, no, Andy rolls his eyes at me when I say that. The answer was not to get everybody all worked up.

The intent was to say that we’re going to have to add a bunch of new teammates either hiring them or acquiring businesses that they’re part of to achieve our next intermediate goal of $2 billion. How and when we get there will depend on the opportunities that are presented to us, both on an acquisition front and on the hiring front.

We are actively recruiting talented teammates across our system today in all segments of our business. So, having said that, there is not a systematic process whereby we have a room in Daytona Beach where there is a chart that says we must hire X number of people net this year. It’s not like that John.

And I would caution you from trying to focus a lot on that, I would actually say the message was intended to give color around how we think about our business. Not to send a signal positive or negative around what we’re doing, I would just tell you that, like I said 7,591 teammates, that’s a lot of folks.

And so we’re going to add some folks to the team and we’re always looking for talented people that can sell and service insurance..

And John and all of that is with the backdrop that we want to make sure that we can continue to grow the business and grow it profitably overtime, and there were a lot of questions about the last call I’ve hated that, when Powell mentioned the 3,000 does that mean you’re going to take your profitability down. No, that was not the signal at all.

As I mentioned our goal is with over the long-term I am sure we continue to grow the business and we grow it profitably..

Great, that makes sense. And then Andy you mentioned last quarter, some of the pushed out bills.

Did all those hit in 4Q as you expected and maybe if you could just maybe quantify that?.

Sorry, one more time on that John you said pushed out bills..

Pushed out bills, some of the closings it sounds like that you got pushed out into the fourth quarter?.

I think you were talking yes that was the comment that I made that was in the Programs division and that was on one of our public entity pools.

So we ended up -- that was just a renewal that did not come in the third quarter, it was in the fourth quarter and I made that comment here that was part of what drove the increased margins this quarter and that’s just a shift..

We’ll take our next question from Mark Hughes with SunTrust..

Andy could you give us outlook for operating expense ratio, other operating expenses for 2015?.

We’d say that’s probably in the range with what we saw on the full year basis, I wouldn’t anticipate anything unusual there..

And then the total Contingents and Supplementals that you kind of got pulled into the fourth quarter that we wouldn’t expect in Q1.

What was that total?.

So we ended up pulling there was 3.3 million incremental for Proctor that historical range has been about 1.5 million to 2 million. And we normally have received those in the first quarter, but with the carrier completing their calculations earlier we got it in the fourth quarter. So, we will not see that until the fourth quarter of 2015.

That’s why we want to make that note just ensuring you’re getting your model right, you need to pull that out in Q1 and move to Q4..

So a couple of million would be that amount?.

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

And so that $3.8 million item within Retail for the disposal of the two businesses that was nothing that you broke out, that was just an expense that you incurred?.

Yes, exactly the reason why we didn’t break it out Mark is we ended up that was a loss there but we had a gain over in National Programs the two of them basically offset. So we’re just at a total level at where we had no impact that’s why we didn’t break it out that way..

Understood..

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

And Powell when you think about the, I guess the two forces here the improvement in the middle-market economy but the moderating rate environment.

How do you think that 2015 is starting out compared to how you might have looked at that environment in 2014 which might have featured a little more rate but a little less economy how do you think the two when you put them together how do we sit here today?.

Well, Mark, if you look first at the results of the large standard carriers and you see what they’re showing as their rate increases are moderating. We anticipated that happening throughout the year particularly in light of no catastrophic, a big catastrophic events.

And you’ve heard me say before that we believe that the economy and exposure of units have the greatest impact on our business versus rates. So, as with rates I could make the argument or we can make the argument that we think rates will be up modestly to probably down 5% somewhere in that range over the 2015 calendar year.

And so, that in and of itself, we’ve always said is 25% to 33% of the exposure and the overall organic growth number two-thirds of it to three quarters would be exposure rate increases. So as we've said before we are very middle-market exposure rate or exposure unit driven.

And I think that like I said your guess is as good as mine on the economy, but we're just trying to continue to grow our business organically and through specifically talking about Retail that's where we see it the most flow through..

We’ll take our next question from Meyer Shields with KBW..

Let me begin could we talk a little bit about the improving organic growth in the Services segment is that sustainable in the near-term do you think?.

Well, we have been fortunate to grow that business through picking up a couple large clients and those large clients year-over-year will lap I believe it's right after the first quarter. So we will have that, we anticipate a positive impact in Q1, we're not saying the full impact and to what it would say but it laps after Q1.

So to answer your question another quarter and we think it goes back to historic levels..

Second other than the timing issues that you mentioned earlier with regard to Contingent Commission, is it reasonable to expect Contingent and Supplemental to basically grow in line with the core commission and fee growth?.

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

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

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

And I guess last question, can you talk a little bit about the issues at Arrowhead that resulted in the credit this quarter, is that something that’s going to affect results going forward?.

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

Having said that the, about $5 million if you may remember the, there was not in that sale a broad base of ownership among the leadership group. And so we put in an incentive for the leadership group to grow that business over the first three years.

And so what you see there is over that period of time we accrued an amount of anticipated expense and that is the release of the portion that they didn't qualify for. The key there though is no I don't think that that would, that's not a go forward expense.

What I would also say though is Arrowhead just like Programs, just like all of our divisions there are people on there that will now participate in traditional SIP grants which will bind them and their performances with those desired performances we're trying to seek as an organization.

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

And Meyer you said problem just for clarification there is no problem in that business that business is doing really-really well for us. And as Powell mentioned this was a incremental that they didn’t earn on top of things, but we're extremely pleased with the performance of that business..

We’ll take our next question from Sean Dargan with Macquarie..

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

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

Okay.

And just on the share repurchase, I think in the past you committed to at least offsetting dilution from share creep through repurchase is that still the case?.

That’s correct..

Okay. And then around your thoughts of the common dividend, we maybe in a scenario if they were in a lower for longer interest rate environment.

Have you given any thought to increasing the common dividend payout ratio?.

We evaluate that with the Board throughout the year and as you know we’ve been very pleased to increase our dividends, for the last 20 plus years. But what we have tried to do is pay and what I would call a modest dividend and reinvest the additional earnings in our business or in acquisitions. So the short answer to your question is not extensively.

We will review it again with the Board later this year as we continue, and as we consider evaluating moving that in the future which we usually do at the end of the year..

We’ll go next to Kai Pan with Morgan Stanley..

Thank you and good morning, and sorry that I got disconnect during some of the question being asked but I apologize doing that.

First question is on the acquisition if you look at in the past 10 years on average about 10% of your revenue grows and on that run rate of 1.5 being total revenue now you need to acquire annual revenue of about 150 million each year.

So I just wondered like that you probably may achieve some bigger deals as you've been in recent years or do a lot of smaller deals, so just on that to elaborate a little and also what is the internal evaluation on deals recently?.

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

And the question is do we have to do one large transaction in order to hit $100 million to $150 million of acquisitions.

No we don’t, but typically there is one upside and when you say a large acquisition I’m talking about something that’s probably $75 million and above $25 million is a large acquisition too but I am saying in the definition of really starting to get towards the number you’re talking about.

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

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

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

And so, just as I said earlier we think about our investment options as hiring new quality teammates 1; 2, acquisitions; 3, return it to shareholders through the dividends and/or share repurchases. So as I said we don’t budget that, we think there are lots of opportunities to continue to make acquisitions.

The question ultimately is would there be any further increase in the price of poker this year and that is yet to be determined..

Then Powell in the past you’ve talked about especially in the lease rate weather like this even though we see it you’re talking about nice weather in Florida and growth potential down there.

So I just want to drill down a bit more I guess this question be asked by the Retail organic growth but it looks we have gone 2%ish for the past two years, that is because like the middle-market have been growing but there is a lot of uncertainty it that, I just wonder outside the macroeconomic environment is there anything internally in your control you can do in terms may be broker incentives or harvesting you can differently to promote growth in the Retail segment?.

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

Obviously, we can always do a better job of writing more new business and yet I say that because we’ve written a lot of new business in the last year. And so we’ve been very pleased with that.

And we have just like anybody else, you do lose some clients sometimes, one; it could be through an acquisition or merger, two; it could be something that we were perceived to do which we may or may not have done from a service standpoint or we lost the relationship or some combination of the above.

But we are in a sales and service business which is relationship-based and so we continue to try to build and enhance those relationships across the performance, a long winded answer of saying no there is not something else that we think were a lever that we could push that magically changes something..

Okay. And lastly a very quick number question, probably for Andy. Thanks for the breakdown of the disposals into the revenue.

What’s the impact on the margin or on the bottom-line?.

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

We’ll take our next question from Adam Klauber with William Blair..

Wholesale business clearly is doing well, but you mentioned that obviously property prices are down.

Do you know actually your tail light is going closer to flat and then you’re seeing more of a rotation back to the standard market? What’s doing well, is it really new business or what’s driving that growth?.

Well, it’s a combination of one, we continue to hire and put in place new teammates which are growing. We are also getting more business through our existing client base, which are retail insurance agents. And then the third part is we are actually finding and working with new retail agents out there.

So those are people that we don’t currently do business with that we somehow get an introduction to co-call or call upon and go and talk about our capabilities and then we get an opportunity to earn some of their business..

But then also I think you mentioned Proctor the business was moderating as the economy is improving does that mean they are just less force plates insurance premiums going out is that correct, just lower volumes?.

Correct..

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

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

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

And then as far as invest in the business I think you mentioned you’ve been adding some good people, clearly that’s having some positive impact on the Wholesale.

Are there other structural aspects that you’re thinking about investing over the next couple of years?.

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

We’ll take our next question from Ken Billingsley with Compass Point..

Just two quick questions, one regarding the Sandy claims in the New York investigations, any update or exposure which you can talk about on any new development?.

Sorry, can you repeat the question please..

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

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

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

I am not aware of that, but I don't -- I am not aware of anything that has been new that’s files but I don't know..

Okay. And the other question I have is this is regarding the Retail section, and you mentioned Employee Benefits and that there was an uptick in rates and some of that was the program design by some of the larger groups.

Within Employee Benefits itself, is there growth within the existing customers as well, are they just changing their product mix or is it a price change of existing business.

Is it a source of growth that you think in '15 and '16 following ACA or is it just a change in their own individual mark through?.

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

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

So I think there is also to your question about a growth area or not, I think that in the last year and probably in the future in this coming year there has been a lot of transitions as ACA impacts different employer groups in terms of size.

And so some of the smaller firms are thinking about their options, I am not saying that they are mandated to go an exchange but an exchange could be a private exchange like the private exchange that we use.

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

And so what we're seeing is lots of discussion around; one, plan design; two, on larger groups we're talking more about defined contributions in terms of I call it the Domino's pizza theory which is you give a person an amount of money and then they select what they want on their pizza.

So how much do they want to allocate towards healthcare, how much do they want to allocate towards disability and life insurance and related other coverages.

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

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

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

But in general maybe typically it starts with the employer seeking out and finding that cafeteria plan of options, that we have a….

Absolutely I mean they have -- let's just say they have a traditional -- they have a plan with two or three options and those options are going up whatever the rate increases on those three options and what they are trying to do is to moderate those increases, but give their employees the right thing a good choice.

And so by doing that they modify those three existing plans but they still go up in price and more of that price increase incrementally goes to the employee..

Operator:.

(:.

And just a quick question on The Advocator Group you talked about incoming social security volume improving, are more people getting injured or are you picking up share?.

We're picking up share, but remember because and it's more of those things that I kind of roll my eyes at, I know that because of sequestration there were a number of people that were either just through retirement they basically are down several thousand people, so to process those claims, to get them through the pipe, they are sitting out there but there is a delay in the processing of them.

And so we are picking up additional opportunities to process them, but until the people there at the SSDI process them we don’t recognize the revenue..

Thank you..

Marquida I wanted to come back and close off one of the questions from Adam. Adam your question was, how did Proctor performed in 2013.

The business was down about 5% or 6% and about the same range in 2014, so just as Powell mentioned we each year we are going to see it if the economy slowly starts to improve the business is downward because it is countercyclical..

Alright, any other questions?.

It appears we have no further questions at this time..

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

So one thing, so I happen to look back, since I wasn’t on the team last year I looked back at our transcript and last year there was a snowstorm in the New York City on the day we had earnings and there was one this year so I am starting to think that New York City get snowstorms when we announce earnings, so may be what we’ll have to do is moving around for you guys up there..

Have a nice day. Thank you..

Thank you..

And that concludes today’s conference. We appreciate your participation. You may now disconnect..