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

Kai Pan - Morgan Stanley & Co. Elyse Greenspan - Wells Fargo Securities, LLC. Charles Sebaski - BMO Capital Markets Corp. Quint McMillan - Keefe, Bruyette & Woods, Inc. Mark Hughes - SunTrust Robinson Humphrey Michael Nannizzi - Goldman, Sachs & Co. Ryan Byrnes - Janney Montgomery Scott LLC..

Please standby. Good day and welcome to the Brown & Brown Incorporated 2016 First Quarter Earnings Call. Today’s call is being recorded.

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

Such statements reflect our current views with respect to future events, including those relating to the company’s anticipated financial results for the first quarter of 2016, and are intended to fall within the Safe Harbor provisions of the Securities Laws.

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

Such factors include the company’s determination as it finalizes its financial results for the first quarter of 2016 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 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 like to turn the call over to Powell Brown, President and Chief Executive Officer. You may begin..

Thank you Taylor. Good morning everybody and thanks for joining us for our first quarter earnings call. Now let’s jump right into it. I'm on Slide Four. We delivered $424.2 million of revenue for the quarter, growing 4.9% in total and 1.3% organically.

Once again, each of our four divisions delivered organic growth and for the quarter, our EBITDAC margins remained steady. Contingents were $34.1 million, we delivered $0.44 per share for the quarter, which is an increase of 12.8% over the prior year.

During the first quarter, we continue to talk with a number of acquisition prospects and we acquired three companies with annualized revenues of approximately $14.5 million.

While valuations remain high and the acquisition marketplace continues to be very active, we're constantly evaluating organizations that fit culturally and makes sense financially. On Slide Five, we summarized the quarter as a continuation of what we experienced during much of 2015.

Our customers continue with modest hiring construction appears to be picking up in a number of communities throughout the country, sales are up slightly and insurable value through increasing. As we’ve said before, this is not consistent in all industries or geography.

This continued improvement in exposure units will be a driver of our organic growth going forward. It continues to be a very competitive market as our carrier partners are very focused on retaining all of their renewals. Rates remain under pressure with property being the most impacted.

Coastal property continue to see rate declines of 15% to 25% down, which we’ve seen now for three renewal cycles in a row and we expected it to continue for the remainder of this year.

The increase in exposure units has helped to offset some of this decline, but these rate decreases are putting pressure on all of our property businesses in retail, wholesale and national programs.

From a retail perspective, we continue to see improvements in new business during the quarter across many geographies and industries, this is partially offset by the impact of declining rates and CAT property and to lost business. Management of healthcare cost remains front and center for our customers.

Everyone is focused on how to best manage and share healthcare cost with their employees. ACA Reporting and Compliance remains the forefront for many of our customers and a concern for many of them was the completion of the first major ACA reporting requirement, which occurred at the end of the first quarter.

We are going to continue to add a lot of interest from our risk bearers in our programs businesses. Our All New risk program is a good example of collaboration and design of a new program with our carrier partners.

During the quarter, we had growth and positive momentum across many programs led by our (Linder Plates) [Ph] coverage programs and our Non-Standard Auto program.

On a opposite end of the spectrum, we have programs continuing to face material headwind such as our Coastal Property Programs due to pricing declines or changes in the risk bearer appetite or both.

The benefit of a broad and diverse nature of our programs across industries and geographies is that when there are few programs going down, others are hopefully and typically going up. In our wholesale business, Binding Authority and Professional Liability businesses continue to perform well as we’re writing more and more new business there.

We are experiencing some rate pressure on Binding Authority as compared to prior years primarily in the property line. We’re seeing some rate increases in certain lines of professional liability.

As I said earlier, catastrophic property brokerage is under the most consistent rate pressure over the past two-years and we expect continued year-over-year downward rate pressure through the end of 2016. Now, I would like to take a moment and look at a historical perspective of property rates in Florida, over maybe the last 22 to 24-years.

I will make a comment that in South East Florida today, rates for the similar properties in the last 22-years are at their lowest level since 1994. So if we go back in time, let’s talk about kind of what occurred in that 22 or 24-years period.

In 1992, as you know Hurricane Andrew hit South East Florida which made a dramatic change in the property marketplace restricting capacity significantly.

We went from 1992 to 2004 and 2005 when we had multiple storms hit the State of Florida and as you’ve heard us talk about the Citizens Property Insurance Company which was the market of Last Resort in 2007 became the most competitive market. In 2007, it became the most competitive property market.

So our market of Last Resort was writing new business out of the private market. Then in the last three-years, there have been several things that have occurred. Number one, there are a number of home owners depopulated in companies.

They are taking policies out of the Citizens Property and Casualty Insurance company and they are writing homeowners are now expanding their risk appetite in to habitational defined as apartments and condominiums many of which are in coastal areas right on the water. Number one.

Number two, there has been as we’ve talked about additional capitals that had come into the marketplace and finally our traditional carriers, some of those traditional carriers have had changes of appetite from a historical perspective, so they can participate in this marketplace.

The reason I bring it all up, is I think you just need to be aware of it, because it’s continuing and as you know it’s been 11-years since we have had the last hurricane hit landfall in the State of Florida.

I’m 48-years old and I can tell you, I remember every hurricane that has hit the State of Florida in my life time and it usually is every 10 to 14-years.

That is not saying that we think there is going to be a hurricane this year, but at a point in the future, there will be a wind event in Florida and that will intern modify or change the marketplace. With that, I would like to go back to our Services Division.

During the first quarter, we acquired another Social Security Advocacy Claim business and our original business, existing business the Advocator continues to grow nicely by adding new clients.

This division in services revenue were impacted by a decline in the first quarter of one of our TPA businesses that processes claims for weather related events. This business experienced very low claim activity as there were minimal storms and events during the quarter.

We did experience an increase in reported claims late in the quarter from the March storms in Texas. So we’re expecting some revenue uptick in the second quarter as we complete the processing of claims. We also have experienced some declines in our Medicare set-aside businesses as there we lower claims volume in Q1.

In summary, we view the first quarter positively, we continue to see improving activity in all of our divisions, our customers are feeling a bit more comfortable and we continue to deepen our relationship with our carrier partners.

While not all of our efforts play out perfectly in our numbers every 90-days, we remain optimistic and focused on growing our business. Now, let me turn it over to Andy who will discuss our financial performance in more detail..

Thank you Powell and good morning everyone. Let’s look at our financial results a little bit closer. I'm going to talk about our key metrics for the quarter. We’re on Slide Number Six, which presents our GAAP reported results. For the first quarter, we delivered 4.9% revenue growth and an organic growth rate of 1.3%.

Our income before income taxes grew by 9.5% and increased by 100 basis points as a percentage of revenues.

From the EBITDAC performance prospective which we define as net income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earn outs, our EBITDAC margin remains substantially flat to the prior year at 32.7%.

Our EBITDAC margin was impacted by a credit for our stock incentive plan of approximately $3 million and a premium tax credit of also $3 million. Our net income improved by 9.1% as compared to the prior year and is slightly lower than pretax growth, due to the modest increase in our effective tax rate to 39.5% this year.

As of now, we see 39.5% as a good estimate for the full-year 2016. As a reminder, we initiated a $75 million accelerated share repurchase program during the fourth quarter of 2015 and we completed it in January of this year. The final settlement was about 363,000 shares.

As a result of our share buyback programs over the past year, we've reduced our weighted average shares outstanding in the first quarter by 3.2% versus the prior year and this is driving our diluted earnings per share to grow faster than our net income increasing by 12.8% over the prior year.

With the completion of the $75 million program I just mentioned, we have a remaining authorization for share repurchases of $375 million. We did not repurchase any other shares during the quarter. As we said before, we do not buy certain dollar or percentage amount each quarter.

Our goal is to balance our capital allocation across all options in order to drive the best long-term shareholder value. We also announced yesterday our quarterly dividend of $12.25 per share that was approved by our Board of Directors and represents an 11.4% increase over the prior year. We’re going to move over to slide number seven.

I would like to walk through the key components of our revenue performance for the quarter, our contingent commissions and guaranteed supplemental commissions are up about $900,000 as compared to the first quarter of last year. The increase in contingents is primarily in our retail division and they were down in our national programs division.

Other revenues are up by about $1.3 million and these do fluctuate on a quarterly basis and in the first quarter of the prior year we had $1.4 million of revenue relate to businesses that we’ve since sold. For the first quarter, we recognized $14.3 million in revenue associated with acquisitions, we completed over the last twelve months.

We isolate the four items above, in order to determine our organic revenue growth which was 1.3% for the quarter. We're going to move over to Slide Eight. Let’s look at each of our divisions a little bit more closely, we’re going to start with retail.

Over the last three months, our retail division has delivered 6.4% revenue growth with organic revenue growth of 70 basis points. Retails year-over-year EBITDAC margin declined by 90 basis points.

From a margins standpoint we have two main drivers, first was the lower revenue for the quarter and the related flow through, which was partially offset by a gain on a sale of a book of business. The second drives was our continued investment in new teammates that we strive to do each quarter.

As we mentioned previously, there may be times we have a temporary drag on margins. We may see these fluctuations during the remainder of the year based upon timing of new revenues and additional investments. We’re going to move over to Slide Number Nine. For the quarter, total revenues for our National Programs division increased by 1.6% organically.

During the quarter, our EBITDAC margin increased by a 160 basis points, this was driven by approximately $3 million of credits related to premium taxes. Excluding this benefit, there was decline in our margin that was driven by a few factors. First is the investment in our new All Risk programs that we announced in the fourth quarter of last year.

We started accepting submissions in February of this year and we’re in the early days of building revenues. We do expect there would be a margin impact for a number of quarters until this program scales. The second driver is the downward impact of rate reductions in catastrophic property programs. We’re going to move over to Slide Number 10.

Our wholesale division had another good quarter reporting organic revenue growth of 3.4%. Our EBITDAC margins were 33.3%, which is a decline of 200 basis points from the prior year. This was driven by the previously noted rate decreases and investments in new teammates.

We expect continued downward pressure on rates over the near to intermediate term, which will put pressure on margins while new brokers build their books. We’re going to move to Slide Number 11. Services division, we delivered total revenue growth of 5.2% in organic - 1.2% for the quarter.

For the first quarter, our Adjusted EBITDAC margin declined by 80 basis points. This was driven primarily by the lower volume of weather related property claims that were noted previously. Due to the flow of clam activity, organic growth and margins for our services division can fluctuate on a quarterly basis.

Therefore, we focus upon trend of the underlying businesses rather than just one quarter. With that let me turn back over to Powell for closing comments..

Thank you, Andy. In closing, we remain optimistic about 2016 and the outlook for our company. The activity we’re seeing in our businesses and how we’re investing for the long-term will put us in a good position for the future. Our technology initiatives are moving forward and we look forward for these to gain more momentum this year.

As I mentioned earlier, we do expect rates for 2016 remain under pressure most notably catastrophic property. From an M&A perspective, the activity in the industry is not slowing. While valuations remain high, we continue to look for company that fit culturally and make sense financially. We are as you know, patience and disciplined.

So performance will more than likely not happen overnight. So our culture and our capital deployment strategy will help us drive long-term shareholder value. Now, let’s turn it over to Q&A. Taylor, I’ll let you open it up..

Thank you [Operator Instructions] And we’ll take our first question from Kai Pan with Morgan Stanley..

Good morning. Thank you. So the first question on the organic growth, it looks like the property has been a drag for the overall organic growth.

Could you quantify like how much of your property business a percentage of your commissions, either overall or by segment and also how much drag the property business on the quarter's organic growth?.

Okay. So we don’t have it broken out exactly in retail in that segment, but I would tell you, we've spoken about this before and we think it’s probably 20% both on individual property or in packages, that’s roughly, but if you look in certain offices in Southeast Florida, they could have very high concentration in condominium and apartment books.

Number one. Number two in our E&S, our wholesale segment, the vast majority I would say that numbers about 65% to 70% of that is related to property. Now when I say property that’s brokerage property and binding authority property.

Binding authority property is under pressure, brokerage property is under what we would call extreme pressure down 15%, 25% and you heard me talk about the historical perspective in Florida.

In terms of our program business, we have several large programs FIU being one, Sigma being another, the Catastrophic or the DIC, Difference In Condition programs both commercial and personal residential in California are big programs that have been affected as well, which we would be competing directly in the phase of that E&S marketplace.

So it has had an impact overall, but that’s not the only reason that’s part of it..

So what are the other reasons?.

I said alluded to earlier that in Q1 we had some offices, we wrote a lot of new business and not all of that new business comes in, in the quarter, so it comes in maybe ratably or in some instances different times over the year, but we experience some more loss business than historical norms and certain offices.

And that could be as a result of companies being acquired, it could be a loss in relationship where these buyer as there has been a change in the buyer at the insurance office or something of that nature.

But we’ve had a number of offices, which historically have very high retention ratios where they may have been affected by one or two large accounts that were loss. And there is not something that I can point to in particular, meaning saying this is a trend because of that.

It is more a combination of acquired, we call it lost relationship in terms of in a property market, I mean in a market like this and as you probably saw in business insurance more recently, the property casualty insurance company many of them or just struggling to keep their premium volume flat somewhere down.

And in that kind of market, sometimes they do squarely thing, squarely things could be defined as writing policies that are longer than 12 months, i.e. 15 or 18 months, shorter than that i.e. eight months to get them out of wind season or do something that over a long period of time they wouldn’t support from a pricing standpoint.

But on a short-term basis one year, two years they would do..

So if we characterize, those are sort of one-off rather than sort of general trend..

That’s correct. I mean, like I said, I'm making a comment that I believe that we’ve had more loss business in some of our strong offices in the first quarter than we have historically. I could say that categorically and those are the reasons why..

Okay, great. That is great. And then my second question is on the margin front. I want to sort of highlight two things. One is your investment in the teams. Just wonder how much investment is that and what do you expect on the margin impact? Then the second item is on the IT expense.

Last quarter you highlighted that you are going to spend $30 million to $40 million over time to sort of improve the IT system and so just wonder how much that budget had been spent in this quarter? Thank you..

Okay so relative to the margin impact in the investment of people.

Kai as you know, we have overtime allocated a portion of our revenues to subsidize or sponsor, not subsidize sponsor hires in offices to incent offices to hire new people and when you hire somebody that has no insurance background to get them launched, it’s usually a two, three or four year period in production at a minimum.

And so we’re making investments not just in retail, which is that period, where a ramp up period might be a little quicker in wholesale, but we made investments in our programs space as Andy and I leaded to in our All Risk program as a newbie. This is what I want to make sure you know about margin compression.

I'll let Andy talk about IT but there are really three components, if I look at the aggregate impact on our margins in Q1. Number one, in our services division as you heard me say, we have a third-party administrator which their claims volume was down dramatically due to the lack of weather related events in the first quarter that’s number one.

Number two, we've talked about growth in some of our programs but impact or competitive pressures on some of our larger very established very good programs in our costal property.

So CAT programs are down and the margins in some of those are higher than those at which that have grown on the top-line in CAT property and the final thing is new teammates, which we talked about first as evidenced by not only All Risk as a new De Novo startup, but continuing to invest in offices in new hires and retail, wholesale and programs.

So with that Andy, I'll turn it over to you..

Good morning Kai. From a IT prospective if you remember back when we talked about this at the end of the last year. We said that we would spend the $30 million to $40 million and we gave a range for this year, we said we should have a margin impact of anywhere from 40 to 50 basis points based upon how you know fast we’re able to ramp the programs.

As it relates to the first quarter, there were some modest investments, we are just kind of getting these off and getting them going, so that will probably continue to build during the year, but no sizable or major numbers in the first quarter, but the range is still good for you..

Great.

So just follow on that do you expect you can sort of maintain the margin, you are at pretty good margin right now given these two investments in new hiring and potential IT investments?.

Let me cover the IT first piece.

What we said at the end of the year on it Kia is that our long-term rate that we would expect to operate inside was around 33 to 35 and when we gave the guidance we said while we’re going through the IT investment we would expect for margins to drop down by in this example let’s say 50 basis points and then we’re on the back end of the program, we got those back.

Okay so I just wanted to make sure we are clear on that piece..

And it relates to the margin maintenance, what we’ve said historically and we would maintaining the position is, in an environment where rates are going down somewhat reasonably we think that we can grow organically and maintain or in some instances grow the margin depending on the quarter.

But if you go into a situation where there was a continued precipitous fall kind of across the board in rates which we don’t see right now, but that would put pressure on the margins..

Great. Thank you so much for all the answers..

Yep..

Thank you..

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

Hi, good morning. I wanted to also touch on the organic revenue growth especially within the retail segment just given the slowdown we saw in the quarter. And I know last quarter on the call you guys had spoken just starting to see a positive benefit of some of the realignment in that segment.

So how are those initiatives going and what was the impact in Q1? And then also is there any way to break out the organic revenue growth within the retail segment that you saw within the employee benefits business as opposed to the rest of the book?.

First thing Elyse is I’m pleased, we’re pleased and I’m pleased with the initiatives that we’re working on and like I said, it doesn’t happen overnight number one.

In terms of retail, as I said to Kai earlier, I would attribute the performance in retail to some more loss business than historical in certain offices, and those are in offices that have historically very high retention ratios and so those could be attributable to acquisitions.

Those that mean business in our insurers are being acquired, it could be a loss of relationship as I said or a carrier doing something very, very unusual, which may not be sustainable in terms of market product and it could be for 12 months period or something less than or greater than that.

As it relates to our employee benefits business, we do not breakout our organic growth for employee benefits versus P&C. However, we have historically talked about the fact that our employee benefits business is about a $260 million business in aggregate. We have talked about that in the past.

So I don’t know if that answered your question exactly, but gave you kind of a benchmark..

Has anything changed? I mean I know we are sitting here on April 19, but being a little bit into the second quarter, has anything changed in terms of what you are seeing in terms of new or lost business in some of these offices?.

You are just talking about overall business?.

Yes, overall or retail specific as well..

Yes. like I said, I don’t think you can say that lost business and very establish longstanding offices in several of those offices in one quarter makes a trend.

So it is I mean Q2 now and it is a little early to see and I wouldn’t want to project a trend one way or the other, but I fully anticipate that in the offices that I'm talking about that their retention will be higher and towards more historic levels in the future..

Okay. And then in terms of margins, I know you guys pointed out a few items including the credit for the stock incentive plans, a premium tax credit as well as you had a disposal of business in Q1.

So if we back out those three items, I mean the margins did contract close to maybe those three items benefited by about 200 basis points, maybe a little bit less.

So is there anything as we think forward in terms of the out quarters of this year where you might expect different margin trends? I guess some of the weather related businesses will run at higher margins but anything else in terms of modeling how we should think about the margins coming in different towards the later part of this year?.

No. In aggregate Elyse I don’t think so. I do think that the GPA weather related events creates a little bit of lumpiness, so I know that that's not easy for you, you collectively all of you to model.

So, I would just say that be mindful that that's not just in this one segment, we have some of that in right, we have some of that we have it in other segments so that's number one.

Number two I think is the CAT property pressure is real, so remember there are it obviously has been, but it is and so what you are seeing as you are seeing some established larger programs that maybe have a little bit different margin profile in some of those that are growing.

Some of those that are growing have good margins too, don’t get me wrong, but that has impacted our margins and we are going to continue to invest in teammates.

And so when I say that we always look for good people that fit big culturally at Brown & Brown and so we hire people sometimes when we so called don’t need them in an office in anticipation of growing the business down the road.

And as I said, the timeframe to get someone launched might be two, three, four years and so there is a long incubation period if you want to call it that or ramp up period..

Okay, and then one last question.

Do you have an outlook for how to the contingent commissions might flow in for the rest of the year?.

Hi. Elyse. No we don’t I mean that's the one that we just don’t have any visibility into the contingence on those. So I think in the current environment I guess the only thing we would say is we wouldn’t expect [form] [Ph] to be going up..

Okay. Thank you very much..

Sure..

Thanks Elyse..

And will take our next question from Charles Sebaski with BMO Capital Markets..

Good morning. Thank you. I would like to dig in a little more on the investments in teammates across the divisions and what kind of overall margin impact.

I appreciate that training people, getting them up to speed, being productive members takes time but there really seems to be some kind of a change over call it the last year where we are now identifying hiring new people as a seemingly unusual expense.

How should we think about that? I guess if I think of a growing business, adding people, training them, getting them up to speed is the normal course of action and wouldn't be thought of as unusual in the sense that we are identifying it as a margin drag.

And why wouldn't we think this is just a perpetual piece of a growing franchise? I guess if we could talk about the number of people you are talking about or what the discrete margin impact is of those people this quarter and how it should roll through if it is a three- or four-year timeframe? I guess that is just - maybe I am missing something.

I'd appreciate any help on that..

Okay. So Charles, you are correct and saying a normal course of business. If you continue to hire and train and recruit people, so that is correct. And when you are in a business like ours, where it’s all human capital 98% let’s call it.

When you acquire businesses or in acquired businesses, you have sometimes people that are going to retire or want to do something else, or in existing businesses, we have this evolution of our workforce.

And so having said that yes we talk about a traditional investment in producers or service teammates or marketing teammates, but what I’m saying is the traditional, the excess investments where we can export talent to offices that need it that don’t have it or we’re trying to invest in that area. And so I think you’re exactly correct.

You are not incorrect in your first observation. The second thing that I would say, is that we and some of the investment community have given us a little brief in terms of acquisitions and/or the lower number of acquisitions this year or last year.

And what we've said historically is, number one, we’re going to do three things with the money that we make. Number one, we’re going to invested new teammates. And in doing that, that is one of our strategies in terms of growing our business organically. Number two, we’re going to acquire businesses to fit culturally and make sense financially.

And number three, we can return to shareholders, which we’ve done through as you know our dividend increases and our share repurchases. So I think the point that we’re tapping on Charles is this. We are continuing to invest for the future, I’m not talking about the normal office hiring one person or two persons that they might hire each year.

I’m talking about hiring more people as we can see grow and as we become bigger for not only operation that we have today, but operations that are really forthcoming..

Can we get some idea of scale? I guess if you said in the third quarter of last year we hired 250 new people that would be considered excess and those 250 people have a three-year run rate, we could at least understand what there is.

It just seems to be that there is this talking that you guys are identifying this investment excess of the normal business operations.

But I guess is it ongoing? Was this something that happened one point a few quarters ago and now we have this three-year build up or is this excess investment something that is happening this quarter, last quarter, it will happen next quarter until we what is the level you need to get at? What is the level of excess investment from a normal operating perspective that we are talking about? I guess that is what I'm trying to understand better..

Hey Charles maybe, I'll see if we can give a little bit of kind of frame into this. The reason why we haven’t broken out the exact amount and this is why we've given a range on the margins of the 33 to 35 that we can operate inside of. But some of these areas that - the reason why we’re calling amount.

Powell mentioned earlier about the investment in our All Risk program is an example of where we’re investing. So you know we've hired a team inside of there up and going, but we haven’t generated any revenues towards - very, very small revenues today that will build overtime.

If you remember in the second quarter of last year, we talked about building out our service centers, that’s another type of examples. And all of these maybe or smaller not so like one individual coming and say well, that’s a big component to it, but if you add up a number of them, they do add up underneath there.

And that’s why we say it can moderate back and forth but the goal in all of this is we want to make that we can continue to drive organic growth and make sure it’s good profitable growth for as an organization..

Okay. Is there currently - I mean those are all things that happened in the past.

Are you still making investments in talent that would be considered excess today?.

Yes and we will continue to in the future..

Excellent..

We've made specific investments in our wholesale business in the first quarter and those brokers will come online. We did this again just for reference, this is why in our commentary Charles we said that things - our margins can flow up and down and fill back to the first half of 2014.

It’s exactly what happened there right, the margins came down in wholesale and then they rebounded back in later quarter, so they can move around overtime..

Okay. I appreciate the answers. Thanks, guys..

Thank you..

We’ll take our next question Quint McMillan - KBW..

Thanks very much, guys. I just wanted to check on the capital management in terms of you guys completed the $75 million accelerated share repurchase in January.

Has the Board discussed the potential for the next accelerated share repurchase program and what would be the indicators of when timing-wise you might want to do that as opposed to being next quarter or 12-months from now? Is there anything that makes you in a better position or want to start a new one?.

Quintan as you remember we talk about capital allocation with our board all the time, as it related to whether we’re going to buy agencies or buy agencies and invest in people or return it to share holders.

And what we do is we constantly evaluate the investment option of buying ourselves versus buying additional agencies or investing it in people of which we’re doing all of the above or have done all the above over last 12-months.

So we’ll continue to talk to the board about it we don’t have as Andy said a stated buyback amount by quarter nor a stated amount would be so called ASR or certain threshold, we continue to evaluate it all times..

Okay, great. Thanks. Just to touch on the margin, Andy, you talked about obviously getting back to the 33% to 35% long-term margin after the IT spending is kind of paying you guys back.

Can you give us underlying thoughts in terms of what you mean by that in terms of - does GDP growth depending on which said governor you are listening to is about 1% right now. You are talking about rates flat to down 10% and some of the property CAT lines down 15% to 25%.

In this environment, do you get back to that 33% to 35% margin or does something need to change?.

I’ll take it. The answer to the question is we can, like I said I told you why retail organic growth was impacted in Q1. Having said that if they are continues to be - our business Quintan is exposure unit or exposure basis driven payroll, sale, number of automobiles.

So I call it the GDP of the middle-market economy, not national GDP, the middle-market economy. So if you go to Miami and you look at what being built in South Beach, you would be amazed with a 15 cranes in the sky, but if you go to some place like another town in Oklahoma may be the economy is not doing as well as an example.

So the rate environment currently borrowing a precipitous fall in rates meaning more than we’re seeing in the other lines of business, we believe that we can, knowing that we are going to start incurring some expenses, you probably need to adjust for the expenses with the technology as some of those come on in a near to in immediate term.

But as we’ve said, I think Charles asked about do we continue to invest in people, we want to continue to invest in people, we’re going to continue to do that and I believe that margin is definitely achievable..

Okay, that is great. Just a follow-up on that though. In terms of our middle-market economic growth and the exposure growth, can you talk about the exposure growth trend? You talked to about some of your clients now seeing some hiring, that has been a trend we have been seeing maybe for the last 12-months plus.

Was it better this quarter than it was last quarter or has it been sequentially improving or sort of staying in a similar place?.

I think it’s sort of thing in a similar place as we talked about, as we’re seeing kind of parts and flashes of 2015. That’s how I would describe it..

Great, thanks very much guys..

Thank you..

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

Thank you very much. Good morning.

The $3 million credit for stock incentive program, was that the net impact of the program in the quarter so it was a $3 million credit?.

It was Mark, $3 million and just represented final true-up for some investment that have we made at the end of last year..

And then I think you had given guidance about $23 million to $26 million for the full year.

Where does that stand now?.

It’s still a good estimate on the range and as you probably saw and as we talked about when we released the year-end earnings, we’ve combined non cash stock compensation with compensation and benefits now as one line item for the fact that we’re on annual grants at this stage.

So that what we used to have historically of doing this kind of low larger brands every two and a half years, put some ups and downs and the numbers with trust in volatility hard to understand. With annual, we don’t think that’s necessary anymore..

Okay.

And then a premium tax refund, was that a revenue item or was it some sort of contra expense item?.

Contra expense. Other expense..

Okay, so it just flowed through below the line, not the top line?.

Correct..

And then the share count in 2Q, what should we sort of start at would you say? Is it similar to Q1?.

Sorry, one more time Mark..

The share count, should it be similar to Q1 and Q2 given that the accelerated buyback was done in January?.

Yes. The weighted average at the end of Q1 that’s pulled down a little for those 363,000 shares that we completed. But that’s probably a good marker for the second quarter borrowing any other purchases..

And then one final question, professional liabilities, you said rates might be up in certain areas.

Any specifics on that, any professional liability lines that were better?.

So well I mean if you think about it and we've talked a lot about it at overtime. Employment practices liability continues to be a challenge in certain classes of business. So there could be certain classes of D&O that is under pressure, but at the end of the day it's spotty.

What we are trying to say is that's one of the segment, commercial auto and professional liability are two areas that are more flat to up ever so slightly. Commercial auto in particular, because they are running temperatures with most of the carriers. If you talk to most of the standard carriers their auto and personal lines are running temperatures..

Thank you..

And will take our next question from Michael Nannizzi with Goldman Sachs..

Thanks so much. Just a couple of clarifications.

Andy, the gain that you mentioned in retail, I’m not sure, did you quantify what that was in terms of the benefit to margins in that segment?.

No. We didn’t. It's under our couple of million dollars..

Okay. So that is a few basis points on margin..

Yes. You can see most of it right in the income statement, it doesn’t all fit there but most of it does..

Okay.

Where? You said where in the income statement?.

Yes. Just go to the income statement where it’s got the gain losses right there..

Okay. Sure. Got it. Okay. And then just on the infrastructure spend, so is it fair to assume - I think you had said that you expected to spend that $40 million or so over the year or this year but didn't spend a lot in the first quarter.

Does that mean that we should assume that $40 million will now get spent ratably over the remainder of the year so maybe whatever that margin impact was it will be a little bit higher on the rest of the year's margin basis? Is that fair?.

Yes, let me clarify. Just may because this be an important point. As we had said 30 million to 40 million over a two or three-year period not in one year Michael..

Okay..

Yes and we said that around a 40 to 50 basis point impact this year..

Okay so that's still sort of within the range then..

Yes, still a good range that we see right now..

Okay.

As far as the margins in the program segment, so that $3 million is a full benefit to the margin so is that right that that margins in that segment would have been closer to like a 32? Is that right?.

Correct..

Okay. And then we have talked a little bit about property. I think you guys sort of highlighted that.

I mean is there a way to think about every 100 basis points of property rate and what that means to your business? Because I was just trying to figure out how much of a headwind might that be for you guys if that trend remains in place for the rest of the year?.

No Michael that really isn’t and we haven’t quantified that because what you are seeing is, remember we talked a lot about catastrophic property, but that doesn’t mean that traditional Inland property isn’t ultra competitive.

And so some carriers as you know want to play in areas where the rate online is higher, which might be in a CAT prone area, whereas other carriers have a risk appetite that says we don’t want to play in let's say coastal property, but we want to play on Inland properties.

So all of the sudden that becomes competitive and their perception of risk is maybe different at one carriers versus another, meaning rate online, what they want to put in their portfolio, all that other stuff. So I don’t want to just give you the impression.

We talked about property in terms of CAT property because if prices are down dramatically that does not mean that Inland property is are not very competitive and we see sometimes people do crazy things there too, but no we have not given any guidance on that..

Okay. And then I guess just to bring it all together, it looks like we have got some sort of investments - I mean Charles alluded to the headcount scaling up front that you are doing maybe ahead of some growth and then we have obviously got the infrastructure spend.

It looks like on the quarter that your margin when you adjust for some of those tailwinds, Andy, that you are below that 33% to 35% range.

So is it only until after we digest the infrastructure spend and then scale up some of these businesses where you are doing the hiring that that 33% to 35% is reasonably attainable or are there things that can happen ahead of that that can help us get into that range?.

Can I take that Michael for just a second?.

Sure..

Let’s make sure that and we tried to articulate this. That some of our businesses that are impacted are higher margin businesses than others or there is a growth in a business, which might be a De Novo business like a program that we start. So as I said earlier and this is not an excuse, this is a statement of fact.

One, we had a services business, a TPA that had very limited claims activity, which impacted our margins. Two, CAT property programs, which are higher margin businesses than number one a start-up, but two, some of those programs that were growing nicely in Q1. And three would be the investment in new teammates.

So I don’t want to say that it’s just investment in new teammates, because just like anything else, some parts of your business are under constant attack and then others might be moving right along nicely.

We just happen to have a lot of segments that are - two or three segments meaning in particular services piece and in our CAT programs, that have been under competitive pressure and we think that will continue for a while.

So to answer your question, our margins maybe like that if we continue to have results like we've just outlined in those three segments. That is not what we want that’s not what you want and we don’t manage our business that way, but we intend over a long period of time for it to work out..

Got it. Okay. Thank you..

And we’ll take our next question Ryan Byrnes with Janney..

Thanks, good morning, everybody. Just had a clarification question on the $3 million non-cash comp swing for the true up of 2015.

Was that independent of the first quarter 2016 or was that just the net impact for the quarter?.

That was independent of the 2016..

Okay. So there was a non-cash comp charge for 2016? Okay..

Yes, there was..

Great. And then secondly, just had a question on the mechanism of buybacks. It seems like you guys have a strong preference for accelerated share repurchases.

Just want to get your thoughts there and I guess if there was a big market downturn, could you guys be flexible enough and nimble enough to buy outside of an accelerated share repurchase? Just want to get your philosophy on that..

Yes. Ryan, when we think about at least the mechanisms for buybacks. And the reason why we generally trend towards ASRs is, we think there are very efficient way in which to buy shares back out of the marketplace. It does give us a upfront share pop, which we like as part of the program allow just to buy through blackouts et cetera so they can run.

And it puts ultimate execution back on whoever the agent is. That’s what they do everything and that’s why we prefer and we think there are a cost effective way to go. That doesn’t mean that that’s the only way that we would ever buy shares back in the marketplace.

So we’re always looking at different opportunities and different programs that are out there. If there ever was a significant dislocation in our market value or price, we would look at the appropriate options that are out there irrespective of any of them, you still got all of the 10b-18 rules that you still have to comply with so..

Great. Thanks for the color guys..

Sure. Thank you..

And we’ll take our next question from Kai Pan with Morgan Stanley..

Thank you for the follow-up. Just large picture question. We have seen some technology startup companies getting into the distribution for business insurance starting from employee benefits now expanding into some of the property and casualty insurance.

Just get your view on these sort of potentially emerging trends and any sort of initiative on your side you think you could plan for that? Thanks..

Okay. So Kai, as you have seen and read, some of these technology backed companies are very well funded and some of them are coming either to a stop or they are going through gyrations. And what I would say is this. Do we believe that there could be a segment of small commercial purchase online? And the answer is yes, that could be the case.

And the carriers are careful about what I would call comparison shopping.

So if you have model, which actually lets you basically compare three companies, standard companies that you know by name against each other and their small business units, they don’t like that, because they try to differentiate their product on coverage and service and which some can and do.

But in that instance when you have an online rater, many times you just stacking and lump against each other and it is a spreadsheet. That said, what we found whether it would be in personal lines or in small commercial.

There are certain complexities that come with risk particularly as you as an individual or as an business start to accumulate assets which they may not be familiar with the coverages that would be appropriate and so there is a possibility that they have what I call coverage is stripped down that maybe cheaper, cheaper, cheaper.

But they maybe buying a Yugo as opposed to a Chevrolet or a Cadillac.

And so and do they actually know the difference in the coverages and so I'm not aware of anything yet that does not mean that we are dismissing that out of hand quite the contrary, and we think about how technology can play a role in our small business units as well and as we invest in our personal lines business which is actually a $90 million business as you know.

What we say so far though, so far is the technology companies that I'm aware of, they have done a good job of sizzle in terms of the marketing but I don’t think that they have done as well a job in the execution of the plan where they are able to make money over a period of time.

So it doesn’t mean somebody is not going to do that, it just means that we continue to watch it carefully and whether it was the online benefits related company or when Google started trying to - the search engine I should say started looking into selling coverage online and then has pulled back from some of that.

We watch with great interest, but we are thinking about how we invest in our small commercial from a technology standpoint in personal lines independent of that..

That is great. Thank you so much..

And we’ll take our next question from Charles Sebaski with BMO Capital Markets..

Thanks for letting me in one more time. Two quick ones. One, just adding up the one-time events in the quarter and I just want to make sure I have something right. There was a $3 million tax benefit, a $3 million stock compensation benefit and a $1.4 million gain on sale.

Do I have those numbers correct?.

Yes, the first two correct on it Charles and then we said that again on the sale was just a little under $2 million..

Okay. And then additionally, just wanted to - I know it is early and this just happened on the claims, the TPA business on what is going on in Texas with the flooding.

Wondering what you guy's footprint is there and you are already seeing that that is obviously a concern for everything that is going on but something where we could see an effect in the second quarter given the scale of what is happening there?.

Yes, the answer is we have had some activity, but once again things kind of evolve overtime, so you have immediate claims and then you have things that sort of roll in as well and so we would say that the magnitude of the impact were not fully - we don’t know the full impact yet, it’s too early, but we can just tell you that we've had a good number of claims already..

Okay./.

There is really kind of two storms there, if you go back there was the mid to late March hailstorms in Texas and with that drove also some other damage.

So we've got claims of that and then obviously we've got the most recent flooding that’s going on just over the last couple of days and as Powell mentioned those - they kind of build overtime, so it’s hard to determine what it will look like right now, but we are starting to get some claims in..

Excellent. Thank you very much for fitting me back in..

Yes..

Thank you..

And we have no further questions, but as a reminder again [Operator Instructions]..

Okay. Thank you all very much and we look forward to talking to you at the end of the second quarter. have a wonderful day..

Thank you line..

And this concludes today's conference. Thank you for your participation. You may now disconnect..