Powell Brown - President and CEO Andy Watts - CFO.

Arash Soleimani - KBW Elyse Greenspan - Wells Fargo Kai Pan - Morgan Stanley Josh Shanker - Deutsche Bank Mark Dwelle - RBC Capital Mark Hughes - SunTrust.

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

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

Such statements reflect our current views with respect to future events, including those relating to the company’s anticipated financial results for the third quarter 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 third quarter that its financial results differ for 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. In addition, there are certain non-GAAP financial measures used in this conference call.

A reconciliation of any non-GAAP financial measures to most comparable GAAP financial measure can be found in the company’s earnings press release or in the investor presentation for this call on the company’s website at www.bbinsurance.com, by clicking on the Investor Relations and then Calendar of Events.

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

Thank you, Jennifer, and good morning everyone. Thanks for joining us for our third quarter 2017 earnings call. I am on slide four. For the third quarter, we delivered $475.6 million of revenue, growing 2.9% in total and 3.4% organically. Our EBITDAC was 33.5, which is down 50 basis points reflecting the investment discussed in previous quarters.

Our earnings per share for the third quarter of ‘17 increased to $0.53 from $0.50 in the third quarter of ‘16. Andy will provide more colour on our revenue and earnings performance later in the presentations.

Finally we completed three acquisitions during the quarter, and we are pleased with our results for the third quarter and the performance specifically of the business year-to-date. I’m on slide 5, during the third quarter we continue to see economic expansion driving exposure unit growth across many industries and locations.

We’ve been consistent in our discussion of our decreasing premium rates across most lines for the past two to three years. In the first quarter of this year, we mentioned that coastal property rates were down in the range of 2% to 10%, as compared to the first quarter of ’16.

In the second quarter of this year, which is typically a big property renewal period, we saw coastal property rates down 5% to 15%. During the third quarter, we saw coastal property rates down 5% to 10% prior to the storms. We see most carriers now drawing a line with flat rates on property in coastal areas.

As it relates to other lines, commercial and personal auto rates continue to increase 1% to 5%, which are being driven primarily by frequency of claims and distracted drivers. For most other lines rates are generally flat. In summary, there continues to be a lot of capital across the insurance market place.

However the recent storms, fires and earthquakes may have implications on pricing in 2018. At the present time, we don’t have a clear view on the potential impact for next year. But there are a lot of discussions about rate increases for coastal properties.

If there are proposed increases which we think there will be, the question really is will they stick. Certain markets are testing that philosophy right now. Let’s discuss the performance of our four divisions; from a retail perspective we grew 2.5% organically for the quarter and have grown 2.5% year-to-date.

We are pleased with this year-to-date performance as compared to the organic growth of 1.8% for the first nine months of 2016. During the quarter, we delivered good organic revenue growth driven by increased new business and a higher retention.

Last year we had a number of large accounts that were acquired and we had some lost business which we’re not experiencing at the same level this year. Regarding our performance incentive program, through the first nine months of 2017, the program continues to perform in line with expectation.

Based on our organic revenue performance for the year, the program is having a very positive impact in helping drive improved results.

The performance for our national programs division exceeded our expectations, primarily as a result of incremental claims processing revenue associated with the significant weather events that happened during the third quarter. Andy will describe the effect of these incremental revenues on the quarter and our outlook later in the presentation.

We are pleased to report that our new Arrowhead Core Commercial program performed in line with the expectations we provided last quarter. As a reminder, we are in the investment phase and as a result there will be an impact to our margins through 2019.

We continue to experience strong performance from our lender-placed business and our all-risk programs. The growth from these and other programs was partially offset by continued downward rate pressure for our coastal property programs prior to the storms and the impact related to the carrier changes on certain programs as we discussed before.

Remember that these changes will result in decreased revenues for national programs in 2017 of approximately 5 million to 7 million for the full year. We realised about half of this impact in the third quarter. Our wholesale business had another great quarter growing 6.1%, driven by strong new business.

Again we realized growth across almost all lines of coverage in the majority of our businesses. Our brokerage businesses continue to improve, as we wrote more new business and rate decreases were less than in the prior year. The services division grew 4.8% this quarter, which is a really good performance.

We experienced growth from several of our claims processing businesses, driven by new business and to a lesser extent some claims from recent storms. Our advocacy business has also performed well. In summary, we’re pleased with the performance of our four divisions for the quarter. Now let me turn it over to Andy.

He will discuss our financial performance in more details. .

Good morning everyone. I’m over on slide number 6, this presents our GAAP and certain non-GAAP financial highlights. For the third quarter, we delivered total revenue growth of 2.9% and organic growth of 3.4%. The difference between the 2.9% and the 3.4% relates to lower contingent commissions.

Our income before income tax margin increased by 90 basis points and our diluted earnings per share increased by 6% to $0.53 versus $0.50 in the third quarter of last year. The effective tax rate for the third quarter was substantially in line with the prior year at 39%.

Our weighted average number of shares increased by 0.5% due to shares issued as part of our long term equity plan and our employees stock purchase program. These increases were partially offset by the impact of our $50 million ASR that we initiated during the middle of the third quarter.

Our goal each year is to minimize the impact of these equity programs through periodic stock repurchases throughout the year. In the few slides, we’re going to walk through the primary drivers of the EBITDAC margin changes.

Over to slide number 7; this slide presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the third quarter each year.

Since these items are non-cash in nature and can increase or decrease by quarter, we believe it is helpful to evaluate the business excluding these adjustments. For the quarter, our adjusted income before income tax margin decreased by 10 basis points.

The differential as compared to the decrease in our EBITDAC margin was primarily driven by lower interest expense, as we’ve been paying down outstanding debt. Excluding the effect of the change in acquisition earn-out payables, our earnings per share increased by $0.01 or 1.9% versus $0.52 on an as adjusted basis in the prior year.

Over to slide number 8, we’ll discuss the key components of our revenue performance. For the quarter, we had no material movements in investment income or other income.

As we’ve been discussing on previous calls, our expectation was that our contingent commission would more than likely decrease due to losses and lower premium rates that are shrinking profitability for risk bearers.

For the quarter, our contingent commissions decreased by $4.7 million and guarantee supplemental commissions were $600,000 lower as compared to the third quarter of last year. The largest decrease was realized in the wholesale division with a reduction of 3.2 million compared to the third quarter of last year.

Our total core commission and fees increased by 4% year-over-year. When we isolate the net impact of our M&A activity, our organic revenue growth was 3.4% for the quarter, and this was driven by growth in all four of our divisions.

Over to slide number 9; similar to previous quarters, we thought it’d be beneficial to include a walk of our quarterly EBITDAC margins from last year to this year and highlight the main drivers. Our EBITDAC margins decreased by 50 basis points year-over-year.

As discussed during the second quarter earnings call, the new Arrowhead Core Commercial program will initially be a drag on the margins as we invest in building our platform and also incur transition services. The investment this quarter impacted our margins by approximately 60 basis points which is in line with our expectations.

Once our platform is in production by the end of 2019, we expect the EBITDAC margins for this program to be similar to the rest of those for the programs division. Our retail performance incentive plan impacted margins by approximately 50 basis points, which is in line with our expectations.

As we mentioned previously, we are accruing the cost based upon a full year projection of growth by producer and as a result there will not be a direct correlation of the expense to the revenue in each quarter. As a reminder, we anticipate this program will impact our margins the most in 2017, less in 2018 and then we’ll breakeven in 2019.

For the current quarter, the impact of our investment in technology was about 40 basis points and the programs are progressing as expected. The incremental effect of the year-over-year change in the gain on disposals of certain businesses and books of business contribute about 30 basis points to the margin change for the quarter.

We also recognize the benefit during the quarter of approximately 20 basis points associated with foreign within our wholesale division. The remainder of the business was able to contribute 50 basis points of margin expansion, which we are pleased with as we continue to focus on leveraging our revenues and managing our expenses.

These efforts enabled us to offset the margin impact from the decreased contingents and guaranteed supplemental commissions. Moving over to slide number 10, looking at the performance in each of our divisions a little more closely, we’re going to start with retail.

For the third quarter, our retail division delivered total revenue growth of 2.6% and 2.5% organic revenue growth, driven primarily by new business and higher retention.

The 40 basis points increase in the EBITDAC margin was driven by gains resulting from the book-of-business sales that we mentioned earlier and could flow through on new business and better retention. These items more than offset the incremental investment in technology and our performance incentive plan.

Our income before income tax margin increased by 380 basis points and was primarily driven by the change in acquisition earn-outs, lower inter-company interest expense and the items impacting EBITDAC margins. Over to slide number 11, for the quarter, total revenues for our national programs division increased by 3.3% and 2.9% organically.

Organic revenue was higher than we anticipated for the quarter, as we realized approximately $5 million of claims processing revenue associated with hurricanes Harvey and Irma. For the quarter, there is not a material difference in revenues compared to the prior year realized from weather related events.

The organic growth for the quarter was primarily driven by our Arrowhead Core Commercial program that was launched in July of this year and our lender placed business. The growth from these programs is partially offset by the reduction in revenue from changing certain carriers and also our coastal property programs.

Our EBITDAC margins decreased by 390 basis points, primarily due to the investment in our commercial program and the impact of the carrier changes. For the quarter, our income before income tax margin decreased by 90 basis points impacted by the EBITDAC drivers that we just mentioned and then partially offset by lower inter-company interest expense.

Over to slide number 12, the wholesale division delivered total revenue growth of 2% and organic revenue growth of 6.1%. As we mentioned earlier, contingent commission decreased by approximately $3.2 million versus the prior year. This explains the difference between total revenue and organic revenue growth.

Our EBITDAC margin decreased 50 basis points to 36.3% for the quarter. The decrease is attributable to the lower contingent commissions. However, we were able to substantially offset this decline through leveraging our organic growth and continued control of expenses. In addition, we recognized a foreign exchange benefit as we mentioned earlier.

Over to slide number 13, the services division grew revenues 4.8% versus the prior year. This breadth was driven by increased new business, managed care claims and to a lesser extent property claims. For the quarter, our EBITDAC margin increased by 230 basis points as a result of revenue growth and continue effective cost control efforts.

We do not expect this level of margin increase every quarter, but are very focused on operating highly efficient claims processing businesses. Our income before income tax margin increased by 380 basis points impacted by the EBITDAC drivers and lower inter-company interest charges.

A few comments regarding outlook, we are expecting continued commissions to continue to decrease in the fourth quarter as compared to what we realized last year, with a rate of decline potentially similar to what we just experienced in third quarter.

Revenues relating to claims processing for hurricanes Harvey and Irma are projected to be in the range of $6 million to $8 million in the fourth quarter and the margins from these revenues should be above the average margins for national programs.

We’re expecting our full year effective tax rate to be in the range of 38.7% to 39% and we’re still expecting the full year impact of our investment in technology to be in the range of 40 basis points to 50 basis points. With that let me turn it back over to Powell for closing comments. .

Thank you, Andy, great report. In closing, we’re really pleased with the performance for the quarter and for the year. As I said earlier, admitted rates in cat areas are flat now excluding automobile. E&S markets are flat to up slightly defined as maybe 5%.

There are some E&S markets looking for increased rates, but higher than that, but it’s not sticking.

We believe this is going to continue to be the case throughout Q4, and as reinsurance treaties renew, we’ll start to see what impact these events will have on insurance rates and we’ll have better insights in to the rate environment after or on our next Q4 call.

We do expect to see incremental increases in claims processing revenue in Q4 of ’17 and Q1 of ’18 as a result of the storms as Andy alluded to. As of now, we do not expect to see much impact on claims revenues related to the fires in California or hurricane Nate.

Our technology programs continue to progress as we focus on improvements to our core infrastructure preparing for the new state of New York cyber security regulations that are effective in Q1 of ’18, as well as our agency management system upgrades in the retail.

We continue to look at a number of transactions that can help us further grow to expand our capabilities and add more talented team mates. As we’ve said before, we’re always looking for businesses that fit culturally and make sense financially. Lastly, our Board of Directors recently increased our dividend by 11%.

This represents the 24th consecutive year of dividend increases, something that we as team mates are very proud of.

Finally, I’m really pleased with the activity going on throughout the company specifically related to how we engage with our customer and carrier partners, and the progress we are making on many of our initiatives to driven the business forward.

I want to take a moment, and thank all of our team mates for all their efforts as our financial performance is only possible through all of their hard work and dedication each and every day. With that, let me turn it back over to Jennifer for the Q&A session..

[Operator Instructions] We’ll go first to Arash Soleimani with KBW..

I know you mentioned the $6 million to $8 million claims processing impact for the fourth quarter, is that also a reasonable run rate for the first quarter of 2018?.

Yeah, to the best that we can tell right now, that’s a good guestimate. I mean we’re still we’ll call it, somewhat in the early days of going through the adjudication process and all the claims. So the numbers could move around a little bit.

As we get in to the fourth quarter, we’ll be able to tighten that up a little bit more for Q1, but that’s a good place holder for right now. .

And I know that the claims processing revenues you mentioned were from Harvey and Irma. But are you seeing any kind of indirect benefit from Mariah just in terms of the shortage of adjusters and any kind of demand in terms of that [indiscernible]. .

No, I would just say there’s already a demand here in the United States even prior to the effects of Mariah. So between Harvey and Irma there’s plenty of shortage. So no, I don’t think directly is a result of that. Maybe indirectly, but that’s it. .

We’ll go next to Elyse Greenspan with Wells Fargo..

My first question, I was just hoping on to get a little bit more colour on what you’re seeing on the organic growth within the retail segment. You pointed to the compensation program, working out in line with your expectations and Powell you also seem to point to a little bit better pricing environment and also some of exposure growth.

So how do you see the organic growth, the trajectory in the retail segment through the rest of this year and just any kind of initial colour in terms of 2018?.

Good morning Elyse and I have to say that this is the first time I think that you’re not our first question, so second today. So having said that, you know Elyse and I know this drives you crazy but we don’t give organic growth guidance. I would tell you that we were pleased with the quarter, as you’ve heard, and we are pleased with the year-to-date.

Right now I hear what everybody else is hearing out there about the market place and what people are speculating on. What people are speculating on and what the market will bear are two different things, until we start to see rate increases sticking I am guardedly optimistic or just guarded in regards to what that would do to our organic growth.

I do think that in certain coastal offices, where we write for example a lot of excess and surplus lines property particularly habitational in South Florida that it will help those individual offices. But they are part of the bigger pie and so you still have offices in Denver and Seattle and California that are riding in a normal market.

So, I haven’t answered your question exactly, I would say. We’ve always said that we think we’re a load of middle single digit organic growth business in a stable, steady state economy. And so I think the economy is pretty good.

I think that we’re seeing our clients thinking about it in a manner where they are making investments in their businesses, so that’s a positive. We’re seeing more construction, that’s a good thing. But if anybody is telling you they are getting ramped up for a hard market, I believe that’s a little premature. .

Okay, great. I appreciate the colour Powell.

And then in terms of – did you guys say how many shares did you repurchase under the ASR in the quarter?.

So we ended up purchasing back a total of about 968,000 shares I think was the exact number on it. Again just remember we did that mid-quarter Elyse. So we only got about half of the impact in the weighted share calculation. .

Are you seeing anything different in terms of the acquisition environment, whether pricing, just availability of deals that obviously deals flow, you guys have found a few deals, but has been still kind of a little bit late for you guys. .

Elyse what I would tell you is this; you have 26 firms out there that are short-term in nature. That means they are private equity backed and they are focused on a flip in three to five to seven years. And so that creates a lot of – people out there calling on businesses.

And those individuals that are going to be attracted to that model are typically different, not necessarily, but typically different than the people that are attracted to us, because as you know, we are a forever model. And so we look for firms that fit culturally and make sense financially.

I know that it’s hard and we’ve been this a lot over the years in the quarters previously, what to expect in terms of acquisitions and acquisitions with us are lumpy, as you know. So we’re always out talking to people and we may talk to somebody today that we do nothing with for five or seven years.

But at the end of the day, as you and I and others on this call have talked about, there are three things that you could say with absolute certainty about Brown & Brown as it relates to our acquisition strategy and execution. Number one, we do what we say and say what we do.

That means when we do due-diligence it’s not a license to renegotiate the actual contract, watch out private equity. Number two, we pay with cash, hard to argue with green backs. And number three, when we make a decision to do something, we giddy up and go.

So we can move probably as quickly or quicker than anybody else, because we in-house pretty much everything from legal to due-diligence to everything. So we think that’s a good thing and its positions us nicely.

But I know it can frustrate you and some of the other folks on this call because it’s not a predictable stream and if we could predict it, we would tell you that. So the answer is we can’t. And so I would tell you that I think there’s going to be a lot of change in the insurance distribution market space in the next three to seven years.

And we plan on being able to look at a bunch of that stuff, but I don’t know if we’ll do any of that stuff. It just depends, and I think that we will as it relates to those that fit culturally and make sense financially, but we don’t know when those will come available. So that’s kind of the story. .

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

First question is on the coastal property pricing. Powell you mentioned that this year the [indiscernible] impact had been anywhere between 2% to 15% in terms of year-over-year pricing change. I just wonder how much a drag on your organic growth.

Just trying to figure out is that rate becoming flat or up, what kind of like a tailwind could be to your organic growth?.

We haven’t figured out that exact drag number, but this is what I would tell you. There are certain offices back kind of what I said in Elyse’s question that write a lot of this business and it has been a drag in their office. But remember that’s not indicative of the entire organization.

So I’m cautious to say that it’s going to be a material amount in terms of let’s say in Q4 or Q1. We would say right now that flat is a positive for Brown & Brown, just a positive, doesn’t mean that we can tell you exactly how much organic growth that’s going to lead to.

But at the end of the day when you had down 15%, down 20%, down 15% or 20% or 25% over the three years, you kind of get to a point where you are like it can’t, it doesn’t seem logically that it could go down anymore. But like I said, there’s a lot of people that would like to move the market up and the question is will the market bear it.

We are not seeing that right now. So, admitted markets are pretty much flat and quite honestly the losses in a number of those are merely as bad in terms of number of claims as we spot. That means a lot of those claims the losses were underneath the deductible amounts.

So you could have an individual loss that was a large loss, but in terms of the number of losses that exceed the deductible has been less than what we thought. .

And what percentages of your revenues are related to Florida coastal properties?.

The answer is, we haven’t given that information out in the past. What I would tell you is, the revenue in Florida, total revenue last year was 184 million part of just over 900 million in retail.

So, like I said, as you know, I think the number is 90% of the total insured values are within one county of the coast in the state of Florida and the vast majority of our population as well. .

My next question is on the margin side. I hope you can walk us through with these three buckets in terms of Arrowhead retail incentive plan and what’s the IT spending for 2018.

What’s kind of the general trend there, are we still going to see similar level of drag on your margin or some of them could be levelled off or are there any other dynamics going down for the margins?.

Kai, its Andy here. So what we mentioned on the call I think previously. The way to think about retail, and you can see where the numbers are right now or they are impacting margins. And the commentary was the largest investment will be in 2017, less of an investment in ’18 and it breaks even in ’19.

So I hope that gives you the guidance you’re looking for. On the technology program, what we’ve said before is that we would be around full investment in ’17 and ’18 and then we start gaining the benefits of those investment programs and they start paying back in ’19 and ’20. .

What about the Arrowhead?.

So on Arrowhead, what we’ve said is, if we look back to the previous slide that we gave last quarter on there, we gave an idea of what we thought the backend of this year would look like. We said we would somewhere around $6 million to $8 million in revenue and we would have an investment of $1 million to $3 million.

And then next year, we said we should have somewhere around $15 million to $17 million in revenue and about $2 million to $4 million net investment in the P&L. Then similar to our comments that we’ll start to improve in ’18..

Or ’19..

We’ll improve in ’19 also, when our platform goes live in the backend of ’19 and then ’20 is when the margins actually really start to improve. .

We’ll go next to Josh Shanker with Deutsche Bank..

Two quick questions, one is on the contingent commissions.

Is the business changing in terms of how you derive your revenue? This is one small part here or do you expect going forward this is just going to be a different way that you guys make money?.

No, I don’t think that something is changing per say. And I’m going to address it kind of broadly. And retail as an example we have businesses that have been impacted by losses and we have that, but the biggest changes this quarter were in wholesale.

And so if you want to think at a macro level on wholesale, what you have is you have rates that are continuing to go down. So the rate online is less, and they’ve have more events not necessarily a hurricane, but things like hailstorms and tornados in places like Texas, Oklahoma, Arkansas, Missouri and very unusual odd events.

And so the combination of those two things Josh has dealt losses in that are not necessarily higher profile as what you all would see on CNN and the weather channel. And so that’s what’s happened. So we do think that that can come back over time. It is not that we think the model is dramatically changed, but it’s something that we think a lot about.

And obviously we think that there is a great alignment between us and our carrier partners with some type of profit sharing and at this time in the market with the rates way down and all kinds of losses all over the place including fires in California including things like that, all of that adds up to more aggregate losses for the industry than we have historically looked at.

I’ll give you an example, we were just at an industry event that occurs every year in the beginning of October. In the discussion the property combined ratio several of our large carrier partners talked about the industry that [105]. I didn’t know that, but that was pre-storms.

So you start to feather that in to like a large binding authority book of business and that’s how you see your profit sharing eroded. .

Makes sense. And in terms of – well you said, going in to the previous prepared remarks is that the higher organic growth is allowing you to improve your margins despite the lack of contingents helping out you.

Can you talk a little bit about the difference between 3% organic growth and 2% organic growth, and how it sorts of filters down in to the operation and helps you grow.

We view this 3% number for a while, but what does 3% mean versus 2%?.

Josh, Andy here. I know this is topic that comes up all the time this one. What’s that magic number that I think everyone is in search of? That says, boy if we hit that then there’s margin expansion.

And I think as we’ve talked about on previous calls is, we don’t believe that there is a magic number inside the business, because what can happen is depending upon on how we’re investing on a quarterly basis, the flow-through from revenues can go up or down.

So in a way to think about is, we’ve given what we believe is our medium term guidance on organic of that low to mid-single digit and we said that we should be able to run the business in a 33% to 35% EBITDAC range. So the combination of those two should be able to keep us right in there.

But again we can be up and down throughout, I think right now because we are going through some of the investments in a few of the areas, we’ll be a little bit below, but we know what those are.

And that’s why we made the commentary about we’re glad to see the flow-through this quarter, the margins, doesn’t mean that we are going to see that every quarter based up on the organic. Again it can go up and down a little bit. .

We’ll go next to Mark Dwelle with RBC Capital..

The first question relates to the guidance related to the flood servicing business. First I appreciate you giving us the guidance.

But the question I wanted to ask is, are you drawing revenues equally from both hurricane Irma and Harvey, or from ground perspective was this more of an Irma oriented level of earnings?.

No, it’s actually the opposite. So think of Harvey as a water even, flood, Irma as a wind event. That’s the best way to describe that. So it’s a more claims in Texas as a result of that. .

And Mark let me clarify, because a couple of people have asked us, where these show up. Again for clarity these revenues are going to show up inside our national programs. We will get a little bit inside our services, but not much. Just a reminder we sold our previous claims processing business for flood back in 2014, Colonial. .

I guess as a point of reference, how much revenues did you earn off of storm Sandy back in ’12? You just had Colonial then, right?.

Yeah we purchased it back in ’11. I wouldn’t try to use that as benchmark, you’re comparing an apple with an orange with what we have in the portfolio. And remember you haven’t. You got variabilities based on the amount of the loss as well. So the loss could be higher or lower in the northeast versus in a rural Texas community.

So there’s a lot variables in there. So it’s really hard to draw a parallel between one other even and this event. .

Are your servicing revenues mostly commercial or residential in nature?.

That’s in services. When you ask to question services, but if you go in to national programs and you go on to flood, that’s personal. .

That’s how I meant to ask the question, if I wasn’t clear. The servicing revenue is mostly personal or mostly commercial, that’s how I should have asked that. Thanks for that. The second question is just a brief clarification.

You mentioned the ASR in the quarter, is that most of the cash movement in the quarter? Andy is that the main driver in the quarter?.

That would probably be the largest item, and then we have our normal interest payment, dividends, the principle repayments on debt..

And the last one is just and Kai kind of already covered this to some extent. But within the EBITDAC walk you had the other item. And I took from your comments that that was primarily just cost saves not just but cost saves within the various business units.

Is that the right way to think about that, that there would be, whatever you have for these - the three main items, the three main drags that you’ve been highlighting for several quarters, then you have all your cost saving efforts that would be the counter to that. .

Mark, cost savings in the component of it. There’s also a piece in there as we talk about, which is just our ability to leverage our revenues. So, it’s a combination of those two. .

We’ll go next to Mark Hughes with SunTrust. .

How much opportunity is there in the third quarter for folks that would be enthusiastic about the five-for-five program and have a big finish to the year?.

I think that obviously there are people that are going to be on the bubble. They know if they’re on the bubble and we want them to get there. But I don’t want to give you some impression that there are some outlandish thing that‘s going to happen in the fourth quarter that we can anticipate.

We could see a lot of the people that are currently tracking towards it, and we are making the right, we recruit appropriately, but like I said, only time will tell. .

Right.

So probably a little extra energy in the fourth quarter?.

I think there’s a lot of energy. I don’t want to diminish the fact of energy although you talk about from a financial perspective. Quite the contrary, we have a lot of producers that are jacked up and that’s exactly what we want. We’re excited and to be able to earn our clients business and go out and ride a lot of new business.

So it is done what we wanted it to do Mark. Meaning if you’re talking about in the hearts and the minds of our team mates it is absolutely working. .

I’m just trying to gauge whether in the fourth quarter you would really see that coming to the floor as people would make sure they get over the lines. .

Mark I guess if you’re trying to make a parallel back to 2012, that probably would not be a good parallel. As we talked about on the previous calls, remember when we did that program, there were probably a lot of things that we learned about during that exercise that we try to incorporate in to this one and one of them was around communication.

And so we’ve been communicating every month with all of our team mates, where they stand and what their projection looks like. So there’s a constant push all year in order to get there. We do not expect this big fourth quarter jump that we saw back in the fourth quarter of 2012. We’d more than happy to take it.

Don’t get us wrong, but that would not be what we would be expecting. .

Andy you talked about the technology being full investment in ’17 and ’18, what’s the marginal impact would you say on ’18, if you’re already getting sort of 40 to 50 basis points this year? Is the margin impact negligible next year? You still have the 40 to 50 that you’re putting in to it, but year-over-year its more steady?.

Yeah, there’s still going to be some drag and Mark we’re still working through that right now as we’re going through budgets and everything else. We’d be in a better position to give that guidance at the end of year.

We wouldn’t want to give out a number yet until we worked through that one, but there will probably be some additional pressure next year. .

Mark the other thing is, as you know, the state of New York and the cyber regulations have put some demand on every organization that does business there that we are continuing to work through. So we think we have our hands around it and I believe we do, but there’s still a lot to get done. So that is going to impact us in to ’18 too..

But Powell when we think about the coastal property pricing, you’d mentioned the impact of reinsurance and maybe we’d know more later this year. Do you think the primary rates will parallel what happens in the reinsurance market to say at the Jan 01 renewals, that Florida doesn’t renew until June.

So how should we think about that when we see the reinsurance pricing is that a good tell for your property?.

No, I don’t think it doesn’t. I would not want you to get overly focused on reinsurance pricing. Here’s the way I would ask you to look at it. And I’m not a reinsurance broker so let met process this. Here’s what I understand and this is how I think this is going to play out.

As you know retrocessional reinsurance is reinsurance for reinsurance companies. They got pounded in the storm, and a lot of that is in London, but it’s all over the world. So the retro market got pounded. So that’s going to have to react or try to recoup. Then you have the reinsurance market, they got pounded.

And the reinsurance market, as you know, one of the most damaging ones was actually Mariah. So it’s like keep hitting you when you’re down in that market. And so let’s just say that the rates are – they try to get significant rate in reinsurance. It really depends on the primary carrier and what they’re trying to do.

If everybody’s cat reinsurance program came up at the same time, then I think that there could be a higher potential for rate increases that could stick. Having said that, I know of several carriers which remain nameless who already have their property programs placed prior to the storm.

So they’re going to operating from a positon of strength, not a position of weakness. So, I think there’s a lot of moving parts that go in to it, and I know that there are some people out there that are frothing, because they think this is going to drive the market up.

Like I said, I would rather create an expectation that we see flattening and we hear people talking about rate increases, but we’re not seeing any big rate increases sticking like, you might have heard, number one. And number two, really a lot of this change won’t happen until after the year.

And the question is on some of these primary carriers, how quickly can the insurance carrier get the message from the head to the foot on what they want to do in executing a pricing strategy or increase. So time will tell Mark and I wish I could be more definitive.

But I do know that the restaurant market and the reinsurance took some severe losses and it will be interesting to see how they react and thus the primary season how they react as well. They will not pass through dollar-for-dollar or per percent increases in to the primary market, it just won’t happen. .

And we’ll go next to Kai Pan with Morgan Stanley..

Thanks so much for a follow-up question. The first one is a number question.

You have a spike on your balance sheet on both reinsurance recoverable as well as loss reserves about $2 billion, is that related to the flooding claims?.

It is Kai. So you see there’s always parity on those. So as [WinFic] is an insurance company, so we report the potential claims on there and then put a receivable right back up for what is ceded back to FEMA. .

Just want to make sure you guys don’t have any basis risk in this claim adjustment. .

No, we do not. .

My second follow-up is on the upcoming accounting changes, the ASC 606. What’s the potential impact on your financial statements as well as quarterly, like a variability in terms of earnings report. .

We’re still working through that most of everybody in the market place. When our cue comes out, we will add some additional disclosures on that. We will probably not be in a position where we will size that up at the end of the third quarter.

So we’ll give an indication at the end of the year as to what it looks like, but we’re still going through, we don’t see any major movements right now. Probably we’ll be more through the quarters, but we’ve got to see exactly where we through. We got a lot of work that we are still buttoning down like everybody. .

We’ll go next to Mark Hughes with SunTrust. .

The expectation for 6 million to 8 million in the storm -related claims revenue, how much was there in fourth quarter of last year of that type of storm or claim revenue?.

We had about 3 million in the fourth quarter of last year. .

Is it 6 to 8 only from these storms or do you think 6 to 8 will be the total.

So the incremental will be kind of 3 to5?.

6 to 8 will probably be a total, that’s a good way to think about it. .

Okay.

And then the advocacy business anything to add there in terms of claims that you’re working on or your success in that business, just any more detail would be interesting?.

Not really Mark. I would just tell you that we continue to execute numbers those are Medicare satisfied and [social] security disability advocacy business, both of which are doing well, but nothing unusual or different. We just continue to execute for our clients. .

And at this time, there are no further questions. .

Jennifer, thank you very much. I wanted to end by making a couple of broad comments. Number one, I’ve lived in Florida for pretty much my entire life, and we have a hurricane here usually every 10 to 12 years. This time I would tell you, there was real fear in the hearts and minds of people in Florida.

The governor called an evacuation and a state of emergency very early on and I would commend him for his efforts. And he got a lot of people out of potentially harm’s way. We were also darn lucky that the storm moved at the last moment and went to the west coast of Florida.

If it had gone further west in the right northeast quadrant had scraped around the coast of west Florida it would have been worse. If it had come right in to Miami and scraped right up the eastern coast it would have been worse.

There are a lot of damages and we have a lot of customers that have incurred significant losses that we’re working on their behalf. But I say that because what we thought it could be and what it ultimately turned out to be was slightly different. In Houston, on the other hand, the amount of rain was just absolutely mind boggling.

And so the most important thing that I would tell you, when we started in this with all the storms is this, I can tell you that every single team mate in the affected area and their family members are safe. So in my mind that’s a huge win for our team.

So we have team mates that have trees through their roof and they are flooded and the answer is they have insurance or we’re working with them. But we can replace that. But we didn’t have any team mates or family members of team mate that were injured in all the storms.

So, I would say thank you all very much and we look forward to talking to you next quarter, and have a wonderful day. Thank you. .

This does conclude todays’ conference. We thank you for your participation..