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

Kai Pan - Morgan Stanley Elyse Greenspan - Wells Fargo Arash Soleimani - Keefe, Bruyette & Woods, Inc. Joshua Shanker - Deutsche Bank.

April, if you could please read the forward-looking statement..

Yes, thank you. Good morning, and welcome to the Brown & Brown Incorporated Fourth Quarter Earnings Call. Today’s call is being recorded.

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

Such statements reflect our current views with respect to future events, including those related to the company’s anticipated financial results for the fourth quarter and the full year of 2017, and are intended to fall within the Safe Harbor provisions of the securities laws.

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

Such factors include the company’s determination as it finalizes its financial results for the fourth quarter and the full year of 2017, and its financial results differ from the current preliminary unaudited numbers set forth for 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 the 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. In addition, there are certain non-GAAP financial measures used in the conference call.

A reconciliation for any non-GAAP financial measures to most comparable GAAP financial measure can be found in the company’s earnings press release or in the investors 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 conference over to Powell Brown, President and Chief Executive Officer. You may begin..

one, upgrading our systems the current versions; two, standardizing certain systems across the company such as having one agency management system for all of retail; three, reducing inefficient technology spend; and four, gaining better inside into our data, which we can use for the benefit of our teammates, customers and to grow our business.

I am really pleased with the progress of this initiative to date is large and it’s very important, we’ll continue to talk about it in the future. Let’s discuss the performance of our four divisions. From a retail perspective, we grew 4% organically for the quarter and 2.9% for the year.

We are really pleased with the fourth quarter and the full year performance, which represents continued improvement as compared to the full year organic growth of 1.9% in 2016 and 80 basis points in 2015. The growth for the year was driven by exposure unit expansion, new business, and higher retention levels.

With all the uncertainties in the health insurance market, our employee benefits businesses performed really well. With the first year completed of our retail performance incentive plan, we considered to be a success.

We have more commission producers on the team and our commission books of business grew more than last year, these were all goals of the program. We do believe some of the increased performance in the fourth quarter related to producers striving to attain their full year target.

From an expense standpoint, we’re in line with our expectations for the first full year. As a reminder, this is a multi-year program, therefore all targets are reset on 1/1, and each producer needs to grow at least 5% in 2018 in order to earn the incremental incentive for this year.

National Programs as you know, is where we underwrite on behalf of carrier partners for specific classes of business both large and small across the country and distribute product through a broad retail agent network.

Several examples of our over 40 programs include writing AAA construction that’s superior construction on condominiums in Dade Broward and Palm Beach County, flood coverage in flood zones, professional liability for dentists, and earthquake on commercial and residential buildings, just to name a few.

The National Programs Division delivered strong results with 20.1% organic revenue growth, primarily as a result of incremental claims processing revenue associated with Hurricanes Harvey and Irma, and our new Arrowhead Core Commercial program.

We’ve realized approximately $22 million of claims processing revenue associated with these events as compared to the $6 million to $8 million that we mentioned in the third quarter earnings call. During the quarter, claims closed materially quicker and at a higher value than anticipated, resulting in more revenue this quarter.

During the quarter, we also recognized about $4 million of revenue associated with our Core Commercial program. We continue to be pleased with the performance of this program, and it’s in line with our expectations and estimates we shared during our Q2 earnings call. As a reminder, we are in the investment phase.

And as a result, there will be an impact on our margins due to Core Commercial through 2019. During the quarter, our DIC programs or difference in condition programs performed very well.

The combination of these programs along with the claims processing revenues and the core commercial program more than offset the loss in revenue associated with carrier changes for other programs we discussed in previous calls. Our wholesale segment primarily accesses non-admitted markets on behalf of retail agents.

Think of accounts that typically would not be written by standard admitted companies. These accounts in this market range from big to small, loss-written or loss-free, and can be unusual or unique in nature. Our wholesale business delivered excellent results for another quarter, growing organically 6.9%, driven by strong new business.

This growth was realized across almost all lines of coverage. Finally, our services division is comprised mainly of claims processing businesses that work on behalf of private or public entities as well as our carrier partners and are supportive or complementary to our National Programs Division.

The services division grew 11.8% this quarter, partially driven by claims processing revenues associated with Hurricane Harvey and Irma, along with increased new business across the division. In summary, we’re pleased with the performance of four divisions for the quarter and the full year.

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

Great, thank you, Powell, and good morning, everyone. I’m over on Slide #7. This presents our GAAP and certain non-GAAP financial highlights. For the fourth quarter, we delivered total revenue growth of 9.4% and organic growth of 9.3%, which benefitted 4.3 percentage points from the claims processing revenues that Powell discussed earlier.

Excluding these revenues, our organic growth was 5% for the quarter. Our income before income tax increased by 11.9%, and our diluted earnings per share increased by 222% to $1.32 versus $0.41 in the fourth quarter of last year.

As Powell mentioned, as part of the Tax Reform Act, we had to revalue our federal deferred tax liabilities down by approximately $123 million, and also, recorded a repatriation tax of approximately $3 million. These two combined resulted in the $0.85 benefit. We’ll discuss our expectation for 2018 effective tax rate later in the presentation.

The effective tax rate for the fourth quarter, excluding the $0.85 benefit was 37.4%, which is slightly below recent quarters due to a couple of onetime discrete items along with the true-up of taxes associated with yearend state tax apportionment.

Our weighted average number of shares outstanding was substantially flat as a result of our $75 million accelerated share repurchase program that we initiated during the fourth quarter. In a few slides, we’re going to walk through the primary drivers of our EBITDAC margins. Moving on, Slide #8.

This slide presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the fourth quarter of each year and the impact of the Tax Reform Act in the fourth quarter of 2017.

Since these items are either non-cash and the earn-out payables can fluctuate by quarter, we believe it is helpful to evaluate the business excluding these adjustments. For the quarter, our adjusted income before income tax increased by 10%, and our EBITDAC increased by 6.7%.

The difference in growth rates was driven by lower interest expense, as we’ve been paying down our outstanding debt. Our adjusted net income grew by 13.7%, driven by the lower effective tax rate for the quarter, excluding the impacts of tax reform.

On an adjusted basis our earnings per share was $0.47, as compared to $0.42 in the prior year, growing by almost 12%. Moving over, Slide #9. We’ll walk through the key components of our revenue performance. For the quarter, we had no material movements in investment income or other income.

As expected, we experienced a decrease in contingent commissions and guaranteed supplemental commissions continuing the trend we have seen recently. Reductions are due to decrease profitability of our carrier partners caused by lower premium rates, the hurricanes and the California fires during 2017.

Our total core commissions and these increased by 9.8% year-over-year, when we isolate the net impact of our M&A activity, our organic revenue growth was 9.3%, driven by solid growth in all divisions along with claims processing revenues primarily recognized in our National Programs Division.

Over to Slide #10, similar to previous quarters, we thought it’d be beneficial to include a walk of our quarterly EBITDAC margins from last quarter to this year and highlight the main drivers.

As discussed during our Q2 earnings call, the Core Commercial program will initially be dilutive to margins as we invest in building our platform and we’ll also incur transition services cost. The investment this quarter impacted our margin by approximately 30 basis points, which is in line with our expectations.

As a reminder, once our platform is in production by the end of 2019, we expect the EBITDAC margins for this program will increase and will be similar to the rest of our National Programs Division. Our retail performance incentive plan impacted margins by approximately 60 basis points, which is slightly higher than the first three quarters of 2017.

We view this increase as a positive, as our producers pushed hard to drive more organic growth during the quarter to earn their performance incentive. As a reminder, we anticipate this program will impact on margins the most in 2017, less in 2018 than will breakeven in 2019.

For the current quarter, the impact of our investment in technology was about 70 basis points, which is higher than previous quarters. This was driven by an acceleration of the phase of implementation associated with certain initiatives. Overall, there has not been a material change in the total estimated spend associated with our IT initiatives.

Later in the presentation, we’ll provide an update on the status of this program. The incremental effect of the year-over-year change in the net gain on disposals of certain businesses and books of businesses contributed about 40 basis points to our margin for the quarter. As a reminder, the prior year includes a net loss on disposal of $1.8 million.

The remainder of the business contributed 50 basis points on margin expansion, which benefitted from the incremental claims processing revenue associated weather events, continued leveraging of our revenues, disciplined expense management across all divisions and with additional earn-out expenses - or additional earned expenses for certain bonus plans due to stronger performance during 2017.

Moving over to Slide #11, looking at the performance of each of the divisions a little more closely, we’re going to start with retail. For the fourth quarter, our retail division delivered total revenue growth of 3.9% and 4% organic revenue growth driven substantially by all lines of business.

For the quarter, our EBITDAC margin was down 280 basis points and was driven by a non-cash stock based compensation credit in the prior year, which benefited the margin last year by 120 basis points.

Our producer incentive plan which impacted margin for the current year by 120 basis points and the investment to upgrade our agency management systems was 50 basis points margin impact this quarter.

Our income before income tax margin decreased by 20 basis points for the quarter, substantially offsetting the EBITDAC drivers noted above were lower acquisition earn-outs and intercompany interest. Over to Slide #12, for the quarter total revenues for our National Programs Division increased by 19.3% and 20.1% organically.

I discussed earlier organic revenue was higher than we anticipated for the quarter, as we realized approximately $22 million of claims processing revenue associated with Hurricanes Harvey and Irma as compared to $3 million that we’ve recognized in the prior year. Isolating this year-over-year impact, our organic growth rate was 2.9% for the quarter.

Our EBITDAC grew by almost 35% due to the higher than average margins for claims processing, continued leveraging of our revenues and expense management. During the quarter, we had a small net investment and our Core Commercial program, which is in line with our expectations and what we previously communicated in the second quarter of last year.

For the quarter, our income before income tax increased 79% impacted by the EBITDAC drivers we just mentioned as well as lower intercompany interest expense.

Due to the quarterly volatility in the National Programs’ EBITDAC margin, we wanted to provide guidance for 2018, which we would estimate to be in the range of 33% to 35%, due to lower expected contingence, lower claims revenues and the full year impact of the investment in our Core Commercial program.

As it relates to claims processing revenues, we had provided guidance that we expected $6 million to $8 million of revenue in the first quarter of 2018.

Due to realizing more revenue in the fourth quarter of last year, we now estimate the remaining claims processing revenues to be in the range of $2 million to $3 million, as substantially all claims have been closed. Moving over to Slide #13. The wholesale division delivered total revenue growth of 8.1% and organic revenue growth of 6.9%.

Organic revenue growth is the result of increased new business. Our EBITDAC increased by 12% for the quarter. The increase is attributable to leveraging our organic revenue, continued control of expenses and improvement in the EBITDAC margin of our 2016 acquisitions.

There was no material difference in the growth of income before income tax as compared to EBITDAC. Over to Slide #14, the services division grew revenues 11.7% versus the prior year. This growth was driven by increased new business across most of our operations and claims processing revenue associated with Hurricane Irma and Harvey.

For the quarter, our EBITDAC increased 27% as a result of revenue growth and leveraging our expense base. Our income before income tax increased by 25%, impacted by the EBITDAC drivers and partially offset by a credit in the prior year for the change in acquisition earn-outs.

Moving over to Slide #15, this presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the 12 months of each year. For the full year of 2017, it was adjusted for the legal settlement we had in the first quarter and the onetime impact of Tax Reform.

2016 was adjusted for the impact of adopting ASU 2016-09, which changed the treatment of the tax benefit associated with stock incentive plans. Since these items are non-cash or non-recurring, they can increase or decrease by year. And we believe it’s helpful to evaluate the business excluding these adjustments.

For the year, our total revenues grew 5.4%. Our adjusted EBITDAC grew 1.2% due to lower contingence and guaranteed supplemental commissions, investments in technology, our retail producer incentive program and the Core Commercial program, which substantially offset margin expansion across many of our businesses.

Our adjusted income before income tax margin grew slightly faster than adjusted EBITDAC, due to lower interest expenses we’ve been paying down outstanding debt. Our adjusted net income grew by 3.2%, due to a 1% lower effective tax rate. Our adjusted earnings per share increased by $0.05 or 2.7% to a $1.92 as compared to the prior year.

For the full year, we are able to maintain our outstanding share count, substantially in line with the prior year. Each year we seek to minimize the dilutive effect of our equity incentive plans through periodic stock repurchases. Moving over to Slide #16, this presents the key components of our full year revenue performance.

For the year, we had no material movements in investment income. And the change in other income was associated with the $20 million legal settlement we had in the first quarter of 2017.

As we’ve been discussing throughout the year, our expectation was that our contingent commissions would be more than likely decreased due to continued losses and lower premium rates that are shrinking profitability for the risk-bearers.

For the year, our combined contingent commissions and GSCs were almost $3 million lower as compared to the prior year. Based upon the trend during 2017 and the losses experienced as a result of Hurricanes Harvey and Irma, and the California fires, we anticipate a further decline in 2018 of $6 million to $8 million.

Our total core commissions and fees increased by 5.7% year-over-year. When we isolate the net impact of M&A activity, our organic revenue growth was 4.4% for the year driven by growth in all four divisions. Moving over to Slide #17.

As we’ve been disclosing our quarterly filings, effective January 1 of this year, the FASB has instituted several new rules that will impact the recognition of revenue and expenses throughout 2018 and beyond. This slide provides our estimate of the effect on each quarter as well as the full year.

The biggest changes relate to recognizing revenues for contingent commission and commissions on employee benefits and workers’ compensation. Contingent commissions were now be estimated and recognized pro rata during the year. We will then true-up the accruals in the following year, when cash is received.

Our previous practice was to recognized contingent commissions, when the cash was received. For employee benefits and workers’ compensation we will now recognize a larger portion of this revenue upon binding of coverage rather than our previous practice recognizing the revenue when billed.

For the full year, we estimate the effect on revenue to be minimal, but the impacts per quarter to be material. The primary impact is within the retail segment with the exception of contingent commissions. From an expense standpoint, we’ll now recognize producer compensation when coverage has bound.

Our previous practice was to recognize commission expense throughout the year, when premiums were invoiced. We will also need to defer a portion of our commissions our new business with the deferral primarily impacting our retail segment.

As a result, our EBITDAC margin will benefit slightly from this cost deferral in 2018, then commission expense will increase over 15 year period as the annual deferral is amortized. We estimate the net deferral of expenses for 2018 to be approximately $4 million to $8 million.

Moving over to Slide #18, this presents the impact upon our 2017 effective tax rate and a walk to our estimated effective tax rate for 2018. The primary impacts for 2017 are the estimated reevaluation of our deferred tax liabilities and the deemed repatriation tax. These items represent the $0.85 benefit for the fourth quarter.

For 2018, our federal tax rate will decrease to 21% but will be partially offset by the lower federal benefit of state tax deductions. As part of the new tax bill, all compensation over $1 million for a company’s CEO, CFO and the next three highest-paid Section 16 officers, will now be non-deductible.

In addition, certain entertainment expenses will now become non-deductible. We estimate these two items will increase our full year rate by approximately 2%. Including all these changes, we anticipate our full year 2018 effective tax rate will be in the range of 27% to 28%.

The lower tax rate will result in tax savings of approximately $45 million to $50 million per year and will further increase our operating cash to revenue conversion ratio. We’re going to move over to Slide #19.

Now that we’re well underway with our technology investment program, we wanted to provide an update on the status of the initiatives, the spend-to-date and the outlook for the program. We’ve already completed certain deliverables and have others underway, which are in line with expectation.

The investment phase started slightly slower than anticipated in 2016, but the momentum increased during 2017. We expect the level of investment in 2018 to be commensurate with 2017, and then we will start to realize savings on the program in 2019.

Then each year thereafter, we will realize additional savings in order to recapture the impact to our margins. We anticipate margins to breakeven around 2021 and to have a slight upside versus our starting baseline margin. In summary, we are on track with the estimated cost of the program and expected returns. A couple of additional comments.

We wanted to mention that we are actively discussing the timing of our quarterly earnings release.

In an effort to align the timing of our first three quarters earnings release and to be consistent with the timing of our year end release, we will move all earnings release dates to the fourth Monday of the month and will seek to file our 10-Qs closer to the earnings release date.

When you get ready to start updating your models for 2018, keep in mind that we anticipate a further reduction on our estimated contingent commissions and GSCs in 2018 due to the large losses associated with hurricanes and the California fires experienced in 2017.

As a reminder, for the full year, we estimate the contingents and GSCs could be down between $6 million to $8 million from what we experienced in 2017. We expect to see this reduction in all divisions. However, the largest effect will be within our wholesale and programs division. With that, let me turn it back over to Powell for closing comments..

Thanks, Andy, great report. In closing, we were very pleased with the performance for the fourth quarter and specifically for the full year. As we anticipated, rate increases for cat properties seem muted now by the existence of fresh capital seeking higher returns.

However, having property rates flat to up 5% is a nice improvement over the past couple of years. On the acquisition front, we only closed 11 transactions with $17 million of annualized revenue in 2017. While we looked at many potential acquisitions, we would like to have closed more.

However, I am very comfortable with our approach to analyzing and assessing potential acquisition candidates for cultural fit and financial returns. Our goal is to more than cover our cost of capital and appropriate period of time based on the strategic nature of the acquisition.

As you know, we attract business owners that see the benefit of joining a larger organization that will provide them the opportunity to maximize our collective capabilities and enhance their entrepreneurial spirit. With 28 or so private equity firms trying to put their capital to work, the space is crowded.

As many of you know, 60%-plus of all deals done last year were done by private equity, and we don’t expect this trend to change much in 2018. However, we believe there are still a number of firms out there that fit culturally and make sense financially for us. It’s now just a matter of timing.

As mentioned earlier, our technology initiatives are to upgrade and standardize certain platforms across the company and specifically within our retail segment. These programs will give us platforms to support our growth and profitability in the future as well as to help us improve the experience for our teammates.

As a reminder, we are a decentralized sales and service organization, and we are standardizing some support functions with the goal of benefiting our teammates, our customers, and engaging deeper with our carrier partners. Today, we are leveraging our data better to win more new business and create new products to the benefit of our customers.

As it relates to additional money from tax reform that we’ll be able to invest, we’re focused upon current and future teammates, innovation both in technology and beyond as well as M&A. Our goal each year is to deploy as much capital as we can that will generate appropriate returns for shareholders.

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

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

Thank you and good morning. And thank you so much for the comprehensive review of - especially on tax and the accounting changes. My first question is on the margins going forward. If you look at the different components, that the IT investment, the incremental margin impact probably will be minimal in 2018.

And the 5 for 5 programs, the margin impact should be less than 2017.

And I just wonder if you see that your organic growth now accelerating, will we see overall margin expansion in 2018?.

Well, remember, Kai, Number one, we don’t give organic growth guidance. And so, as you know, we have been consistent in saying that, we believe that it is a low- to mid-single-digit organic growth business in a steady-state economy. That’s number one.

Number two, we’ve outlined several things that we are doing, technology being one, 5 for 5 being another, and other things that we’re investing in the future. And so, we’ve tried to give an indication of sort of where we thought the margin or where we are.

But we are looking to, obviously, improve that, but we’re making investments right now that would in the near term, as you saw this year, impact that.

Fair enough, Andy?.

And I think, Kai, the other two areas to maybe keep in mind is, with the decline in claims processing revenue associated with storms, that will have an impact on the margins year-over-year. And then, dependent upon exactly where we turn out on contingents and GSCs, our estimate is $6 million to $8 million down that will have some pressure there.

But the rest of the business, we’re very focused on getting the best flow-through that we can..

Okay. That’s great. Then my second question, the tax rate. You mentioned that the tax benefit is going to be about $45 million to $50 million per year.

And how much of that are going to flow through the bottom line versus reinvest in the business or sort of lower price for your customers?.

one, being invested in current and future teammates; two, in innovation; and three, in M&A. And so we are continuing to evaluate that as we speak, Kai..

Okay..

And, Kai, the reason we also look at it is, that basically it increases our cash flow from operations by about 10%. And we never view that we were in a situation where we didn’t have the appropriate capital to fund the business as so needed in the past..

Okay. And then my last one if I may. On the acquisition front, you mentioned lot of competition.

And do you think that, do you - do you see that dynamic change in the marketplace?.

Not in the near-term. I don’t, Kai. I think that it’s going to continue to be competitive. And so, there’s a lot of people with financial backgrounds that are buying businesses, they’re not - many of them are not insurance people. And so, they’ve got their own view on it. And that’s typically a short-term time horizon, 3 to 5 to 7 years.

And we’re playing for the long game, so it’s different, but it is - they’re closing a lot of deals, a number of them are..

Right, thank you so much for all the answers..

Thanks, Kai..

Thank you. Have a good day..

We will take our next question from Elyse Greenspan from Wells Fargo. Please go ahead..

Hi, good morning. My first question, if I back out the storm-related revenue in the quarter, it seems like your organic was running around 4%. Is that kind of how you see it? And I guess, I would like to make that a two-part question.

You guys mentioned that maybe some producers were driving for growth in the fourth quarter towards that retail comp program. Do you think that we might see a sequential slowdown because of that? I know you don’t give guidance, but just some kind of color on the growth outlook just in context of the pickup you saw in the fourth quarter..

Okay. Elyse, let me see - I’ll tackle your first one pretty quickly. As we mentioned in our comments, we said that the total organic was 9.3% for the quarter. And if you isolate the flood impact, it’s about 430 basis points. So underlying is about 5% organic growth. Okay..

All right. So, Elyse, your second question, the answer to the question to me right now is, we don’t know. And you could say, well, the only experience we’ve had with this before, it was only a one-year or one-half-year program. This is an ongoing program.

And so, I think that we - everybody is equally as motivated on January 23 of [indiscernible] business, 5% or more, than they were in the fourth quarter of 2017. And so they just have more months to hit the bell. And so, we don’t know actually. But I would say that, we feel good about the results on 5 for 5 for 2017.

We believe that 5 for 5 will continue to drive desired outcomes and behaviors in the organization in 2018 and beyond. But we just don’t know to be specific on your question..

And, Elyse, we mentioned this on a couple of previous calls and we would just reiterate it now. The program is performing almost right in line with exactly what we expected on kind of estimated top-line contribution as well as the investment side. So there’s no real deviation to it..

Okay, great.

And then, in terms of the retail comp-program is it correct that we should expect the impact on margins to be lower in 2018 than 2017?.

Slightly..

Okay.

And then in terms of the tax impact, the entertainment deduction that you guys called out that is going away, what kind of entertainment falls in that bucket that you are no longer going to be able to deduct under the new tax legislation?.

Yes, this is still a gray area as it relates to the IRS and when working through these pieces. They’re supposed to come out in sometimes around the middle of March with additional guidance.

But at least the areas that had at least been talked about right now, Elyse, is anything from sports tickets, golf, your country clubs that could be out there, any sort of events that you go to. So again, as backdrop, it is traditionally meals and entertainment were already 50% non-deductible.

So what we really did for simplicity is we just took the other 50%. And we’re going to wait until we see additional guidance from the IRS exactly what they’ve included in there..

Okay, great.

And then my last question on the tech-related investment, so it seems like the right way to think about this that you are seeing more of a margin hit, say, at the end of 2017 and maybe into 2018, but overall that’s why maybe less of a hit in the later years and that’s why the total potential investment has not changed?.

That is correct, yes. So if you look back what we presented on Slide 19, and hopefully this graph helps with everybody, is we were a little bit slower starting the programs than originally anticipated but not unusual for all of these. And as we kind of continued on through 2017, we picked up momentum.

We think, we are at kind of full spend right now, so the impact between 2017 and 2018 will be de minimis. Then what happens in 2019, 2020 and thereafter is we start gaining the benefits or the synergies out of the program. That’s how we capture our margin back and brings us back up to our original baseline..

Okay.

So no - so there shouldn’t be an impact on margins in 2018 that’s what you just said?.

Correct. Yes. We would not - on a full year, we would not expect a margin impact versus 2017. There might be a little bit in the first half of the year, but then we start our way back out of this..

Okay, great. Thank you very much. I appreciate the color..

Have a good day..

And we’ll take our next question from Arash Soleimani from KBW. Please go ahead..

Thanks. On the weather-related claims processing, I know you said that should be $2 million to $3 million now in 1Q 2018.

So just to clarify, is the $2 million to $3 million higher year-over-year? Or would it imply that it should be about flat year-over-year?.

Yes. It will be around flat year-over-year..

Okay. Thanks. And….

Thank you..

Yes - and can you - have you disclosed like what are the actual margins on the claims processing revenues? Is it basically pure margin?.

The answer to the question is no. But it is better than the division average..

Yes. The reason why we don’t disclose it, Arash, is it all depends upon the storm and the nature of the claims. They definitely move around based upon complexity..

Okay. Thanks. And the $4 million to $8 million of expense benefit you mentioned in 2018 from the revenue recognition changes. Is that - so did you say that $4 million to $8 million in 2018 will then subsequently reverse? Just want to make sure I understood that correctly..

Yes, exactly. So we’ll defer it in 2018, then what we’ll do is we’re going to take 1/15 each year and amortize it back into the P&L. And so the 15 years matches with our estimated useful life of our customers, which we disclose in our 10-K every year..

Okay. Thanks.

And just my final question, when you mentioned that part of the tax savings could be deployed into innovation, what exactly do you mean by that, just to give some more color?.

We’re talking about it right now. And if we told you, it wouldn’t be a secret. And once we figure it out, we’ll tell everybody..

Okay. Fair enough. Thank you for the color..

I am not trying to be funny. I’m just saying that we are evaluating all kinds of things in that space with our senior leadership team as we speak, so more color on that in the future..

Okay, great. Thank you very much..

[Operator Instructions] We’ll take our next question from Josh Shanker from Deutsche Bank. Please go ahead..

Yeah, good morning, everyone. Congratulations on a great quarter..

Thanks..

Good morning..

I appreciate it..

I was looking at the updated information technology spend plan. Andy, I know this is like right in your wheelhouse; you’ve done a whole career. As you push this out, I think about technology, it changes quickly.

As we get out to 2020, 2021, is there another technology update coming? I mean, what is being finished look like? And, how do you know that you can put a fine point on and say this is the end?.

Yeah, so lot of this, Josh, is about doing a lot of our core infrastructure. And it doesn’t mean that we won’t have some refreshes like all companies out there in out years. But this is to catch up on a few areas, such as - look, we had way too many data centers running. We just need to shut them down and we need to get ourselves down to two or three.

We wouldn’t see a reason why we would need to do that again in the future, building some of our core network, again, it’s not something that you would do over time. Generally, we’ll probably have some actual infrastructure or some technology refresh, but a lot of that is CapEx. So we don’t see that as - go ahead..

And between now and then three months ago, what was the incremental sort of decision making that went? Did you try to take on another project or just became more expensive? Or like what was the process in extending this out?.

No, I think the only process in extending out is in - this is why we’re trying to give the update is, as we got through these things and just looking at them, sometimes they just take longer to get done than anticipated. Our total spend is not going to be different. But we think it might take about another year.

And it’s really around just doing all the conversions within retail and upgrading on the agency management system. We’ll be probably doing anywhere from $25 million to $40 million per year. So you just kind of run that out. That’s going to take about three years to get through..

Hey, Josh, I’d like to make one other point, and I know you’re very familiar with this. But in terms of the Department of Financial Services in New York and compliance with Cyber, we as - and many other companies that do businesses in the State of New York, are having to attest. Our CIO will attest next month for the first part.

And then we got another thing to attest to a year from February of 2019. So that has been big on this list, too. So that doesn’t mean we weren’t going to be doing these things, some of these things. But some of that spend has been accelerated because of that need..

Well, that makes perfect sense. Thank you. And I just want to follow-up on Kai’s question about private equity, and deal pipeline and whatnot. I mean, I’m not a tax pro. From what I understand, and maybe it’s incorrect, it seem like that the tax law is going to benefit you relative to private equity in trying to make these deals.

Is there any truth in that? Or, you know, I mean can you help give us your outlook kind of what the tax plan does for strategic buyers as opposed to financial buyers?.

I’m going to give you the just gut response as opposed to the technical response. And what I think it is, is this. At the end of the day, I think many of us think of private equity in the truest sense of seeking a 20% return annually. They put things out and it says 20% IRR and this and then blah, blah, blah.

Well, in reality, that’s not happening in my mind. They are pricing deals at things that - or seeking returns of maybe 12% or 14%. And so, the answer to the question is, when you have new money in the market, with people that may not know about the insurance business, then they’re going to make some decisions to do some things that we wouldn’t do.

And that’s not a criticism. It’s an observation. And so, I look at it this way. Could there be some benefits? Yeah, possibly. But, the gut instinct is this. If private equity wants to pay a big ugly number for a business, they will do it. And they have to be accountable to their investors over time.

But I can assure you that if you think that their expectations for returns are the 20% that they’ve always said, that is absolutely not what we’re seeing in terms of the way they’re pricing their deals out there. So I don’t get uptight about it. I would say that we looked at a number of transactions last year.

And, there were several that we would like to have done, that the chemistry was good. But some - in those instances, somebody else was willing to overlook something. And we weren’t willing to overlook that. And so, that’s okay. Remember, we’re doing this forever. They’re thinking about it just to flip it.

And so, we’re thinking about our teammates, our customers, our carrier partners, our shareholders. And so, we’re all very focused on looking at numbers of acquisitions.

But there’s lots of business brokers out there calling on agents, basically saying, we can get you a lot of money for your business and the prices are at an all-time high, you ought to look at it. So that sparked some conversations that maybe heretofore two or three years ago wouldn’t have occurred..

Well, thank you for the details and good luck in 2018..

Thanks, Josh..

Thank you..

That concludes today’s question-and-answer session Mr. Brown. At this time, I’d like to turn the conference back to you for any additional or closing remarks..

Thank you, April. We want to wish everybody a happy New Year. And we appreciate your time and look forward to talking to you at the end of our Q1. Have a nice day. Thank you..

This concludes today’s presentation. We thank you for your participation. You may now disconnect..