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

Elyse Greenspan - Wells Fargo Arash Soleimani - KBW Kai Pan - Morgan Stanley Mark Hughes - SunTrust Josh Shanker - Deutsche Bank Adam Klauber - William Blair Mike Zirinsky - Credit Suisse.

Good morning, ladies and gentlemen, and welcome to the Brown & Brown Incorporated 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 first 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 first quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday, other factors that the Company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the Company’s reports filed with the Securities and Exchange Commission.

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

We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call.

A reconciliation of any non-GAAP financial measures to the 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, it’s now my pleasure to turn the call over to Mr. Powell Brown, President and Chief Executive Officer..

Thank you, Debby, and good morning, everyone. Thanks for joining us for our first quarter 2018 earnings call. I am on slide four. For the quarter, we delivered $501.5 million of revenue, growing 7.8% in total and 5.7% organically with the latter excluding the impact of adopting the new revenue recognition standards.

For convenience, during this call, we will refer to this adoption of the new standard, simply as the new revenue standard. Our EBITDAC margin was 31.2%, which is down a 160 basis points. The decline was driven by the gain from the legal settlement received in the first quarter of last year.

Later in the presentation, we’ll discuss the movements of our margin in more detail. Our net income per share for the first quarter of 2018 increased to $0.32 from $0.25 in the first quarter of ‘17, driven by the impact of the new revenue standard and the ongoing benefit from federal income tax reform.

Our net income per share excluding the change in acquisition earn-out payables was $0.33 for the first quarter, increasing 50% as compared to the first quarter of last year. Finally, we completed acquisitions with annual revenues of approximately $9.5 million during the quarter.

We’re pleased with the top and the bottom line results for the quarter and have really good momentum across the Company. Later in the presentation, Andy will discuss in more detail our results, excluding the impact of the new revenue standard. I’m on slide five.

Before we get into the results for the quarter by segment, I wanted to make some broad comments about the economy and rates. From an economic standpoint, we continue to see expansion across most geographies and industries. Customers feel better about their prospects going forward, and are investing in their businesses.

Construction projects, big and small are popping up in most communities around the country and companies are hiring. The next topic obviously is rates. As we’ve mentioned over the last couple of calls, we were cautious regarding how much rates would increase on the heels of the weather related events last year.

We have seen a very modest impact to rates. They are generally flat to up slightly, excluding automobile in some coastal property. The main area of interest -- I know you’ll ask questions around coastal property, earlier in the quarter we were seeing rate increases of 5% to 15%. That’s highly dependent on loss experience.

And as the quarter continued, rate increases were more in the 3% to 7% range. Loss free accounts were at the low end of that or even reductions. While those properties sustained losses, could be in the high single digits to low double digits or higher, depending on the damages sustained.

At the end of the day, there is still a tremendous amount of capital in the market chasing a finite number of risks. We would not be surprised to see rates moderate downward a bit further during the second quarter and in the storm season this summer.

Retaining the other lines of coverage, commercial and personal auto continued to increase the most with rates moving up in the 5% to 10% range. Many of the carriers’ auto books are running hot and they have been trying to close the gap with rate increases. Professional liability and general liability rates were mixed but essentially flat.

Rate increases from employee benefits continued to rise with small group under 50 typically seeing the highest rate increases of 5% to 15% and then as the group sizes increase, premium rates have moderated with the increases in the range of 2% to 5%. Obviously, this is all dependent on loss experience.

From a technology investment standpoint, we continue to make good progress and our programs are on plan.

As a reminder, our investment in technology -- investments in technology are a combination of one, standardizing certain systems across the Company such as having one agency management system for all of the retail segment; two, upgrading our core infrastructure to current version; three, reducing inefficient technology spend; and four, continuing to gain better insight into our data across the Company that we can use for the benefit of our customers and our teammates, ultimately to grow our business even faster.

I am very pleased with the progress of our team who are putting a great deal of time and effort into implementing these important initiatives. I’m on slide six. So, let’s talk about the performance of our four segments. From a retail segment perspective, we grew 2% organically for the quarter.

Last year in the first quarter, you may remember, after calling out for timing, we grew 3% organically. We had some sales that didn’t come to fruition in the quarter within our employee benefits businesses. We believe these should close later in the year. We did realize improved year-over-year performance within our commercial line of business.

Our national programs segment had a great quarter, growing 12.5% organically.

This was driven by several programs including growth in our core commercial program, additional revenue related to processing the final hurricane claims from last year, increased sales activity in commercial and personal earthquake, growth in our all risk program and continued momentum in our lender-placed business.

Regarding our core commercial program. We recognized about $4 million of revenue this quarter. We’re pleased with the operational and financial performance of this program. It’s in line with our expectations, which we shared during our second quarter 2017 earnings call.

I would like to recognize our team for doing a great job in transitioning this program from one of our carrier partners. As a reminder, we’re in the investment phase; and as a result, there will be an impact on margins in 2018, with the most significant impact in the first half of this year.

We expect margin expansion in the second half of this year as compared to ‘17 and that should continue into 2019. For the quarter, we realized approximately $3 million of claims processing revenues associated with the 2017 storm events. At the end of the quarter, we closed substantially all of the claims from last year.

Our wholesale brokerage segment delivered solid organic revenue growth of 6.1% for the quarter. We realized growth in both our binding authority and transactional brokerage businesses, as well as across most lines of coverage, industries and geographies.

Rates across most lines are flat to up slightly with cat property generally 3% to 7% up, depending on loss experience. As I said earlier, we’ve seen them down and we’ve seen them in the double digits, depending on loss experience. Our services segment had great results with 8.3% organic revenue growth for the quarter.

This was driven by many of our businesses that won new customers and expanded relationships with existing customers. We realized growth in our claims advocacy businesses as well as our claims management businesses. In summary, we are pleased with the performance of our business for the quarter.

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

Thank you, Powell. Good morning, everyone. On the following slides, we’re going to present our GAAP results, then our adjusted results excluding the impacts of acquisition earn-outs and one-time items, and then we’re going to exclude the impact of the new revenue standard including for the calculation of organic growth.

We believe this presentation will help in the understanding of our underlying performance year-on-year. We plan to use this format for the remainder of 2018; then in 2019, we will be on a comparative basis. Moving on slide number seven, this presents our GAAP and certain non-GAAP financial highlights.

For the first quarter, we delivered total revenue growth of 7.8% and organic growth of 5.7%, driven by organic growth in all four segments.

Our income before income tax, increased by 6.7%; our EBITDAC grew by 2.8%; our net income grew by 29.5%; and our diluted net income per share increased by 28% to $0.32 versus $0.25 in the first quarter of last year.

The growth in our financial metrics except for organic revenue growth was impacted by the adoption of new revenue standard this year and a $20 million legal settlement we received in the first quarter of last year.

The growth in net income and diluted net income per share in excess of revenue growth was driven by leveraging our revenues in a lower effective federal tax rate, resulting from tax reform last year.

For the quarter, our effective tax rate was 23.3% as compared to 36.8% last year with our effective tax rate, benefiting from the 14% decrease in the statutory federal corporate income tax rate.

Remember that the first quarter of each year we normally have a lower effective tax rate due to the benefit associated with vesting of stock grants to our teammates. For the year, we continue to expect our effective tax rate to be in the range of 27% to 27.5%.

Our weighted average number of shares outstanding decreased approximately 1% compared to the prior year due to the stock repurchases we completed in the second half of last year. As a reminder, we executed a 2 for 1 stock split on March 28 of this year. And lastly, our dividends per share increased to $0.075 per share or 10% compared to last year.

Moving over to slide number eight. This slide presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the first quarter of each year and the legal settlement last year.

Since the change in estimated acquisition earn-out payables is non-cash and can fluctuate by quarter and the previously mentioned legal settlement was nonrecurring, we have historically evaluated the business excluding these adjustments as we believe to provide better understanding of our year-on-year performance.

However, for 2018, we will also be excluding the impact of the new revenue standard, which is shown on the next slide. For the quarter, on an adjusted basis, our total revenues grew by 12.7% with a little less than half of this growth, resulting from the adoption of the new revenue standard.

Income before income taxes is increased by 25.7%, growing faster than revenues due to lower depreciation and amortization. Our EBITDAC increased by 17.3%, benefiting from a $2.5 million gain associated with an earn-out for the business we sold in 2015. Our net income grew by 52.5%, driven by the lower effective tax rate for the quarter.

On an adjusted basis, our net income per share was $0.33 as compared to $0.22 in the prior year, growing 50%. Moving over to slide number nine.

This presents our results after removing the change in estimated acquisition earn-out payables for both years, the legal settlement last year, and the impact of the implementation of the new revenue standard for the first quarter of this year.

We believe this presentation provides the most comparative basis when evaluating our performance year-over-year. For the quarter, on this basis, our revenues increased by 6.5%; income before income tax increased by 10.6%; EBITDAC increased by 6.4%; and our EBITDAC margins were flat year-over-year.

Our net income grew by 34.2% and our diluted net income per share was $0.29 as compared to $0.22 in the prior year, growing almost 32%.

Higher growth in income before income taxes was driven by lower depreciation and amortization; and our net income growth as compared to total revenue growth was driven by leveraging our revenues, disciplined expense management and the lower effective tax rate. Moving over to slide number 10.

This slide presents the key components of our revenue performance. For the quarter, the change in other income was driven by the legal settlement last year. Our total commissions and fees increased by 12.6% as compared to the prior year. Our contingent commission decreased by $18 million as compared to the first quarter of last year.

This was driven primarily by the adoption of the new revenue standard that requires contingent commissions to be recognized upon the effective date of the underlying policies rather than received from our previous treatment.

Excluding the impact of the new revenue standard, contingents were flat year-over-year as decreases were less than anticipated, we qualified for some new contingents and we had some favorable timing. When we released earnings last year, we provided guidance that we expected are continues decrease for the full year, about 6 to $8 million.

Since they did not decrease as much as expected in the first quarter, we are now projecting the full year decrease to be in the range of $3 million to $5 million. Guarantee supplemental commissions were not impacted by the adoption of the new revenue standard.

Core commissions and fees increased by $45.6 million associated with implementation of new revenue standard. This impact was primarily within the retail segment, which we will discuss later.

The total revenue impact for the first quarter related to the adoption of new revenue standard was about $27 million, which is in the range of the previous guidance that we provided on our Q4 earnings call.

And then, excluding the impact of M&A activity and the new revenue standard, our organic revenue growth was 5.7%, driven by growth in all segments. We will move over to slide number 11.

To provide some insight into the components of our EBITDAC margin, we’ve included a walk of our quarterly EBITDAC margin from last year to this year and highlighted the main drivers. The legal settlement benefited our margins last year by approximately 270 basis points.

The new revenue standard benefited our current quarter margin by approximately 120 basis points. Later in the presentation, we will discuss the impact of the new revenue standard on future quarters. As we discussed in the past two quarters, we are in the investment phase for our core commercial program that we launched in July 2017.

The investment this quarter impacted our margin by approximately 50 basis points, which is in line with our expectations. For current quarter, the impact on our investment and technology was about 30 basis points.

As we mentioned on last quarter’s call, there might be some impact to our margins in the first half of this year, but we do not anticipate any impact on a full-year basis, as compared to 2017. Please refer back to our technology slide that we included in our fourth quarter results for any guidance on future projections.

Nothing has changed during the first quarter that would impact these expectations. The incremental effect of the year-over-year change and the net gain on disposals contributed about 50 basis points to our margin, and this was driven by a gain we realized for an earn-out we received from business sold in 2015.

Lastly, the business increased margins about 20 basis points from organic growth and continued disciplined expense management. On the following slides, we have presented the results of our business segments on an as reported basis as well excluding the impact of the new revenue standard.

A reconciliation by segment is in the appendix to this presentation. Moving over to slide number 12 now. By segment, we’re going to start with retail.

This segment is one of the most impacted by the adoption of the new revenue standard as we moved approximately $30 million of revenues and almost $19 million of profit from future quarters into the first quarter.

This movement was primarily to recognize revenues upon the binding of coverage rather than our past practice of recognizing revenue upon the later date of either billed or effective and to recognize contingent commissions throughout the year rather than received.

As a result, we’re going to have a significant change in our revenues and margin for the first two quarters of the year and a smaller impact to the third and fourth quarters. Later in the presentation, we will provide a little more of an update on this.

For the first quarter, our retail segment delivered total revenue growth excluding the new revenue standard of 3.9% and 2% organic revenue growth, driven substantially by all lines of business.

For the quarter, EBITDAC declined by 4% or 230 basis points, driven by our investment in talent to help support future growth; increased non-cash stock-based compensation as our equity plans our performing higher than expected, resulting in incremental costs.

A large portion of this is one time in nature and we had increased intercompany allocations for technology as well as our investment to upgrade our agency management systems. Our income before income tax grew by 5.3%, benefiting primarily from lower intercompany interest. Moving over to slide number 13.

Our national programs segment had minimal impact this quarter associated with the new revenue standard. For the quarter, total revenues excluding the impact of the new standard increased by 10.4% and 12.5% organically.

As discussed earlier, organic revenue benefited from approximately $4 million of revenue related to our core commercial program and approximately $3 million of claims processing revenue associated with hurricanes Harvey and Irma. Isolating these items, our organic growth was still 5% for the quarter, driven by a number of programs.

Our EBITDAC grew by 11.7% due to continued leveraging our revenues and disciplined expense management that helped offset the net investment in our core commercial program. For the quarter, our income before income tax increased 59%, impacted by the EBITDAC drivers we just mentioned as well as lower intercompany interest expense.

Moving over to slide number 14. The wholesale brokerage segment had a significant impact associated with the adoption of the new revenue standard, primarily for the recognition of contingent commissions. Historically, we received most contingent commissions in the first quarter. These will now be recognized throughout the year.

Excluding the impact of the new revenue standard, total revenues grew 8.6% and organic revenue growth was 6.1%. Excluding the new revenue standard for the quarter, our contingent commissions were up year-over-year but benefited from some timing.

Although the underlying performance was better than anticipated, we do continue to expect downward pressure for the remainder of 2018. This is the primary reason for our full year guidance of a $3 million to $5 million decrease in contingent commissions that we mentioned earlier.

Our EBITDAC increased by 7.8% for the quarter, when excluding the new revenue standard. The growth was slightly slower than total revenues due to lower contingent commissions, increased non-cash stock compensation costs which are driven by higher performance versus original targets and higher intercompany IT allocation.

Income before income taxes grew 3.3%, impacted by the same factors contributing to EBITDAC growth and higher estimated acquisition earn-out payables. Over slide number 15. The services segment excluding the charge associated with the new revenue standard delivered revenue growth of 8.4% and organic revenue growth was 8.3% versus the prior year.

For the quarter, our EBITDAC increased almost 41% through solid revenue growth, leveraging our revenues, disciplined expense management, and the gain associated with an earn-out from the sale of a business in 2015. Excluding this gain of $2.5 million, EBITDAC grew almost 13%.

Our income before income tax increased by almost 64%, benefiting from EBITDAC drivers and lower intercompany interest charges. Moving over to slide number 16. On this slide, we’ve included an updated outlook for the remaining quarters associated with the new revenue standard.

We’ve broken down the impact between core commissions and fees, contingent commissions, employee compensation and benefits, and then other operating expenses. Hopefully, this will help everyone with your modeling.

On a full-year basis, we now expect revenues to increase $8 million to $11 million and income before income taxes to increase $7 million $9 million as a result of the implementing the new standard. 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 first quarter, driven by the efforts of all of our teammates across the Company. I’d like to make several broad comments about the Company in conclusion. We are a sales and service organization, which is going through a digital transformation.

We continue to evaluate emerging technologies and innovative companies that can help us improve the customer and teammate experience. Not unlike the cyclical nature of organic growth, our spend may vary by quarter. It’s an exciting process, but a bit daunting at the same time.

We’re optimistic about our investment in teammates; those as well may vary by quarter. With all the capital out there today, it is presenting new challenges for our carrier partners. We’re well-positioned to continue to work closely with them to develop additional solutions for our customers.

Our Company, as you know, is defined by our culture and our teammates. We’re proud of what we’ve built. Our culture defines us as a company. We’ve not done as many acquisitions over the past three years as our historical averages.

However, I’m pleased with the $9.5 million we’ve done year-to-date, but we’d like to do more that fit our culture and make sense financially. I’m confident there will be plenty of opportunities to invest in our business in the future. Apparently, many people out there think of us as a retail broker only. That could not be further from the truth.

Retail represents, as you know, just over 50% of our total revenues. We’re diversified insurance broker. It’s this diversity that reduces the volatility in our results and increases stability and consistency. National Programs represents 26% of our revenue.

This is where we’ve been granted delegated underwriting authority to assume risk on behalf of our carrier partners within a defined box. Several examples of programs would include earthquake, wind in coastal communities, professional liability on dentists, et cetera. Wholesale represents 15% of our revenues.

In this business, we sell property, casualty and professional liability that standard markets don’t want or cannot price as competitively.

Examples include a coastal frame apartment complex with $25 million of total insured values, the liability on underwater demolition contractor or the directors and officers liability on a small struggling technology company. Our services segment represents 9% of our company.

In this segment, we have businesses that include third-party claims administration for workers’ compensation and all lines liability and claims adjusting businesses that support our programs.

It’s this combination of our four segments and the underlying businesses that provide stability and consistency in the delivery of our financial results each quarter and each year. With that, let me turn it back over to Debbie for the Q&A session..

[Operator Instructions] We will go first today to Elyse Greenspan with Wells Fargo. .

Hi. Good morning. My first question, I want to start out in terms of just thinking about the overall margin profile. If we exclude the impact of legal settlement and revenue recognition, your adjusted EBITDAC margin was about flat year-over-year. I know there are some items you call out.

And as we think about forward numbers for the balance of the year, we’ll still have the impact from the Arrowhead program.

Is that what we should really be thinking about in terms of maybe an impact from that program and then adjust for rev rec impact in your margins kind of flat or slight improvement over all? Can you just help us tie your comments together in terms of the margin profile you see for the balance of ‘18?.

Yes. I think you’ve hit on some of the key areas. Let me just kind of run through these for everybody. So, make sure you incorporate rev rec because that is a little bit higher from a benefit than what we anticipated before. We’ve given the guidance on core commercial.

So, again, continue to use that for the full year, make sure you adjust for the contingents. Again, we had projected on those be down 6 to 8, then on 3 to 5. Technology should be flat year-over-year. Those would be the biggest items..

And then, in terms of the retail comp program, I know you guys had called out some headwinds last year.

Did that not have enough of an impact to call out that hit this year?.

Yes. Maybe you’ll recall back on this. When we implemented the program, what we said is that the largest impact financially would be in the first year; and then each year after that we get compounding effect of the higher organic revenue growth.

So, there’s less margin impact in the second year and then by -- we said, by 2019 that we would be somewhere around breakeven..

So that’s at the end of ‘19..

Yes, the end of ‘19. So, the plan is performing exactly the way we anticipated..

Okay. And then in terms of the retail organic growth, Powell, I do appreciate you pointed to the dispersion between your different businesses. But, if we wanted to think about that segment, the growth slowed in the quarter.

Is there any way you could help us parse out the growth between employee benefit and your commercial business, just to kind of see the disparate trends as it seems like the employee benefits is what drove the slowdown.

And did you guys see -- I know we saw a pickup in growth in the fourth quarter, do you think that there was some organic revenue that got pulled forward as some brokerage we’re looking to hit -- hit their targets under the comp program at the full year?.

Okay. So, couple of comments, Elyse. Number one, as you know, last year in retail, our stated organic growth by quarter was 4% in Q1 of which we called out 1% on timing; it was 1.1% in Q2; it was 2.5% in Q3; and it was 4% in Q4. So, that’s 2.9% for the year.

So, as we said, although we are measured every 90 days by an earnings call, we don’t look at the performance of the business in a vacuum of 90 days. We’re looking at the progress that we’re making year-over-year and so forth, number one.

Number two, no that would be -- you could from an outside standpoint potentially draw that conclusion about a sales incentive, but that sales incentive is ongoing, it’s not one-time in nature.

So, based upon all of the analysis that we’ve done so far, we don’t see anything that indicates something where somebody tried to pull something forward or anything. Number three, remember, I look at it and say it was 3% organic growth in 2017 Q1 and it was 2% this time.

We do not break out the performance specifically of employee benefits versus commercial lines. We are commenting on a broad case. Once again, it is the overall business performance. It was 2%. And like I said, it was compared to 3% last year, and we grew 2.1% or really stated 1.1% in Q2 of last year.

So, we think we have good opportunities for growth in both our employee benefits businesses and our P&C business forward..

Okay. Thank you. And then, one last question, Andy, in terms of the tax rate, you said that for the full year it’s 27 to 27.5, even with the lower Q1 rate.

So, does that mean you’re expecting something that’s higher up in the 20s, like maybe 29% or so for the balance of the three quarters, to get to that full-year level? Did I understand that correctly?.

Yes. So, couple of things on that. So remember, first quarter of ever year, we’re almost always going to have a lower effective tax rate, as we talked about last year, because of the tax benefit on vesting of equity grants. And then, it jumps up in the back end of the year. So, yes, the rate will go up in the second through fourth quarters.

As we talked about at year-end, now, remember, just because there’s the drop in the federal rate, there is two other components to it. We lose a portion of the deductibility for the state and then there is also the elimination of entertainment cost in there as well as comp over $1 million for the 162 [ph] officers.

So, that’s what gives us the blended on full year we think around 27, 27.5..

We will take our next question from the Arash Soleimani with KBW. .

I just wanted to touch on the M&A comments at the end.

So, does it sound -- are you trying to communicate that perhaps you’re a bit more optimistic on M&A prospects today than you were maybe a quarter or two ago?.

No, the answer, which is the same answer four years ago is the inventory and pipeline is good. And I don’t believe anything till it’s closed. I’m just trying to make sure that people understand that we are very conscious of our capital allocation commitments and look for a balanced approach. And we’re always looking.

And sometimes there are opportunities for us to close. And sometimes there’s not as many. But, at the end of the day, we think inventory overall is good. And I’m not trying to signal one thing versus the other. I’m basically trying to say, I believe that we’re consistent in our activity. We sometimes close more than others.

It’s all about cultural fit and making sense financially..

And just to clarify again on 5 for 5. [Ph] Did that have any margin impact this quarter? And again, there is a point there that you should get back in 2019 some of the margin you lost in 2018 or that there will be some incremental pressure in ‘19, sorry, in ‘18..

Hi, Arash, it’s Andy here. No, there was no impact of the retail performance incentive plan in the first quarter. And we would expect margin improvement little bit in ‘18 and then also towards -- going through ‘19. Thanks..

And then, lastly, on services, to what extent were the claims processing revenues you planned out, this quarter, was any of that weather-related or was it all ex-weather?.

Yes. There is not a tremendous amount in there on weather-related. As we said in our comments that really came down to -- we just won a lot of new business, which was great. And we did a great job of expanding relationship with existing....

But there was $3 million in the national programs..

National programs, but not in services..

Let’s make sure -- did you hear that?.

Yes.

And that $3 million was from the 2017 hurricanes, right?.

Correct. That is why I wanted to make sure you -- we’re clear on where that was, just make sure it’s in national programs. .

We will take our next question from Kai Pan with Morgan Stanley..

Thank you and good morning. First question, just drill down a bit more on the margin questions. So, it looks like there would be no full year impact on IT spend. And Arrowhead, it looks like there is going to be margin contraction in the first half, but expansion is second half.

And you’ll grow organically like 5% or more, which is about 3% the threshold people think, they will have margin expansion.

So, shall we expect margin expansion versus 2017 for the full year?.

Wait a minute.

Are we saying that in programs?.

No, overall..

And so, remember let’s back up for just a second. The 5.7% organic growth that we enjoyed in Q1 is one quarter. And we have said historically that we have -- we believe the business is a mid to low single-digit organic growth business in a steady state economy. So, yes, we have some drags on margin because of investment in programs i.e.

core commercial and some other things. But just because -- I thought you were trending towards national programs, just because national programs grew 12 plus percent in Q1, doesn’t mean they are going to grow 12 plus percent next quarter..

And Kai, just make sure, when doing the comparative year-on-year, don’t forget about the legal settlement that we had in the first quarter. So, that was 270 basis points for this quarter but it’s going to impact the year-over-year, adjusted or not..

I’ll just try to figure out, because last year, if you adjust legal settlement, then probably you’re running around 31% EBITDAC margin.

Just wonder for 2018 will that be sort of higher than that, or there still continue going to be some pressure in the near-term on that margin?.

Well, remember, we said -- when Andy says the technology investment is going to be flat, there is still -- we’re going to still make the investments. So, it’s not exceeding; it’s the same amount..

Yes. It’s not a year-over-year impact. .

Okay, great. And then, follow-up on the national programs. If you’re excluding out the 3 points from the flood and 4 points from these core programs, Andy you mentioned that the underlying 5%, very strong still.

So, how much that is -- do you think it’s sustainable coming from either pricing or new business?.

One, it’s from new business, so Kai, just so you know. And the program that we listed across the board, in addition to a lot of our other programs but all of them are having success in writing new business and retaining a good amount of the renewal business. Having said that, we talked about earlier the amount of other capital in the marketplace.

And when we have the underwriting authority on behalf of one carrier, we’re assuming risk for them. And so, we have to be mindful of new entrants into any market at any given time which could impact the growth trajectory of that individual program. So, it’s hard for us to tell, because it is always kind of in state of flux.

Some markets are pulling out, some markets are coming in, and actually, other capital is coming in looking for returns and what we referred to as uncorrelated asset classes. So, hard to estimate. I mean, I wish I could give you a more specific.

But, just remember, the program business is a wonderful business and we’re very excited about it and are looking to invest in it, just like all four of our businesses. And there are other entrants that can come in on a quarterly or a yearly basis; they can peck away a little bit at your business.

And so, you got adjust and modify throughout the year, but it’s very hard to give you an estimate that we’re going to grow x percent next quarter. We like the trajectory. We’re very pleased. .

Thanks for the color.

And lastly on acquisitions, I just wonder has tax reform impact potential sentiment in terms of valuation of the deals, as well as higher interest rate, would that impact any sort of potential valuation from private equity funds?.

Well, we haven’t seen any indication of a change in the way others view acquisitions yet. So, it’d be purely speculation on our part. At this point, we haven’t seen any slowdown in interest from other firms.

And many times what you have is you have a group of strategics and or small handful of strategics and maybe a couple of firms that are all maybe in the general range, financially. And then, if you have one new PE firm, they do something way outside the box sometimes. So that’s not uncommon Kai, as we’ve talked about before.

And so, will interest rate impact that? Logically, it makes sense, if you have a lot of variable debt, but we haven’t seen that yet..

Next to Mark Hughes with SunTrust. .

Any kind of the technology investment is having a positive effect on organic growth?.

Yes. The answer is, through some of the technology, we’re having better visibility into our businesses, which enable us to act upon that in soliciting business. So, yes, I can think of individual instances where it’s helped us get business.

So, having said that, are you going to say well, we implemented this program, so therefore we are going to grow X percent? No, that’s not. But I know anecdotally of instances where we have written business because of our new technology and investments in technology..

And then, the national programs business, you expressed a lot of enthusiasm.

Any way to characterize -- is there a pipeline there, are there more opportunities you’re seeing today than say a year-ago?.

No, Mark, we can’t characterize. We want that -- I don’t want to give you the impression that we’re looking to invest there over the others. Coincidently, we’re looking to invest in all four of our segments. And over time, we get to see a lot of unique opportunities with the diversity of our business.

That said, the retail space is the biggest space out there. So, just in sheer numbers, we’re going to see, as you know, more retail business in a year than probably anything else. But, we also get to see a good flow of program business as well. And as you know, people sell for different reason at different times. We’re always cultivating opportunities.

The one thing that is really good, one of the many things that’s really good is we are known in the industry as having one, good leadership; two, exceptional relationships with our carrier partners; three, good technology and attitude of getting stuff done, and great distribution.

So, you roll all those up, and that can be appealing to a partner, if they want to join us..

Understood. And then, just final question, in ramping up the margin outlook. If your technology was slightly dilutive to margins in the first quarter, in the first half, presumably it will be accretive.

So, it will be a tailwind in the second half, plus national programs up in the second half, plus the sales incentive which was flat this quarter, picking up a little bit of momentum, so on all fronts presumably, second half tailwind on margins.

Is that the right way to think about it?.

Well, hold on a minute. Once again, that’s a very logical outlay of thought. And having said that, I want to make sure that we go back to my comments about investments in technology and investments in people, which is by the way the most important thing, can vary by quarter and by two quarters or three quarters.

So, if we operated in a vacuum, I think that may be a fair statement. But, we don’t operate in a vacuum.

So, remember, that would be assuming that we didn’t think that there were investment opportunities where we might have a little pull down because of X or Y or we have a technology spend that we end up doing in the latter half of the year that would have been in Q1 and Q2 of next year.

So, I would caution you on saying that, not because we go into saying margins are going to be down, quite the contrary. We don’t think so. We are actually excited about the profile going forward. But, I want you to understand that we are investing in our business for the long term and there is opportunity there.

And we’re going to see that when we think it’s the right opportunity for our company..

And Mark, we have those. We will call them out if they pump up..

We will take our next question from Josh Shanker with Deutsche Bank..

I want to go back to some Elyse’s question about retail versus others. Obviously, you for legitimate reasons have been irritated when people look at your overall growth and instead look [ph] at your retail growth. But, what does that say about the insurance industry? We’ve seen this decoupling before.

Are people changing the way they buy that we should expect over a materially long period that your national programs business will outgrow your retail business?.

I don’t think that you should make that assumption. I think number one, I believe Josh that we are held to a double standard. And let’s talk about the double standard. We have the industry-leading margins in the industry. We have the industry leading cash conversion and free cash generated by the business and yet we are criticized.

And by the way, that’s fine. We’re okay with that. We’re big boys and girls. We’re criticized for having a slightly slower organic growth rate in retail, which is 50% to 52% of our revenue. So that’s fine. We’re really looking at something [indiscernible].

But, when our margin is 2x of somebody else’s, and then my comment is, we’re trying to do it and what’s best for the Company, long term. And so, remember, I have said historically and I will in the future, we started as a retail business.

And many of you have heard me say that I think that there will be lots of opportunities for us to grow in all of our segments. But over time that our retail business might be historically in a 60% to 70% of our total revenue, maybe -- and it might be different than that. But, let’s just say it’s in that range.

That doesn’t mean we still don’t have a diversified business. And at the end of the day, Andy and I and the rest of the senior leaders are focused on growing the free cash which we can redeploy in the business, as you know in three areas.

Number one, most importantly, invest in teammates; two, invest in M&A; and three, return it to shareholders through dividends or periodic share repurchases. So, I look at it little differently.

And maybe I am -- I wouldn’t say I’m sensitive to it, but I do scratch my head and laugh periodically when I see analyst reports that criticize us on a low organic growth of 2% and the Company grew organically 5.7%. I would say we had a dam good quarter. And by the way, I’m pumped that our teammates are doing a great job for our customers.

Having seen said that, you, not you Josh, but you, the group, might see that differently. You’re entitled to a different opinion. I feel good that over the last two years or three years, our retail business has continued to improve, as evidenced by the organic growth improvement year-over-year. I don’t get caught up in the quarters.

And I am very excited about some of the things that we have going on internally that I think will help us grow in the future. So, once again, maybe I’m not as sensitive or maybe I am a little prickly about it, I don’t think so.

I sort of laugh actually because I believe that it is not a quarter to quarter business and I think sometimes people don’t fully understand the dynamics and the difficulty of growing a retail business because of the competitive landscape and the changing markets and all. It’s all good. That’s it..

One more, that was very thorough. In terms of back when this has happened before when you had good growth in national programs and weaker growth in retail, a lot of it was ascribed to a sentiment issue that you used the word bunker mentality on several conference calls in the past.

Do you see any wavering in the retail markets in terms of desire to purchase insurance now?.

No. Let’s talk about that bunker mentality. The bunker mentality was between 2008 and 2011, and that was discussed about how people were thinking about and viewing investing in their business.

And as I said in our prepared remarks, I think owner sentiment and more specifically CEO and owner sentiment of private business is positive, very positive, and people are buying things to help them grow their businesses, i.e. vehicles or production equipment, and, and, and. So, no, I don’t see that.

Number two, remember, we do have some businesses and programs, most notably, the lender-placed business that did grow substantially as a result of the slowdown in the economy. And so, you have some business that are countercyclical, maybe is the right way, I would say that.

But no, I actually would tell you that my personal opinion on one retail is great. And I have very, very positive and high enthusiasm about the future performance of retail, one. Two, ecstatic about the programs growth for the quarter, I think they crushed it.

Wholesale, nobody’s asked about wholesale, they’ve only grown 6.1%, again for another quarter in a row. And so, with Tony and his team, they’ve grown in excess of 4% for six years in a row, and I think it’s 5% five out of six years. And I’m really very pleased with services.

So, no, not a bunker mentality; no, we’re not hesitation of people to buy less insurance; it’s just continue to be competitive..

We will take our next question from Marcos Holanda [ph] with Raymond James..

Hey, good morning, guys. Calling in for Greg Peters. I just had a quick one on the contingents, just hoping if you guys could comment on the couple million bucks improvements for the outlook for this year and how we should be modeling the contingents for the remaining three quarters.

Like, should I still expect them to come down in the second quarter?.

Mark, by the way [indiscernible] take your full-year estimate wherever you are now, and if you had adjusted that down by 6 to 8 from 2017, you’d now want to make sure that you’re only going to be down about $3 million to $5 million on a full year basis.

And remember, what we said on the way it works with the new revenue standard is that gets recognized substantially throughout the year, relatively evenly by quarter. It’s not perfect but it’s a good proxy. You’re going to primarily see that year-on-year downward pressure in wholesale is what we’re expecting right now..

So, is it reasonable to assume that it’s not going to -- the quarterly year-over-year comparison is not going to be lower throughout the rest of the year then, on a consolidated basis?.

Yes, it’s going to be down $3 million to $5 million, Marco..

It was down 18.3 this quarter. That’s what I’m trying to say….

That’s the movement. Just remember, what we did is we recognized the large portion of our contingents in the first quarter historically. With the new revenue standard, we now take that and recognize it throughout here. So, we move basically $18 million into future quarters. That’s why it’s easy to look it on a full-year basis first.

And you know what ‘17 is; once you got, what you would look -- believe ‘18 would look like, then spread that across the year, you will figure out then how the quarters drop out..

Next question from Adam Klauber with William Blair. .

How much of your win related property book in programs and wholesale renews in June and July? And is that business somewhat dependent on reinsurance conditions?.

It’s spread out all over the year. And actually, Adam, I don’t have a specific number for you, but I would tell you that it is preferred to not have your policies renew then. So, many people try to move out of win season, i.e. pre or post, so 5, 1 or before or 10, 1 and after.

So, the answer to the question is, as you know, insurance companies, some have multiyear reinsurance plans in place, some renew, 1, 1, some renew July 1. But everything we’ve seen and everything that we’ve heard is very modest increases if at all because of always additional capital.

So, in our win book, we see some up and we see some down but it’s not highly dependent right around one date right and win season. I will tell you in some of the public entity business, we have some business that comes up in July, some of that 10, 1, but it’s spread out over the year..

And then as far as homeowners in Florida, what’s the average rate you’re seeing today?.

It depends actually, because there are some new entrants in the higher end market. So, when I say that homes, $700,000 and up, new construction, so we are seeing rates in some instances where we’re reducing rates nicely on the homeowner. Automobile, depending on the carrier, as I said, is under pressure.

Smaller, I don’t have the exact rate off the top of my head in the 200 and 700 range. But, there seems to be ample capacity out there to provide that to not only our customers, but prospective customers. .

We will take our next question from Mike Zirinsky with Credit Suisse. .

Good morning. Thanks for fitting me in. I don’t mean this to be a peck. So, I do appreciate the really good revenue momentum you guys are experiencing. But, I am just kind of curious from maybe a macro perspective and isolating the exposure growth component of revenues.

If I think about how low the unemployment rate currently is on an absolute basis, I mean, should we expect less of a tailwind from that factor, if we think out over the next year. Maybe it’s less of a tailwind now.

I guess it’s almost like the opposite of the bunker mentality talked about in terms of maybe it’s tougher for people to -- for business owners to grow as fast as they might even want to..

Well, I would look at it a little differently, Mike. Number one, if you think about, we’re very consistent in what we said about our business. Two-thirds to three quarters of our organic growth is impacted by exposure unit increases and the remaining one-third to 25% is usually rate impact. That’s number one.

Number two, depending on the class of business, and I will just use an example [technical difficulty] and you go to the most cities in Florida and you see all kind of construction going on. And so, these contractors are jammed up. And so, they are -- even though they are having a hard time hiring new -- a lot of new people, they got plenty of backlog.

And so, they’re growing and getting new contracts in place and new projects and the whole deal. So, actually, I would look at it a little differently. I would say that I understand the point that you are making.

And ultimately, I think demand for labor put deflationary pressure on wages, which in turn, the firms with the most business are going to try get and retain the best people to deliver their product and their service. And so, if you want to look at macro numbers, the economic numbers would say that GDP this year, I think it’s just under 3%, globally.

And depending on who you listen to or what you read, next year it’s going to be down slightly from that number globally, barring some unusual international events. There is a whole bunch of things going on with not only the Federal Reserve but Bank of Japan and Bank of England.

And all of those banks and how they look at bond repurchases and the impact of increases in interest rates, which we think are going to continue to go up. And so, the Fed is trying to keep a lid on inflation, which it is already. But, I think the economy -- if you go into the communities we’re in right now, it’s going well.

And I think that you should say that that’s a positive for exposure increases going forward for our business..

With no more questions in queue, I will turn it back to management for closing remarks..

Thank you, Debbie. And we wish everybody a great day and we look forward to talking to you next quarter. Good day..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect..