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

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

Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the fourth 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 fourth 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 release issues yesterday other factors that the company may not have currently identified or quantified in 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 Investor Relations and then Calendar of Events.

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

Thank you, Bryce. Good morning everyone and thank you for joining us for our fourth quarter 2018 earnings call. Before we get into the performance of the quarter, we’d like to welcome all of our new teammates that joined us this quarter from recent acquisitions.

We definitely had a busy quarter adding almost 800 new teammates and acquiring five businesses with approximately $227 million of annualized revenue. The largest deal we completed in the quarter and in our history was the Hays companies and it closed effective November 15.

We’re excited about the additional talent and capabilities these acquisitions bring to our customers and to our team. I’m now on slide four. Now, let’s get into results for the fourth quarter. We delivered 508.7 million of revenue growing 7.3% in total. Excluding the impact of the new revenue standard, our total revenues for the quarter grew 8.6%.

Our organic revenues decreased by 2.1% for the fourth quarter, which was driven by the significant claims processing revenue we recognized in Q4 of 2017 associated with Hurricane Harvey and Irma. Isolating this impact, our organic revenue growth would have been over 3%.

I will get into more detail in a few minutes about the organic growth for each segment. Our EBITDAC margin was 28.1%, which is down 210 basis points versus 2017, and it was primarily impacted by the claims revenue recognized in the fourth quarter of 2017, and the new revenue standard in 2018.

Andy will discuss the detailed movements of our margins later. Our net income per share for the fourth quarter was $0.26 versus $0.66 in the fourth quarter of 2017. Remember that our EPS for the fourth quarter and the full-year 2017 was impacted by the one-time benefit of $0.43 associated with tax reform.

On an adjusted basis, which excludes the one-time tax benefit, the change in acquisition earn-out and the new revenue standard, our earnings per share was $0.27, which is an increase of 12.5% as compared to 2017. I’m now on slide five. We’re pleased with our full-year performance as we surpassed $2 billion in total revenues for the first time.

This is a significant milestone for Brown & Brown. It was seven short years ago that we crossed the $1 billion threshold, a lot of positive changes and improvements on our company since then. This is a result of all the efforts of our outstanding team of almost 10,000.

For the year, we grew total revenues over 7% and experienced organic revenue growth of 2.4%. Please remember, Q4 2018 was negatively impacted by a significant amount of claims revenue recorded in Q4 2017. Isolating the year-on-year variance in claims activity, we would've grown organically approximately 4% for the full-year.

Our EBITDAC margin was 30.6 and our net income per share for the full-year 2018 decreased to 122 from 140 in 2017, almost entirely driven by one-time tax adjustment I mentioned earlier and the nonrecurring claims processing revenue.

On an adjusted basis, which excludes the one-time tax benefit, change in acquisition earn-outs and the new revenue standard, net income per share increased by 23% to $1.18. For the full year, we closed 23 transactions with approximately $323 million of annualized revenue by far a largest year ever for acquisition activity.

In regards to acquisitions, 2018 was one of those years that everything seemed to work out for the Brown & Brown team. We’re really pleased to have completed at least one acquisition in each of our four segments last year, another first for our company.

Lastly, we would like to extend a huge thank you to all of our teammates that supported our acquisition activity. It was a busy year and our success would not have been possible without their significant efforts. In 2018, we grew the top and bottom line nicely.

We added talented teammates, increased our capability to serve our customers, invested in technology, and continued to invest in our teammates. Our performance is the direct result of the incredible effort and dedication that our team strives to achieve each day for our customers.

Later in the presentation, Andy, will discuss our financial results in more detail. On slide six, the economy during the fourth quarter continued to expand with exposure units increasing across most industries and geographies as our customers continue to invest in their businesses.

We’re seeing a lot of construction going on around the country and there's a general shortage of qualified labor for many industries. Rates for most lines remain generally flat.

The exceptions continue to be commercial automobile, which is up 3% to 7% or more depending upon the loss experience and almost all employee benefits accounts continue to experience rate increases. Worker’s compensation continues to be down in the 1% to 3% range in many states across the country.

Coastal property rates for the quarter remain generally flat with some downward pressure on the best accounts and upward pressure on those with poor loss experience.

We made a lot of progress this past year and are pleased with the investments in our core commercial program as well as our technology investments related to both core infrastructure and innovation. Now on slide seven. Let’s talk about the performance of our four segments.

Retail segment delivered solid organic growth of 3.5% in Q4 with most lines of business growing through solid new business activity. During the quarter we completed five acquisitions and realized approximately $44 million of year-on-year revenue growth from acquisitions.

For the year, we delivered 3% organic revenue growth which represents continued incremental improvement over prior years. As we’ve discussed before, while it’s good to look at the quarter as we believe the real measure is the full-year results and 2018 was another year of improvement.

Over the past four years, we are pleased with the continual improvement from 1.4% organic revenue growth in 2015, then increasing to 1.9% in 2016, then 2.9% in 2017, and 3% for 2018. Our national programs segment decreased 14% organically.

This was driven by approximately a $20 million decrease in claims processing revenues as compared to the fourth quarter of 2017. Isolating this change, our national programs segment would have delivered positive organic revenue growth of just over 1%.

A number of our programs performed well, most notably our earthquake and all risk programs, but we had some experiencing changes in carrier risk appetite that resulted in decreased performance year-over-year. For the full year, our organic revenue was about 1% negative, which was impacted by lower year-over-year claims processing revenues.

Isolating this change, we would have delivered positive organic growth of over 4%. So, it was a good year for national programs segment. Our wholesale brokerage segment delivered organic revenue growth of 3.4% for the quarter driven by expansion in all lines of business.

This is down versus prior quarters –the prior quarter of last year, which is consistent with the past three years that we had lower organic growth in the fourth quarter due to the amount of new and renewal business in the quarter. For the full year, we’re very pleased with the organic growth of 5.7% for our wholesale brokerage segment.

Our services segment organic revenue decreased by 3.3% for the quarter driven by claims processing revenues recorded in Q4 2017 as result of Hurricane Harvey and Irma.

Isolating these claims revenue in the services segment experience strong organic revenue growth of approximately 7% for the quarter driven by new business, isolating the decreases in claims processing revenues our full-year organic revenue growth would be approximately 6%.

When we look back on the year we’re pleased with the performance and the acquisition activity of our four segments. Now, let me turn over to Andy who will discuss our financial performance in more detail..

Thank you, Powell. Good morning everybody. Consistent with previous quarters we’re going to discuss our GAAP results and then our adjusted results excluding the impacts of acquisition earn-outs, the impact of the new revenue standard and the impact of the fourth quarter 2017 reevaluation of our deferred tax liabilities that Powell mentioned earlier.

As a reminder we have exclude the impact of the new revenue standard for calculation of organic growth in order to provide a better comparison of 2017. Moving on slide number eight, this presents our GAAP and certain non-GAAP financial highlights.

For the fourth quarter we delivered total revenue growth of 7.3% and with organic revenues declining 2.1%. The decrease in organic revenue is a result of the claims processing revenues recorded in the fourth quarter 2017. Isolating these revenues are organic revenue growth would've exceeded 3%.

Our income before income taxes decreased by 5.3% and our EBITDAC declined by 10 basis points, both of which were negatively impacted this quarter by the new revenue standard and the claims processing revenue we realized in the fourth quarter of 2017.

Our net income declined by $114 million or 60.8% to $73.5 million and our diluted net income per share decreased by $0.40 or 60.6% to $0.26 versus $0.66 in the fourth quarter of 2017. The one-time deferred tax benefit recorded in the fourth quarter of 2017 was $120 million or $0.43 of earnings per share.

During our third quarter earnings call we estimated the impact of the new revenue standard for the fourth quarter of 2018 to negatively impact revenues by $3 million to $7 million and the pretax income impact to be in the range of zero to negative 5 million.

For the quarter the actual revenue impact was a negative $6 million and the pretax impact was a negative $4.5 million. Net income and diluted net income per share were impacted by the one-time benefit of tax reform recorded in the fourth quarter of 2017 and the lower claims processing activity.

Our weighted average number of shares outstanding decreased approximately 930,000 as compared to the fourth quarter of 2017, this was driven primarily by the share repurchases we initiated in the fourth quarter of 2017 and we completed in the first quarter of 2018.

During the fourth quarter of 2018 we also initiated a $100 million accelerated share repurchase program. This is expected to offset the dilution associated with the Hays acquisition. As we discussed before we still intend to repurchase shares periodically in 2019 to manage the share creep associate with our equity plans.

Our goal is to generally keep our share count flat. Lastly our dividends per share increased by $0.08 or 6.7% compared to 2017. Moving over slide number nine. This slide presents our results after removing the change in estimated acquisition earn-outs payables for both years.

The one-time tax revaluation adjustment record in the fourth quarter 2017 and the impact of the new revenue standard in 2018, this approach provides a more comparable basis. For the quarter our revenues increased by 8.6%, income before income tax decreased by 1.4% and EBITDAC increased by 3.1%.

The lower EBITDAC growth rate was primarily due to the claims processing revenues in 2017 and increased non-cash stock compensation cost in 2018. In a few slides we'll talk more about the components of our margin change year-over-year.

The lower growth rate for income before income taxes was driven by incremental interest and amortization associated with the acquisitions we completed during the year. Our net income grew by 14.9% and diluted net income per share was $0.27 growing by 14.9%.

Both of these metrics benefited from our lower federal income tax rate which was 27% for the fourth quarter as compared to 37.3% for the fourth quarter of 2017. Moving over to slide number 10. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 7.3% as compared to 2017.

Our contingent commissions increased to $9.1 million as compared to 2017, which was driven almost entirely by the adoption of the new revenue standard. As a reminder we now recognize contingent commissions throughout the year upon the effective dates of the underlying policies rather than when received per our previous treatment.

Guaranteed supplemental commissions were down 800,000 year-over-year and were not impacted by the adoption of the revenue standard. Our core commissions and fees increased by $26 million or 5.6%. When we isolate the impact of the new revenue standard and the net impact of M&A activity our organic revenue growth declined 2.1%.

As noted earlier this growth rate was materially impacted by lower claims processing revenues of approximately $24.5 million, isolating this revenue our organic growth rate would've been approximate 3%.

We’ll move over to slide number 11 to provide some additional insight and the components for our EBITDAC margin we've included a walk-through of our quarterly EBITDAC margin from 2017 to 2018 and highlighted the main drivers.

The acquisition of Hays negatively impacted our margin by about 10 basis points for the quarter and this is in line with our expectations. Keep in mind this only represents 45 days of operations with the acquisition effective November 15th. Later in the presentation we’ll provide additional information regarding the quarterly numbers for Hays in 2019.

During the quarter we realized about a 30 basis point impact to our margins as non-cash stock compensation costs have increased due to the incremental financial performance and higher retention of teammates. The new revenue standard negatively impacted our margin for the quarter by 50 basis points.

Other reflects the significant year-over-year decrease in claims processing revenue which more than accounts for the margin decline year-over-year. We also had some one-time items, the most significant being performance-based bonuses for certain businesses.

On the following slide we presented the results of our business segments on an as reported basis as well as excluding the impact of the new revenue standard. We’ve include a reconciliation by segment in the appendix. Let’s go ahead and start with retail which is on slide 12.

For the fourth quarter our retail segment delivered total revenue growth of $39 million or 17%. When excluding the negative impact of the new revenue standard of $12 million total revenues increased by $51 million or 22.3% and we delivered 3.5% organic revenue growth.

Total revenues benefited primarily from the acquisitions we completed over the past 12 months that contributed $44 million of incremental revenue. Overall it was a good quarter for our retail segment.

When excluding the $6 million impact of the new revenue standard our EBITDAC for the quarter grew by $13 million and our margin declined by 40 basis points.

This decline was driven by increased inter-company allocations for technology as well as our investment to upgrade our agency management systems and as we mentioned earlier increase non-cash stock-based compensation cost as our equity plans are performing higher-than-expected resulting in incremental cost.

These two items more than offset the underlying margin expansion from leveraging our revenues during the quarter. The growth in income before income taxes was impacted by higher intercompany interest expense and amortization for acquisitions we completed during the year.

Moving over to slide number 13; for the quarter revenues for our national program segment decreased by 12.5% and organic revenues declined by 14%, the revenue decline was due to significantly lower year-over-year claims processing activity of approximately $20 million as well as a $2 million impact from the new revenue standard.

These items more than offset other organic growth and revenues from acquisitions. Without this decrease in claims activity organic revenues would’ve been slightly over 1%.

Income before income taxes declined by 38.8% primarily due to the lower claims processing revenues, the new revenue standard and was partially offset by lower intercompany interest expense.

EBITDAC excluding new revenue standard decreased $15.7 million or 27% primarily due to the lower claims processing revenues, the finalization of year-end bonuses, calculations associated with the performance of certain programs and incremental non-cash base compensation cost. Over to slide number 14.

The impact of the new revenue standard on the wholesale segment was about $1 million for both revenues and EBITDAC. Excluding the impact of the new revenue standard the wholesale brokerage segment delivered total revenue growth of 3.7% and organic revenue growth of 3.4%.

Our EBITDAC margin excluding the new revenue standard decreased 190 basis points for the quarter. The decrease was impacted by lower contingent commissions, higher intercompany technology allocations and increase non-cash stock-based compensation cost.

Our income before income tax margin excluding the revenue standard decreased by 60 basis points, impacted by the same factors contributing to the EBITDAC margin change but benefiting from lower acquisition earn-out liability expense and intercompany interest expense.

The services segment delivered 19% total revenue growth and excluding a $6 million impact for the new revenue standard total revenues grew 5.3% primarily driven by an acquisition we completed in the third quarter of 2018. Our organic revenue declined 3.3% driven by lower year-over-year weather-related claims processing activity.

This decline was about $4.5 million and its claims volumes were consistent year-over-year organic revenue growth would’ve been about 7% as most businesses continue to grow. For the quarter our EBITDAC excluding the new revenue standard increased 6.8% and margins expanded by 30 basis points due to leveraging our higher revenue growth.

The lower growth for income before income taxes were driven by intercompany interest charges for the acquisition of the third quarter. On slide number 16, we presented our GAAP results for the full-year 2018 and 2017. For 2018 we delivered $2,014,000,000 of revenues, growing 7% and earnings per share of $1.22.

For the year we also decreased our total outstanding shares by approximately 2 million. Over to slide number 17. Due to all the moving parts and difficulty with comparability we presented on this slide certain GAAP and non-GAAP financial highlights.

For the full year 2018 we adjusted for the impact of the change in acquisition earn-out payables and the new revenue standard. For the full year 2017 we adjusted for the impact of the change in acquisition earn-out payables, the legal settlement we had in the first quarter and the one-time impact of the tax reform we realized in the fourth quarter.

Since these are non-cash or nonrecurring and can increase or decrease by year we believe it's helpful to evaluate the business excluding them. For the year our total revenues grew 7.2% or $134 million and our organic revenues grew 2.4%.

Isolating the year-over-year decrease in claims processing revenues of $24.5 million our organic revenue growth would be an approximate 4% or $70 million, which is a really good year for Brown & Brown.

Our EBITDAC grew by 2.1% and was impacted primarily by the 2017 claims processing revenue, our investment in the core commercial program as well as additional non-cash stock compensation expense. Income before income taxes grew by 2% due to higher interest and amortization related to the acquisitions we completed this year.

Our net income grew by 22% and earnings per share increased by $0.22 or 23% to a $1.18 as compared to 2017 benefiting from the lower federal tax rate. Our effective tax rate for 2018 team was 25.6% decreasing from 38% in 2017. Over to slide number 18; this slide presents the quarterly and full-year impact of the new revenue standard.

In connection with the implementation of the new revenue standard we now record certain of our revenues in the services segment on a gross basis. For the full-year 2018 the total impact of this change was an increase to core commissions and fees of $10 million and other operating expense of $10 million.

As a reminder in the third quarter we recorded $8 million nonrecurring adjustment to revenue and income within the national program segment. Isolating the one-time impact our full-year income before income tax benefit would have been approximately $8 million to $9 million. Please take both these items into consideration in your modeling for 2019.

Moving over to slide number 19 we’d like to provide some additional information regarding the anticipated annual performance for Hays. We continue to believe that Hays will deliver $210 million to $220 million of annual revenues, $47 million to $53 million of EBITDAC and diluted net income per share of $0.02 to $0.03 for 2019.

The chart shows our current view of the estimated quarterly phasing and incorporates the impact of the new revenue standard, similar to what we expected for the remainder of Brown & Brown. Hays will have a significant shift of revenues and profit into the first quarter due to the high percentage of employee benefits business.

Please take this quarterly phasing into account when you build your models for 2019. We got some closing comments regarding outlook on few items. Let’s see the first one.

Keep in mind our previous comments about our lender placed business within national program segment as we’re anticipating material headwinds due to the continued improving economy and bank consolidations that are impacting our customers.

We expect continued pressure into 2019 and believe this business could decline anywhere from $2 million to $4 million in 2019. This is in addition to the $8 million one-time new revenue standard adjustment we called out in the third quarter of 2018.

We’re expecting revenues to be under pressure within our services segment due to lower claims for our social security advocacy business, resulting from the completion of advocacy work on a book of business. We realized about $8 million to $9 million of revenues in 2018 that we do not expect to recur in 2019.

Due to the fact the retail segment had the most impact of the new revenue standard. We want to remind everyone that our organic revenues may fluctuate by quarter, therefore we would anticipate the first quarter of 2019 to be lower than the average for the full-year and then higher in the second quarter versus the average for the full-year.

As we’ve discussed over the past two quarters our stock compensation costs has been increasing as a result of higher performance of certain grants. We expect this trend to continue into 2019 and anticipate non-cash stock compensation costs could increase three to $5 million.

Interest expense should be in the range of $66 million to $68 million for 2019 and amortization should be in the range of $100 million and $102 million for 2019.

Both estimated interest expense and amortization are excluding any additional acquisitions or borrowings that may occur in 2019, so you need to make your own assumptions regarding these items.

We expect our effective tax rate to be in the range of 26% to 27% for the full-year 2019 as a result of various state tax law changes and the geographic mix of our acquisitions completed throughout the year. Let me turn it now -- I'll turn it back over to Powell for closing comments..

Thank you, Andy, great report. I wanted to make a clarification. The dividend increased to $0.08 [ph], an increase of 6.7%. And I know you know that. In closing, we have really good momentum across the company and feel great about our business.

I want to thank first and foremost our 10,000 teammates for all their contributions in 2018 to help grow our company and serve our customers and also for everything they’ll do in 2019.

We remain optimistic about the economy, but as I mentioned earlier I think there's a reasonable possibility, the economy may slowdown in the second half of 2019 or in early 2020 and something that we watched very closely and we’ll keep you posted if and when we see that.

We talked about premium rates earlier in the call and would say we don't expect any material changes in premium rates in 2019. There’s still a lot of capital out there that will keep pressure on rates and we just don't see them moving up. We feel really good about our acquisition activity in 2018 as we talked about.

And today as I usually say, our pipeline is good. It's been that way for the past few years and we’re actively talking with the lot of people.

We will remain disciplined in our approach as you've heard me say before when and why someone sells is different for each party, but we’re always out talking to people and when that time comes we would like to be considered particularly if there's a cultural fit.

As we’ve said in the past one of the most important things we can do is invest in our teammates. We’re proud to announce that we're setting aside $25 million to help fund an education program for our teammates and their dependents.

The interest income from this money will be used to fund tuition reimbursements, student loan repayments and scholarships for dependents of teammates. This new program will commence this year in 2019 and is something we expect to continue going forward. We believe this program will be great benefit and motivator for our teammates.

Our goal is continue to grow the top line and the bottom line and do this in a disciplined manner. In 2019 we expect to generate over $500 million in cash. Again, something we’re very proud of.

Our capital deployment philosophy is to invest this money into acquisitions, return it to our shareholders, pay down our debt and invest to where appropriate in our businesses. We will do this prudently with the objective of driving long-term shareholder value. With that, let turn it back over to Bryce to start the Q&A session..

Thank you. [Operator Instructions]. And we’ll take our first question from Elyse Greenspan with Wells Fargo. Please go ahead..

Hi. Good morning. My first question, going back to some of your outlook comments, you Andy, pointed to organic growth in the first quarter due to rev rec being lower than the full-year number. My assumption was because rev rec went in place in 2018, it wouldn’t impact comparison. So, just a little confused there.

And then was that a comment with the first quarter growth being lower than the full year? Was that just specific to retail or was that a consolidated company comment?.

Hi. Good morning Elyse. Good question. Let me take the last one, and I’ll come to the first.

The comment was associated with just retail, and as we look out to 2019 and just the implementation of rev rec, there’s going to be some noise between the first and second quarter, so that’s why our comment was -- whatever you anticipate the full-year organic to be, the average in the first quarter will be a little bit lower and will be higher in the second quarter, so it’s just kind of a waiting..

Okay. And then in terms of retail, sticking there for a minute, you guys saw little bit of a nice uplift in the fourth quarter sequentially from the third quarter. I know the last quarter you’d said, new business was a little bit lighter Powell, and I believe you kind of thought it would just be a one-quarter situation.

Can you just comment about new business and retention trends within your retail segment that you saw in the fourth quarter?.

Sure. Well, remember Elyse, as we’ve talked about, we don’t think – we don’t look as much at quarterly results. We look at the yearly results overall as a kind of a barometer to success. And so, we had a good quarter in Q4.

We always like to write more new business, but we wrote a good amount of new business and we’ve done a nice job in retaining our clients as well. But we're very pleased with the 3.5% organic growth for the quarter. And as I said -- as I've referred back to the prior four years, I just look at the trend 1.4%, 1.8%, 2.9%, 3.0%. That's how I look at it..

Okay. Thank you. And then one just -- one last question on margins.

When we bring together some of your comments about some of the headwinds you're expecting in some of your business, and then, it does look like retail should show stronger growth, but what I guess I'm wondering about is can you talk us through the five items that you might call out when you when we talk to the margin build for 2019? Obviously, Hays will be a drag and as you give us numbers can you kind of talk to the other buckets as we think about the consolidated margin we should expect in 2019?.

Yes. So Elyse, coming back to some of the comments we've made. So, yes, you're correct. On Hays and the guidance that we've given, so make sure you incorporate that. Keep in mind, our comment about the $8 million adjustment that we recorded in the third quarter of 2018. Again, that will not recur, so that will be an impact.

And then think about also the guidance that we've given on services, and then also keep in mind the stock comps. So those are the primary ones. Okay? No other items..

Okay. And then one just last quick question. Was there a couple million of flood-related revenue in the fourth quarter of 2018 or to kind of on I guess $22 million in programs last year -- 20 million was the delta.

Was there about 2 million that came through this year?.

Yes. It was – yes, about $1.5 million, $2 million. Not a lot. It was really small..

Okay. Thank you very much..

Thank you..

[Operator Instructions] We'll take our next question from Kai Pan. Please go ahead..

Thank you and good morning. I would like to follow-up on both questions Elyse has asked. First on the organic growth, so you have seen like sequential year-over-year improvements in the retail segment. Your overall organic growth for the company is 4% in 2018.

So, will we see better than 4% in 2019 or the other factors like in the national programs or service would sort of like a -- would weigh down that a bit in 2019?.

Good morning Kai. Thanks for the question. As you know, we've talked, we don't give organic growth guidance. We have always said in our business both the overall business and even in retail that we believe it's a low-to-mid-single-digit organic growth business in a steady state economy.

So, the answer is we’ve got some positive things gone and we're going to have some headwinds too, and it's going to all work out in the end, but we're not going to give you -- we're not going to say like some others. This is what our organic growth is going to be for the year..

Kai, what we would suggest on this one is definitely do your projections by segment, don't use kind of just a blanket percentage because you'd be -- more than likely, you would end up getting a very different answer, because the performance in each other will be different in 2019 based upon the guidance that we've given..

Okay. Thank you for that. And then follow-up on the margin question, I wanted to drill bit down into details. So you have – Hays headwind, I estimate it’s probably about a 70 basis point because they add 10% revenue to your overall and their margin is about 7 points lower than yours.

And the -- I just want to make sure my math is correct?.

Yes. The guidance that we gave back on the third quarter as we said it would be around 100 basis points. So somewhere in that range, depending upon if we're on the higher or lower end of the guidance that we've given..

Okay. And then the comp expense, non-stock comp. There had been a drag actually in 2018 as well.

So is 2019, there will be further drag or the drag will be actually less, so it will be incrementally a positive factor for your margin overall?.

Yes. So the guidance that we gave on it is, it will be an incremental expense year-over-year of another $3 million to $5 million in 2019..

Okay. And then the last items on the margin side. Were you getting – I was assuming the IT investment area had core programs is -- it will be accretive in 2019.

Would that be like a significance that more than offset this IT factor we mentioned earlier?.

No. It wouldn’t. I think those programs as we mentioned during the commentary is they are progressing along in accordance with plan. If you go back to our previous decks that we've talked about, they are progressing along. But no, they would not be enough to offset the other items..

Great. Thank you so much..

Thank you..

Thank you..

We'll take our next question from Greg Peters with Raymond James. Please go ahead..

Good morning. I wanted to touch base on a couple of the -- I guess, you can call them legacy initiatives considering it's been over a year now, specifically around the 5 for 5 in the tech spend.

With retail accelerating growth as you pointed out Powell do you feel like the 5 for 5 has started to have an impact there? Or do you expect it to yield better results in 2019 and 2020? I know you don't give organic growth.

And then – and same comments around the tech spend and then with Hays – just with Hays coming on board, will there be incremental dilution from 5 for 5 or tech spend as it relates to the integration of Hays?.

Okay. So the first thing you're asking about Greg, we call the producer incentive plan and the producer incentive plan is working in line with exactly what we thought it was going to do. So we're pleased with the results. And every year we look at how it's operated and we've been very pleased since inception with its results.

So, we think that's a positive going forward. You talked about the tech spend and I think that tech, its an important point to make is we don't believe that there's going to be an additional or additional moneys in the tech spend that we're aware of or that are known.

And what I mean by that is as you know there are certain states that are imposing cyber security or and/or cyber guidelines which may in fact actually increase that spend at some time in the future that we're not aware of to be in compliance.

So you've heard us talk and others probably talk about the New York, the DFS regulations and compliance in New York, if you do business -- any of your businesses do work in New York State, that's an example.

But as it relates to Hays the short answer is relative to the incentive plan and/or the tech spend we believe that their expenses anticipated are actually reflected in the guidance that we gave last year and Andy just reiterated..

Great. Thank you for that color. I know you in your opening comments or your prepared remarks talked about the M&A pipeline.

Given what's happened in the markets I suppose in the last half of 2018 and with the tax law change, I'm wondering if you've seen any sort of change in the appetite from private equity on M&A in your space? Or if you've seen any impact on multiples as you consider – as you look across your pipeline?.

Yes. Well, first of all, I think it's as competitive as it's ever been. So that's not -- that hasn't changed. The last count and it seems like there's always somebody new considering getting in, but there's somewhere between 28 and 30 private equity backed firms.

And typically what we see when we're involved in these transactions and this is not new, Greg, is usually there are a group of firms that are involved on a pretty constant and consistent basis and you can many times throw a blanket over kind of the group of the offers there and then it comes down to cultural fit and how that might work.

Having said that, periodically in those instances you have one outlier and that outlier might be a new private equity firm coming in or them buying into a new part of the country or they do something that just doesn't seem to make sense to us and/or the rest of the group seemingly based on the offers that are given.

But I think the most important thing is cultural fit and we always talk about that. But there's a there's a lot of firms that -- the thing that I would say that's a little continues to amaze me is at the end of the day private equity can give an offer within like 30 minutes and just throw it out on the table and that's not the way we operate.

And we think a lot about the cultural fit and the talent and the people and there are a lot of talented firms out there that wouldn't fit culturally with us and we wouldn't fit with them. And so we want to know that up front. And so we spend a lot of time on vetting that process more than anything else.

And then ultimately if there's a cultural fit we usually think that we have a pretty good shot of doing the transaction. But it amazes me when you're just putting things together with baling wire and chewing gum that they just -- they put offers out there with boom, boom boom, boom, boom, so it's very interesting.

It's just -- it's different from an operator standpoint to a financial consolidator, that's what I would say..

That's entertaining commentary. Thank you. I was just looking at the cover of your press release and on the cover and I know there's different accounting basis, but it does point out that your commission and fees were in excess of 2 billion for 2018. And I distinctly remember years ago when you launched and rolled out the 2 billion target.

What's your new target? And what's – and have you established that yet?.

Well, the answer to the question is we have but it's a secret. And so, we will roll that out probably at the end of the Q1 because we are galvanizing all of our teammates around that theme. But what I would say is this, if you remember, Greg, and I appreciate the offer.

When we were a billion dollars in revenue and we said we were going to be 2 billion, everybody said the following. How long is it going to take you to get there and what's the margin.

And we basically said if we wanted to be 2 billion or to double overnight we could have done that in the last month, the last six months or the last year, but culturally that wouldn't have made sense. And more importantly it wouldn't have made sense for our teammates of which our teammate owns 30% of the company.

So what I would tell you is this; when we double again as a company it's not the number of years that takes, it's the quality of the people, it's the quality of the people that we add. And so interestingly enough from a shareholder standpoint we believe that that applies to all shareholders not just teammates.

That just is an interesting unique fact that you know that we happen to be large owners of the company which I believe is something that investors would find interesting. There's alignment..

Great. Thanks for the answers..

Thanks Greg..

Our next question comes from Yaron Kinar with Goldman Sachs. Please go ahead..

Good morning everybody. Powell, you ended the scripted comments with the couple of headwinds that you noted for 2019 namely possibly economic slowdown and maybe not a headwind but rates not necessarily being a positive trend. At the same time you were also quite optimistic about opportunities for all four segments in 2019.

So could you maybe talk about the opportunity set a little more?.

Sure. So, remember I feel -- we feel the best about our company today that we ever have in terms of the capabilities our teammates, the way we work collaboratively across the organization to the benefit of our customers. So, that's just categoric. I mean, I feel really and we feel really good about that.

I think that there's going to continue to be some interesting opportunities that will be presented to us. I'm not foreshadowing something. Everybody -- I get a kick out of – Yaron, they say, well, when are you going to do your next big deal or what are you doing with the money on the balance sheet or what are you doing.

And the answer is we're going to invest it wisely and when the right opportunity comes along we're going to make that investment. Case in point with the investments we made last year. But I just think that from a standpoint of -- I just think that we're well positioned to continue to steadily grow our business to improve the margin profile.

And we just need to be mindful of those things. I mean once again I am not an economist by profession. I do have an economics degree from the University of Florida. I will tell you that there are lots of things that I look at that may not directly impact the U.S. economy but, by god they're going to surely indirectly impact the U.S. economy.

And so there are all kinds of things that sit out there that a lot of people maybe they don't think about and maybe they won't impact ours. But that's part of my job is to think about things that could potentially impact our business and foreshadow those.

I think it's pretty clear that if you talk to many CEOs in the United States, there is a feeling that sometime in the latter half of the year or early part of next year we may have a slowdown economically. There also happens to be a lot of questions around transitions with Brexit, Angela Merkel, Italy, China and the rest.

And so trade wars and how that impacts our customers and their businesses and things like that. So, I think it's kind of a balance and I'm an optimist but I'm a realist, and I think that's reflected in our company. We are optimist and we are realists.

And so we go in with very positive feelings about 2019, but we're just trying to make sure that you're aware that these are the things we're thinking about..

Okay. And then just a question on the IT initiatives. So I thought IT was supposed to -- the IT investments were supposed to start weaning a little bit in the fourth quarter and we're supposed to be a lift to margins. And I think they were so little bit of a drag.

So is that because you identified additional opportunities? Or is that because the initiatives are just taking a bit longer than you initially expected?.

Yes. Good morning. No nothing real unusual for the fourth quarter. Everything still right in line with what we were expecting. So it's progressing along course..

Okay. And then finally with the wholesale business it sounded like the organic slowdown was more a matter of timing than anything else.

Is that a fair way to think about it?.

I think it's fair.

It's kind of interesting because I went back and looked real closely at their performance over the last several years and they've had one fourth quarter they'd have a really good fourth quarter relatively speaking and then they might have a slight down quarter year over year over year if you go back to 15, so you have up down, up down, up down.

I don't want you to read something into one quarter performance in wholesale. That's a business that's had the most steady organic growth in our system over the last six years. And so I look at it and say they just didn't grow as much in Q4. But remember they grew 7.7% in Q3. They grew five point three and two and they grew six point one in one.

So, there's a five seven over the entire year. I feel real comfortable about Tony Strianese and his team..

Okay. Got it. Well, thanks for the answers and good luck on the year ahead..

Thank you..

Thank you..

Our next question comes from Mike Zaremski with Credit Suisse. Please go ahead..

Hey, good morning. Just one question. Powell, you mentioned that tight labor market in your prepared remarks. Obviously, compensation is your largest expense.

Is that having or expecting to have an impact on your margins going forward? And I guess I ask because I thought comp plan you guys had implemented in previous years was going to be a tailwind in 2019 and it sounds like, unless I'm mixing apples and oranges, that that’s not going to be the case based on the prepared remarks?.

Mike, good morning, let’s make sure we’re clear the producer incentive plan impacts a small group relatively speaking of people in the overall company. So that's in our retail segment. And it impacts a group of people that are on commission only.

And so, having said that in a certain segment of the business -- having said that there’s impacts across the entire organization in terms of wage pressure. Here's the way we look at it. At the end of the day we're trying to attract, retain, reward and develop the most talented people that fit culturally with our organization.

And having said that, we periodically come across people who we feel and I tell our teammates this, we can't -- it would be a mistake not to hire them. If they're not in the budget then you just figure it out. And so I think that it's just like anything else. It's not purely linear, Mike.

And that's the reason I say that because I think -- we think of it about one person at a time. And so if that impacts all of a sudden 35 offices then it may have a -- it may drive our S&R up slightly that quarter or the next two quarters.

But then they start making such a positive impact on the organization and helping us either retain our existing clients or write new clients. So I don't want to give you the impression that it's not a tailwind. I think that the producer incentive plan is working very well. We're very pleased with it.

But I just want to remind you it impacts a relatively small number of people of the 10000 total teammates. So we're always mindful of wage pressure, but that means we need to grow the company both organically and through acquisition..

Got it. All the best in 2019. Thanks..

Thank you..

Our next question comes from Mark Hughes with SunTrust. Please go ahead..

Yes. Thank you. Good morning. And just think about it my own way the -- I think the original plan was the technology spending and the producer incentive payouts would begin to taper in 2019 and therefore be margin accretive. I think you said you're performing along with the original plan.

So is that a fair look at it that the expenses should taper and therefore would be positive for margins?.

Yes. So good morning Mark, it’s Andy here. So think about those two in two different ways, okay. Is on the IT side, yes, you’re correct from a spent and thinking about it as a percentage of revenue. So that is correct. On the retail incentive program, it's actually not about the expense.

If you recall back when we talked about the program is the goal there was to drive incremental organic revenue which therefore compounds over time. So the expense remains relatively constant. We're just growing off of a larger base.

So what that really means is and that's why we said in our previous comments you would see some margin expansion out in 2019. That's how the plan works and is designed..

Right. And then the stock comp, a stock comp is only up 3 million to 5 million.

Presumably, if you have any sort of organic growth that likewise would be margin creative if the expense is relatively fixed or up fractionally and your revenue grows faster, based on what we assume then that would also be margin accretive?.

If total revenues grow faster than the increased stock comp, you are correct. Yes, that would be a margin. So the guidance that we gave on it was 3 million to 5 million. And if you look at the cash flow statement you can see we had about $33 million – $33.5 million of stock comp in 2018..

And then finally with the employee benefits you say the rates are up.

How much do you participate in those higher rates at this point with your mix of business with Hays, how much do higher rates act as a tailwind for your revenue?.

Limited, and the reason is the amount of self-funded business and/or in many states the smaller market, smaller market depending on a state defined is under 50 lives or under 100 lives.

The companies in many states have moved the way you're paid on them from a commission whereas you know Mark if the premiums go up you would get more income to per head per month. So the only way you get additional commissions would be if you add another head or another bellybutton and it's what they use, the term. So the answer is limited..

Thank you..

And we'll take our next question from Josh Shanker with Deutsche Bank. Please go ahead..

Thank you for taking my question. I just want to walk through the $22 million versus the $2 million of hurricane servicing revenues.

It's the margin on those the same or do you get their economies of scale benefit in a quarter like 4Q 2017 and what is that margin?.

Good morning, Josh. So what we said on previous calls is the margin on storm claim related activity is higher than our average. We have not said exactly what the margin is..

And is there any reason why? I mean, is that would be really useful for us for making a year-over-year comparisons given the exceptional circumstances a year ago?.

Yes. I guess similar to we don't give exact margins on any individual business underlying..

Okay.

And if -- so then can we understand if there are economies of scale you can do 22 million in storm margins, does it -- in storm revenues, does it have a higher margin than a quarter where you only do 2 million or is it the same generally regardless of the situation?.

Yes. The margins go up a little bit. But it does scale underneath. It's the magnitude..

Okay..

And so you're going to see it -- you're just not going to see a margin movement on a couple million dollars of flood claim activity..

Okay.

And then if we look at -- you're getting larger – you’ve had a very strong first half of year in terms of growth and now it's one of the back half the year, as you get larger is there a seasonal move that more renewals are happening, I guess, due to the employee benefits or whatnot in the first half of the year? Or is that -- is the first half of 2018 going to be a headwind in the first half of 2019?.

So, Josh, definitely look at how the quarterly numbers have fallen now because the impact of the new revenue standard has absolutely moved revenue and margin around by quarter without a doubt.

And if you remember back we had the margins on some of the different businesses were different by quarter, some of that has leveled out, so definitely look at it by quarter now..

But the first – I guess the first half of the year was like up 5.4% on apples-to-apples basis with post ASC 606 retrofitted for 2017 I guess.

Is that a tough comp I guess is what I'm asking?.

Yes. Go back. If you look at -- so here's probably the way to think about it. Look at the rev rec slide that we included inside there. So if we go back to and if you look at slide 18. So we moved $27 million of revenue into the first quarter and then 14 into on the income before income tax, it about offsets in the second quarter..

But I guess I mean maybe I'll have to go through it. I feel I'm looking at apples-to-apples. There's no headwind coming from having a strong first half 2018, that’s an extra headwind in 2019..

Now the only the only piece in there is again when you're modeling it just keep in mind that we were making our core commercial program. We had not made the lap on it in the first half of 2018. So remember that program we started that up in July of 2017, okay..

Okay. Thanks very much. Good luck..

Thank you..

We'll take our next question from Meyer Shields with KBW. Please go ahead..

Great. Thanks. Two quick questions on Hays if I can.

One, do the revenue numbers on slide 19 anticipate supplemental and contingent commissions that are roughly equivalent to legacy Brown & Brown?.

Yes. It does include contingent commissions and GSCs. And yes, they are in a similar percentage ratio..

Okay. Perfect.

And if there any reason that the inclusion or integration of Hays would slow legacy Brown & Brown organic growth? Or should that not be impacted at all?.

We don't think it's going to slow Brown & Brown legacy organic growth..

Okay, excellent. Then one final question just to make sure I understand it. Powell, you talk about the potential for an economic slowdown in the back half of 2019.

Would that impact revenues on a real time basis? Or do you expect it to be a lag between when, I don't know, GDP growth slows when you actually see commission volumes reflect that?.

I think it depends on how the clients manage their exposure units. And what I mean by that is there are some customers which will adjust their insurance exposure units particularly on larger accounts right when they see that change and sometimes they won't.

And so there inherently I would say that there would be slight lag, but you could see other people adjusting if I mean like I said I don't think this would be the case, but if it was a severe rapid downturn then could people adjust their exposure units being their payrolls or their number of vehicles on the road or whatever the case may be.

Could they adjust the midyear? And the answer is they could..

Okay that's very helpful. And then last question with regard to the revenue headwind guidance in lender-placed insurance and social security advocacy.

Is any seasonality to that? Or should we just assume that spread out over the year?.

I think you should assume that’s spread out over the year..

Okay, fantastic. Thank you so much..

We'll take our next question from Robert Glasspiegel with Janney. Please go ahead..

Good morning, Brown & Brown. I'm going to follow Meyer's questions on Hays with the more on the margin side. This quarter I think I saw it was a pretty negative. You said inclusive of any restructuring charges, deal closing charges.

And I was wondering if you could spike what your onetimers were in Q4?.

Good morning, Bob. No, they were minimal for the fourth quarter for the 45 days..

So there's no deal restructuring, there's no banking fees or anything else that getting expense to deployment for the numbers as of yet?.

No nothing materiality. We didn't have a banker on our side..

And is there any seasonality as we think about margins for you? You gave us $0.03 accretion in the Q1. So it looks like they have a heavier revenue contribution in Q1 than the rest of the year.

And its -- I assume its mainly retail wholesale or the revenues are going to flow to?.

It’s retail business. And remember they have a very large employee benefits portion of their business which is why from a rev rec standpoint, that's moved into Q1..

And one last – go ahead..

Yes, Bob, just make sure you look back to slide number 19 on Hays, because the phasing by quarter is really important..

Okay. We'll do that. And the restructuring charges, are you going to spike those out or are we just going to have to sort of guess at them and I think it was $0.02 to $0.03 of accretion.

Does that inclusive of restructuring or exclusive?.

That is included of integration cost. So again we don't have restructuring cost. We've got integration. And what we said on our previous comments is, they are more heavily weighted to the out years. We're really just trying to get all of our teams together and figure out all the moving parts in it, but we're not.

And again similar to our previous discussion the objective of this transaction was not to drive cost out, right. The objective was to drive the top line and grow the business. We will get some cost out but it is not a cost play..

No. I understood that.

Those -- you're not going to be integrating new office [ph] as day one they're like, right, autonomous?.

We’ll integrate the applicable offices at the right time when it's right for the business, but we're not driving down a plan that to kind of crash everybody together, Bob, that's not the goal. Again we're trying to keep all the momentum on the top line moving forward..

Good luck in 2019..

Okay. Thank you..

And we'll take our next question from Adam Klauber with William Blair. Please go ahead..

Good morning. Thanks guys. In the wholesale business from what I hear the markets bit more dynamic, you get a couple of the big players; Lloyd's and Lexington pulling back.

Would that be -- how would that impact you? Will that be good for you? Will that be bad for you? Any thoughts on that?.

Well, I think it depends on the -- how the rest of the market responds.

And what I mean by that is if you have a big player in a segment as you referenced and they pull out or they double or triple or quadruple their pricing on that same exposure unit depending on how quickly the market would come in and fill that void is going to impact if it's going to be that positive for us or not.

I would tell you based on everything that I'm hearing that there's plenty of capacity in many other instances to fill that right now. So could there be a certain class that I'm not aware of? Absolutely, there could be. But as a general statement I believe there are other markets who are willing and want and willing to fill that gap..

Okay. Thanks.

And then as far as your retail business before Hays what was the growth in your producers in 2018?.

You mean you're talking about the number?.

Yes..

Yes. We haven't talked about the production growth publicly. And we aren't going to do that in terms of how many we've added or how many have left or whatever. But we're growing our business nicely and it's reflected in the organic growth and we continue to always look for people that can help bring new customers in..

Okay. And then on the technology, you've been upgrading your agency management system.

Does that give you more analytic capability? And could you could you give us an idea what you're doing in the analytics front?.

Sure. Well I mean we have a way now to better look inside of our data and look at similar classes of business whether it would be in a state or in a region or across the country. And we are able to share information more easily which enables our teammates we believe to bring better solutions to our customers.

So as we continue to migrate everybody onto this new one agency management system we think that that will only continue that that capability will be enhanced. So we put the first things in place and as we continue to migrate the rest of the offices onto that system we know and that it will get even better..

Okay.

And how long will that migration take? Is that mainly 2019? Will that go into 2020 also?.

Right now we are looking at another -- it's -- it would be between 2019 and 2020. And if you take -- if we didn't do another acquisition which we're going to, so that's a little bit misleading, but if we didn't do another acquisition the existing businesses that we have it would take till the end of 2020 to migrate everybody across..

Okay. Thanks.

Last question on Hays, have you disclosed the retention pool for existing producers at Hays? And how is that being accounted for in your financials?.

So, no, we haven't described that publicly. And Andy….

Yes. Yes, for anything that was post transaction, Adam, is that's being expense through the P&L.

Okay. And I’ll take it that's in the performance you gave us..

Yes it is..

Okay great. Thanks for that. Thanks for the answers guys..

Thank you..

Appears there are no further questions. Mr. Brown I'd like to turn the conference back to you for any additional or closing remarks..

Thank you, Bryce. And we appreciate everybody's time today. We wish you a great day and we look forward to talking to you next quarter. Thank you and good day..