Good morning. And welcome to the Brown & Brown Fourth Quarter Earnings Call. Today’s call is being recorded.

Please note that certain information discussed during this call, including information contained in the slide presentation posted in 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 thus its financial results differ from the current preliminary un-audited 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, further events or otherwise. In addition, these 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 measures can be found in the company’s earnings press release or the investor presentation for this call on the company’s Web site 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..

Thank you, Cecelia. Good morning, everyone. And thank you for joining us for the fourth quarter 2019 earnings call. I'd like to take a few minutes to make some broad comments about how we think about our business. In 2018, we crossed an intermediate goal of $2 billion in revenue and in 2019 we delivered almost $2.4 billion in revenue.

As many of you may know, our next financial goal is $4 billion in revenue. We do not have a stated timeframe to get there, we'll get there by adding talented teammates, growing organically and acquiring businesses that fit culturally and makes sense financially.

If we'd just wanted to achieve our next intermediate goal, we could've done that last week, last month, or last year. Acquiring businesses and running businesses are two distinctly different skills. Furthermore, overpaying for a large acquisition does not create value for our teammates or our investors.

As we mentioned in the past, approximately 25% of our company is owned by teammates. So when I go into an office and our teammates ask me, how, what's up with the stock, I know those team mates own Brown & Brown and want our company do well.

We believe that shows great alignment inside the company and that will ultimately yield positive results for all shareholders. The achievement of our overall divisional and local goals are not possible without great team mates focused on delivering solutions to our customers. We're always searching for innovative ideas to help our customers succeed.

We have over 10,000 teammates. They are the most important ingredient to our success. These teammates armed with new capabilities are always seeking to improve the customer experience at Brown & Brown.

How will we do that in the future? One way will be through the better use of data and digital capabilities, and by partnering with the appropriate tech firms to help us drive innovation in our company. Technology is a very high priority for Brown & Brown and myself in 2020. Private equity is very aggressive in our space.

They are betting that interest rates stay flat or go down towards zero. Each owner sponsor hope they can grow the business organically and flip it at a higher exit multiple. It's frothy out there. When PE buys PE based on inflated EBITDA and expected synergies, there's not much room for error, if any. Our investment thesis is forever.

Our focus on capital allocation -- we focus on capital allocation, return on invested capital and cash flow from operations, which enable us to reinvest our earnings into the business each year. While many are focused on quarterly results, we're focused on next year three years from now and five years from now.

We're a customer focused solutions business that has a disciplined capital allocation approach. We consider cash flows as a key benchmark in addition to total shareholder return versus major indices in our publicly traded peers.

For the past five years, we've exceeded the average total shareholder return of the other public brokers by more than 50% and the S&P 500 by more than 125%. I raised these points because all of us at Brown & Brown are proud of our results, not just in 2019 or the last five years, but since inception.

We are a disciplined solutions provider that allocates capital effectively. We're pleased with our past performance and we will prompt about the future. Now moving on the Slide Number 3. For the fourth quarter, we delivered $578 million in revenue, growing 13.8% in total and we grew organically 5.2%.

We're very pleased with this strong organic revenue growth, and I'll get into more detail in a few minutes about the organic revenue growth for each segment. Our EBITDAC margin was 27%, which is down 110 basis points versus the fourth quarter of 2018.

Our net income per share for the fourth quarter was $0.27, increasing 3.8% as compared to the same period in the prior year. On an adjusted basis, excluding the change in acquisition earnout payables, we delivered $0.28 of net income per share, growing 7.7% over Q4 of '18.

During the quarter, we acquired five businesses with annual revenues of approximately $19 million. And now on to Slide 4. For the year, we grew revenues at 18.8% and delivered organic revenue growth of 3.6%.

The one-time non-cash $8 million adjustment we recorded in the third quarter of last year within our National Programs segment had a negative impact of 50 basis points on our 2019 organic revenue growth for the year. We're very pleased with the continued improvement in our organic revenue growth we delivered in '19.

Our EBITDAC margin was 30%, down 60 basis points compared to 2018, which was primarily driven by the addition of the Hays business. Our net income per share for the full year of 2019 increased 14.8% to $1.40 from $1.22 in 2018. On an adjusted basis, which excludes the change in acquisition earnouts, net income per share increased 13.8%.

Later in the presentation, Andy will discuss our financial results in more detail. For the year, we closed 23 transactions with approximately $105 million of annual revenue. We had another good year of M&A activity as we added many excellent businesses and team mates that fit culturally with Brown & Brown. I'm on Slide 5.

For the fourth quarter, premium rates continued to increase or as we said previously are farming. While we experienced some acceleration in premium pricing as compared to the last three quarters, we do not believe this is a broad-based hard market.

As we discussed during the year, risk bearers are seeking rate increases, and these are sticking in certain areas and not sticking in others. We've seen more significant increases in large accounts. However, these will not necessarily impact our organic growth as many of the larger accounts were on a fee basis.

In general, there is a continued upward trend from most lines. The amount of increase continues to be driven by the loss experienced for the account or certain classes of business.

The lines with the most notable increases include, but are not limited to transportation, habitational, coastal property, both wind and quake and excess liability or otherwise known as umbrellas. As we've mentioned before, accounts of losses are generally seeing rate increases well above those accounts with minimal or no loss experience.

Commercial auto remains well -- the one line and coverage is consistently realized 5% to 10% rate increase, and we are seeing these increases across almost all carriers. Workers' compensation rates in most states remain down 2% to 5% and then other lines, typically are increasing 2% to 5%.

As it relates to the E&S placement for cat-prone properties including wind in quake, we realized increases in the range of 5% to 20%, but there can be outliers. Most professional liability lines for private companies were flat to down 10%. Public company D&O and E&O typically are up 5% to 10% or more.

As it relates to casualty pricing and the adverse loss development that's being realized across the industry, it's prompting carriers to review the adequacy of their pricing. If the loss development trend continues upward, we believe there will be more pressure to increased casualty pricing over the coming quarters.

The E&S space remains the area we continue to see a number of carriers being more selective in certain lines or geographies. And therefore, we're seeing a more pronounced impact on E&S rates versus the admitted markets.

In general, while risk barriers have been able to get rate increases, there has been upward movement from where we were a year ago for most lines. There's still a lot of capital in the market and competition for accounts with low loss experience remains.

In the current environment, we do not think these conditions will abate for at least the first half of 2020. We're pleased, actually very pleased with the progress we've made on many company-wide initiatives throughout 2019 and feel we are in a great position to continue growing the business in 2020.

I'm now on Slide Number 6, let's talk about the performance in our four segments. Our Retail Segment delivered organic revenue growth of 7% in Q4. We like to congratulate all of our teammates within the Retail Division for delivering the strongest organic revenue growth we've seen in many years.

Our growth for the fourth quarter was driven by good new business, improved retention and some rate improvement. On a full-year basis, the 4.7% organic revenue growth represents continued incremental improvement over the 3% organic revenue growth we realized for the full-year in 2018.

Finally, we're pleased with the performance of Hays for their full first full-year. Our National Programs segment grew 10.7% organically in the fourth quarter, delivering another really strong quarter. The organic revenue growth this quarter was also one of the highest we've delivered in many years when you exclude the impact of flood claims.

Our growth was driven by continued strong performance from our earthquake programs, our lender placed program and many of our other programs performed very well. For the full-year, our National Programs segment grew 3% organically.

The one-time $8 million non-cash adjustment recorded into the third quarter of last year within our lender placed business negatively impacted the full-year organic revenue growth by approximately 180 basis points. Overall, it was a great quarter and a full year. Thank you to Chris Walker and all of the team at National Programs.

Our Wholesale Brokerage segment delivered another solid quarter with organic revenue growth of 7.9%, driven by strong performance in our brokerage business and increasing rate, rounding out another great year with organic revenue growth of 7.4% in 2019, a big thanks to Tony Strianese and all of the team in wholesale for delivering another great year.

The organic revenue for our Services segment decreased 19.4% for the quarter. We mentioned last quarter we expected revenues and margins to decline by 5% to 10% for the services segment in Q4, being driven by Social Security, advocacy business and a terminated customer contract with one of our claims processing businesses.

Additionally, organic revenue growth for the Services segment was further impacted for the quarter by lower weather-related and general property claims. As we've seen in the past, our services segment can have more volatility in its revenues based on claims activity in a number of our businesses.

While we experienced good growth over the last few years, 2019 was one of those years we did not have a lot of claims activity contributing to the Services segment decline of 6.3% organically. Now let me turn over to Andy to discuss our financial performance in more detail..

Thank you, Powell. Good morning, everyone. Consistent with previous quarters, we're going to discuss our GAAP results, certain non-GAAP financial highlights and then our adjusted results, excluding the impacts of change in acquisition earnouts. I'm over on slide 7.

For the fourth quarter, we delivered total revenue growth of $70 million or 13.8% and organic revenue growth of 5.2%. Our income before income tax and EBITDAC increased by 1.3% and 9.2% respectively.

The lower growth in pre-tax income was driven by increased interest amortization expense associated with our acquisition activity, as well as an increase in the change in acquisition earn-out payables of $5 million as multiple businesses experienced stronger than anticipated performance.

Later we'll walk through the detailed movement of our EBITDAC margin and the impact of Hays. Our net income increased $3 million or 4.1% and our diluted net income per share increased by $0.01 or 3.8% to $0.27. Our effective tax rate for the fourth quarter of 2019 was 25% compared to 27% in the fourth quarter of 2018.

The lower effective tax rate was driven by our state tax footprint and corresponding apportionment along with the tax rate change in Florida. Our weighted average number of shares were generally flat compared to the prior year as we purchased shares in order to mitigate the impact of our stock incentive plan.

And lastly, our dividends per share increased to $0.085 or 6.3% compared to the fourth quarter of 2018. Moving over to Slide Number 8. This slide presents our results after removing the change in acquisition earnout payables for both years. We believe this presentation provides a more comparable year-on-year basis.

Our income before income taxes on an adjusted basis grew 6.2% or slower than EBITDAC due to the incremental interest and amortization expense associated with the acquisitions we completed since 2018. Moving over to Slide Number 9, this slide presents the key components of our revenue performance.

For the quarter, our total commissions and fees increased 13.6%. Our contingent commissions and guaranteed supplemental commissions or GSCs increased by $2.5 million as compared to the fourth quarter of 2018, which was partially driven by our acquisition activity.

When we isolate the net impact of M&A activity, our organic revenues increased by 5.2% for the fourth quarter. Over to Slide Number 10. To provide some additional visibility into the major drivers, our EBITDAC margin, we've included a walk through from 2018 to 2019.

During the quarter, we had a couple of disposals that resulted in a gain that benefited our EBITDAC margin by 90 basis points. In line with our expectations, Hays negatively impacted our margins by approximately 150 basis points for the quarter due to the phasing of revenues and profit in accordance with the new revenue standard.

I'll talk more about the financial performance of Hays in a few minutes. Other reflects the margin change we experienced across the remainder of our business.

The main drivers were higher non-cash stock compensation cost and the dilutive impact of an acquisition we completed in 2019 that recognizes substantially all of its revenue in the first quarter of each year. Excluding these items, we experienced margin improvement for the quarter.

On a full year basis, excluding the impact of Hays, we expanded margins driven by higher organic growth, increased contingents and GSCs, managing our expenses and realizing benefits from our previous investments, which more than offset the impact of increased non-cash stock compensation expense. Moving over to Slide Number 11.

Our Retail segment delivered total revenue growth of over 22%, driven by acquisition activity over the past 12 months and organic revenue growth of 7%, driven by growth across most lines of business.

Our EBITDAC margin for the quarter decreased by 140 basis points due to the phasing of profit from Hays, the margin impact associated with an acquisition we completed in the third quarter of last year, 2019 and higher non-cash stock-based compensation cost. All of these items more than offset gains we realized from current quarter disposals.

When we isolate all these items, we experienced margin improvement for the quarter. Our income before income tax margin declined by 530 basis points due to higher intercompany interest expense, amortization and incremental acquisition earnout expense and the drivers of the EBITDAC changes noted previously. Moving over to Slide Number 12.

Our National Programs segment increased total revenues by $14.2 million or 11.8% and organic revenue by 10.7% due to strong performance from a number of our programs, including commercial, residential earthquake, lender placed and our sports and entertainment programs, as well as increased contingent commissions.

Income before income taxes increased by $11.9 million or 46.5%, primarily due to leveraging revenues and lower intercompany interest expense. EBITDAC increased by $9.9 million or 24.9% due to higher revenues and continued expense management. Moving over to Slide Number 13.

Our Wholesale Brokerage segment delivered total revenue growth of 5.9% and organic revenue growth of 7.9%. Our contingent commissions for the quarter were down due to an adjustment in the prior year that did not recur in 2019.

The EBITDAC margin decreased 80 basis points as a result of lower contingent commissions and GSCs, which more than offset margin expansion, driven by higher organic revenue and expense management.

Our income before income tax margin decreased 20 basis points due to the same factors driving the EBITDAC margin, which was partially offset by the benefit of lower intercompany interest and amortization expense. Over to Slide Number 14.

Total revenues for our Services segment declined due to a decrease in organic revenue, which was partially offset by acquisition activity. The lower organic revenue growth was driven by our social security advocacy businesses and lower weather-related and property claims and a terminated customer contracts that we mentioned last quarter.

From a margin perspective, the EBITDAC decrease was driven by lower revenues. We anticipate this segment's revenues will continue to decrease approximately 5% for the first half of 2020, continuing to be impacted by our social security advocacy businesses and the customer contract that was terminated in the third quarter of 2019.

Over on to Slide Number 15, this slide presents our GAAP results for the full year of 2019 and 2018. For 2019, we delivered $2.4 billion of revenue, growing 18.8% and earnings per share of $1.40. EBITDAC increased 16.5% and the EBITDAC margin declined by 60 basis points.

Excluding the impact of Hays, we experienced full year margin improvement, which we are very pleased with. Our full year effective tax rate was 24.2%, decreasing basis points versus 2018. For the year, our share count remained relatively flat, decreasing by 30 basis points from the prior year. Moving over to Slide Number 16.

This slide presents our results excluding the change in estimated acquisition earnout payables for both years. Our adjusted income before income taxes grew by 12.7%, which is slower than growth in EBITDAC due to higher interest and amortization related to the acquisitions we completed since 2018.

Our adjusted net income grew by 14.7% and adjusted earnings per share increased 13.8% to $1.40 as compared to 2018. Finally a comment regarding the efficiency with which we convert revenues to cash. On a full-year basis, we converted 28.4% of our revenues to cash flow from operations, which is 20 basis points higher than last year.

On a full-year basis, our cash flow from operating activities has grown 19.5% as compared to total revenue growth of 18.8%. Moving over to Slide Number 17.

We'd like to provide some additional information regarding the quarterly and annual performance for Hays for the fourth quarter, Hays delivered revenues of $52 million, which is just about $4 million above the top-end of the expected range for the quarter. EBITDAC for the quarter came in at about $8 million, which was at the low-end of the range.

From a full-year perspective, revenues were $221 million, which was just above the top-end of our initial guidance of $210 million to $220 million. EBITDAC for the full-year was $50 million, which was in the middle of our estimated range.

Diluted net income per share, excluding the incremental change in estimated acquisition earnout payable, was $0.02 for the full-year and was in-line with our expectations. Before we move to closing comments, we've got some additional guidance regarding certain line items for 2020.

We want to provide some guidance regarding the third quarter acquisition that was previously discussed that will recognize substantially all of its estimated $20 million to $22 million in revenue in Q1 to correspond with the effective dates of the policies at place.

As a result of the new revenue standard, this acquisition will impact our quarterly profits in 2020. The positive impact to our EBITDAC margin in Q1 is expected to be in the range of 100 basis points to 150 basis points.

And then we expect about a 30 basis points to 40 basis points of compression in the second quarter and then about 15 basis points to 20 basis points of compression in the third quarter versus the same period in the prior year.

We anticipate GSCs will decrease $8 million to $10 million in 2020 as compared to 2019, primarily as a result of the one-time GSC of approximately $9 million. We realized in the National Programs Segment in the second quarter of 2019. As we discussed before, our stock compensation cost has been increasing as a result of better performance.

We expect our stock compensation cost to increase during 2020 by approximately $6 million to $8 million over 2019. And based upon our current rate outlook, interest expense is projected to be relatively flat year-on-year. And then our amortization expense should be in the range of $100 million to $105 million for 2020.

Keep in mind that both the estimated interest expense and amortization are excluding any additional acquisitions or borrowings that may occur in 2020. So you need to make your own assumptions regarding these items. We expect our effective tax rate for 2020 to be similar to 2019.

While the projected annual rate will be similar, we do anticipate our effective rate in the third quarter to be in the range of 14% to 17%, and then all other quarters to increase versus the prior year of 2019. The anticipated variance in the third quarter is driven by the tax benefit associated with the vesting of stock incentive awards.

With that, let me turn it back over to Powell for closing comments..

Thanks, Andy, for a great report. In closing, I want to make some comments regarding a number of topics and how we are thinking about our business and opportunities in 2020 and beyond. As it relates to the economy, we expect the growth rate and corresponding impact on exposure units to be relatively similar in 2020 from 2019.

This is barring any major negative changes in trade relations or another matter that could impact the overall economy. From a rate perspective, we anticipate premium rates will continue to increase slightly during at least the first half of 2020.

However, I'd like to repeat, we do not believe we have hard market conditions, but rather a firming of rates for many lines. This is driving certain risk barriers to either constrain capital or pull out of certain lines or geographies entirely. On the M&A front, we expect competition will remain aggressive until interest rates increase materially.

We expect PE will more than likely continue to leverage deals higher than strategic players. We're going to remain disciplined with our approach as it has proven very successful over the years and we will buy businesses that make sense financially and fit culturally. There are plenty of opportunities that fit the profile.

We've been talking about the increasing importance of technology and the use of data. We firmly believe these will have a material impact on the delivery of insurance over the coming years. Let me be clear, I'm not saying that technology will displace the importance of a customer talking with their broker regarding the transfer of risk.

We're talking about how we'll interact with customers during the buying and renewal experience, removing the friction of simple transactions, as well as how we use data to help create new products with our carrier partners.

We will also be focusing on how we can be more efficient and therefore direct more time toward winning and retaining additional customers.

Since we are not a technology company, nor do we have all the answers, we will more than likely partner with insure-tech companies so we can leverage their innovation in concert with our industry expertise and data. Allocating capital in the most optimal way remains top of mind for all of our leaders.

We're fortunate to generate over $600 million of cash and anticipate this will grow more in the future. As we've stated before, our goal is to deploy all of our available capital and more, if the right opportunities are available, so we can continue to deliver industry-leading financial metrics, cash flow conversion and ultimately, shareholder value.

Increasing and investing in our teammates remains a key priority for our Company as it is through our talented team that we're able to serve our customers. We believe we have the right operating framework and culture to stimulate additional profitable growth in 2020 and beyond.

With that, I'd like to turn it back over to Cecelia to open it up for Q&A..

Thank you [Operator Instructions]. We will now take our first question from Greg Peters from Raymond James. Your line is open, please go ahead..

I wanted to circle back. I have a couple of questions.

But Powell, you were talking about technology and I'm just wondering, in the context of you're not being a technology company, do you anticipate that in 2020 that you're going to be spending more on technology-related initiatives across the franchise relative to 2019 or how should we think about that in terms of an expense headwind?.

The answer to the question is, as you saw, we named Steve Boyd, the Head of Technology, Innovation, Data and Digital Strategy last year and we continue to evaluate not only things like security, but we talk about the way we are actually doing business internally.

So we're not at a point yet to say exactly what that is, but the answer to the question is, we do believe that there is going to be more investments and we are going to do it in a thoughtful way. I don't want anybody in this call taking something out of context like we're going to just go throw $25 million in a bucket. That's not what we're thinking.

But we are thinking about technology in several ways. There are the ways to keep the lights on and running like electricity and then there is protecting from the bad guys, as I call it, and then there is two parts of innovation.

There is using something that would actually be emerging, which would be kind of a fast follower concept and then there is also a component which might be on that leading edge concept, which is the smallest bucket.

So I feel really good about our team and some of the new people that we have had join us or are joining us in the technology area to help us think about doing business more efficiently where our teammates can focus more time on serving our customers. So I'm excited about it..

Greg, Andy here, maybe one other thing just to think about that. Similar to what we did back in the first quarter of 2016, if we had a large technology investment, a multi-year, we would come talk with all of our investors about that. But we don't see anything like that on the horizon right now..

Thank you for saying that, because I would -- as we are sitting here thinking about just your EBITDAC margin for 2020 and I know you provided some guidance around what the acquisition is going to do, it's down 60 basis points for the full year in 2019 versus 2018 and Hays is in that, do you think that we've sort of stabilized? Do you think it's going to be better in 2020? Directionally, can you give us some ideas of where you guys are thinking about that?.

Greg, so let's come back to '19 just for a second. When we look at the margins for the organization, you're right, they are down. If you just pull out Hays by itself, our underlying margins are up. When we came into 2019, we said our goal was to increase our margins a little bit for the business. That's exactly what we delivered.

So we feel really, really good about where we are today. So really important to make sure we pull Hays up. And there's all kinds of other moving parts underneath there. They're almost all net out back and forth. We increased underlying margin, so, again, really pleased with 2019.

As it relates to 2020, we don't see any major headwinds coming at us that we know about right now. Not that things could never change, but as of today, no, we don't see anything and feel really good about the trajectory of the business..

Let's pivot back to the revenue side. And, Powell, I know you commented about exposures and the outlook for exposures. Retail was really strong as you pointed out.

Can you give us an idea of how much, not only for the fourth quarter, for the year was exposure versus rates and should we be thinking about some pretty difficult comps as we move through 2020 on organic because of the success you had in 2019?.

So we don't break out the exact amount of the organic revenue growth for rates and exposures. But as I've told you, kind of it's a balancing act from a standpoint of -- from an exposure standpoint, we would say, anecdotally, that our customers are doing better generally across the board, which is no surprise to you, number one.

And you heard my comments earlier about the rates in the market. I believe and continue to believe that we're very consistent with what we've said.

The retail business, not unlike the overall business, is a low to mid single digit organic growth business in a steady state economy that could be positively impacted slightly by other impacts, i.e., rates increasing in the area where we are today. But we're not giving guidance on organic growth, as you know.

I will say this, though, I could not be happier with the progress that we have made in our retail business and for that matter, the entire business over the last three to four years..

And the final point just on free cash flow conversion rate. Is there any sort of headwinds that we should be concerned about as we think about the conversion rate for 2020? And that's my last question..

Just to clarify, Greg, we look at cash flow from operations as one of those key metrics, as no major items that we know about -- the one thing that can occur back and forth is the movement in the fiduciary cash because that ultimately rolls to cash flow from operations, so depending upon that movement that's the only item that can cause noise up and down on some years, but otherwise no, nothing..

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

My first question, we've been hearing a lot in terms of the pricing environment within Florida getting better as we move through 2020.

Given your exposure there, Powell, I was hoping if you can kind of talk about what you foresee happening in Florida during the year, and then also how that could potentially impact your organic revenue growth and provide a tailwind potentially even beyond the first half of the year?.

So let's talk about Florida in a couple ways. As you know, Florida has got the most coastal exposed building construction in the United States, meaning cat exposed within one county other than New York State. So Texas would be number two. So the last time I saw this number, it was $1.300 billion or something. It's a huge number, it's kind of staggering.

So first of all, we talked about the impact of E&S market and how that would impact potentially residential and commercial accounts that we're seeing and we said earlier that, generally speaking, we're seeing rates that are in that 5% to 20% range. So that's a component.

Number two, I would tell you that, in the State of Florida, there are lots of take-out companies and those take-out companies are depopulating the citizens as many of you know. And there are, as we understand, a number of those companies that are being under watch by Demotech and others today.

We don't know exactly what that will mean for that space yet, but some of the losses that have occurred in the past couple of years are developing in a manner or may have hit their reinsurance layers in a way that were not otherwise anticipated.

Having said that, when we became a public Company in 1993 the vast majority of our business was in Florida. Today at $2.4 billion -- just roughly $2.4 billion of revenue, our Florida exposure is much less.

So I say that because remember, in a business that in retail, which is roughly -- these are all rough numbers, $1.4 billion, maybe $180 million of it is in retail.

And so we don't break out the amount of property we have and we also have some nice-sized wholesale in Florida as well, but they are writing business all over the country in cat-prone areas. So, Elyse, I would caution you by saying that we're going to get some huge lift from these so-called Florida effects.

We are all really happy to live in Florida for a whole bunch of reasons and run our business from here. But I would just tell you that I think that I would want you to look at the Florida effect as similar to around the country with a slight upside to it.

But nothing something where you need to go tweak something substantially, I would caution you about that..

And then in terms of the Retail Segment, I know you guys don't like to give guidance, but if I recall correctly, I thought earlier in the year you had pointed to the second quarter of 2019 as being your strongest quarter for that segment just given rev rec and some of the shift between the Q1 and the Q2.

Now the fourth quarter ended up pretty strong -- the strongest you've had in some time as you pointed out.

So I'm just curious, was it like new business, renewal, something one-off that drove the 7% in the quarter and that might have lifted that number relative to your prior expectations?.

So I think just to clarify your earlier comment, I think it was the first quarter as opposed to the second quarter that we talked about. And number two, I think that there is -- I have Andy sitting right next to me and you guys will chuckle, but I always think that 606 clouds the issue versus makes it clear. But I'm not a CPA and I'm not a PCAOB.

So having said that, I would tell you that we had just a damn good quarter and that means we wrote a lot of new business and we have clients that -- or some of them, sometimes our clients get purchased but we had clients that were buying businesses. We had exposure increases. We had things. It was just a really good quarter.

And I also would say, I mean, to manage your expectation, Elyse, is this. One quarter doesn't make a trend and we've said that. I look at it -- if you look back at the organic growth of retail in the last four years and I might be off on the four years ago, but I think it goes something like this 1.8%, 2.7%, 3%, [4.7%]. We're pretty happy about that.

And we think that that is a big reason that the stock price has reacted accordingly in addition to our acquisitions and are executing our plan on other divisions and this and that and all this other stuff. But again, we're really pleased with it..

And then just lastly on the margin side, so if I calculate it correctly and I'm sorry if you gave the number. It seems like you improved your margins by about 20 basis points in '19 ex-Hays.

So can you just comment, in 2020, is that the right level of improvement to think about for all of Brown & Brown? And then, Andy, those quarterly impacts for 2020 from that one acquisition, that's on the overall Company, right, and then we would see really all of a much larger impact in Retail?.

Yes. So let's take the last part of the question first and then we'll come back around is, yes, that is correct. It is the movement on the total Company. So maybe a way to think about that is, once you've modeled in what you think the business will do ex that, then lay those potential adjustments in there.

And then flow that over into retail on a proportionate basis. And then, yeah, on underlying companies, we talked about earlier, we were up ex-Hays about 20 basis points to 30 basis points..

And does that seem about the right level of margin improvement when you think about 2020?.

Yes, we don't give outward guidance as you know, but we don't see any major headwinds coming at us right now for '20 at this stage. So we don't have any reasons why they would go backwards..

Let me interject one thing there, Elyse. Here is the thing and that this doesn't help you with your model. But what I would tell you is this. We are working really hard and we're having a lot of fun. And we are going to be investing in businesses that we think fit culturally and make sense financially.

And that includes hiring good people that would build businesses and all kinds of things. So I wanted to just make sure that -- I know you're trying to come up with an absolute number, and this is what it's going to be and it's going to pop-out the other end in your model and we acknowledge that.

I just want you to understand that we are growing the top line and the bottom line. And if you look at the performance in the last year or last three years or last five years, our goal is to continue to do that. So I just say that because that doesn't mean you can just plug one number into the model and it's going to pop-out the other end.

I just want you to understand that we're going to try to invest the money the best way we think possible to yield the best long-term results. That may not be one the quarter or one year for that matter.

And sometimes 606, as Andy referenced earlier, impacts the way when we buy something, all of a sudden impacts the overall company in terms of an acquisition. And that's fine, we're going to just work through it. But we're just trying to make good acquisitions and hire more good people to get to $4 billion..

We will now take our next question from Mark Hughes from SunTrust. Please go ahead..

Was the Hays acquisition incorporated in organic this quarter since it closed in this quarter last year?.

It was included, it's only for the 45 days, so didn't have an overall major impact just from a weighting standpoint in the quarter..

And as we think about that making a bigger impact in Q1, can you say kind of what the growth trajectory Hays has been on?.

The answer is, we don't talk about the growth trajectory of individual businesses. We're very pleased with the performance of Hays and the future -- what we think is the future performance of Hays, but we're not going to comment on that.

That's all wrapped up in my comment around the low to mid single-digit organic growth over in steady state economy..

And the margin effect from Hays, the lower contribution in the fourth quarter, was that just a change in earn-out that caused that or is there some other factor?.

No, nothing unusual there, Mark. When we closed out the third quarter, we had anticipated -- we said there was -- more than likely the fourth quarter would have some noise inside of it. We anticipated that it would be a $0.01 loss in the fourth quarter. It came out to be $0.02 or excuse me -- yeah, $0.02.

$0.01 of that is the incremental acquisition earn-out. So we kind of landed right on where we were. We weren't too focused on the individual margins by quarter for the business.

We were really focused on the total just because as we went into it, we took our best shot at the quarterlies and when we look at the full-year, we turned out on the top-end of our revenues and kind of right in our margins. So we feel really, really good about how Hays performed this year..

And then the stock comp, you said I think up $6 million to $8 million, if I'm looking at it properly just off of the cash flow, looks like that's about half the pace of increase of 2019.

Is that correct?.

Yes..

We will now take our next question from Yaron Kinar from Goldman Sachs. Your line is open. Please go ahead..

So my first question is more of a market question. You talked about different lines of business, somewhere you're seeing a lot more firming than others.

Are there areas that you're seeing disruption at this point or difficultly placing a program?.

When you say difficulty, meaning you're unable to get coverage, is that what you're referring to?.

Yes, or maybe you have to shrink the overall size of the program?.

So I think there is really two instances that come right to mind and I'll give you an example. There have been, historically, some writers of large property, particularly engineered property risks who are pulling back their limits. So by doing that, then you start to have to -- so they might put up a $1 billion or $2 billion or something.

And all of a sudden if they pull back, then they are layering that property. And so the cost is going up. I'm not saying that categorically in all instances we can't place it, but sometimes they may not buy at higher limits because of cost pressures or things like that. That would be an example, that'd be one.

So I think property, particularly large limit engineered risk. The second that comes to mind would be umbrella business, particularly on things like transportation or very, very heavy products exposure.

So if you had a transportation account you're on and it -- let's just say for sake of this discussion that you had one market write $25 million primary umbrella and then you had another market write another $25 million, so they had a $50 million umbrella, I would tell you that, to best of my knowledge, there are very few people on a transportation account that will put up more than $10 million today.

So all of a sudden, the price of the $10 million might be as much as the price of the $25 million or more last year. That's the first thing.

And then they may get to a point where the pricing is such that nobody wants to offer the price at the higher levels just because they don't think they're getting enough rate for -- or what they will give or quote wouldn't be bought because people don't think that it's worth that much.

So there are a few instances that I'm aware of where you have difficulty in placing accounts, but for the most part of what I'm aware of is, we have been pretty successful for our clients, but we watch that very closely..

And then my second question, National Programs' organic growth, it seems like the last two quarters have turned a corner, and it's been on a very positive trajectory.

Are the headwinds that you faced earlier this year and late last year, are those kind of done at this point?.

Well, remember, I think that you're correct in saying, number one, National Programs and the team have the business in a really good place. So that's the first thing. The second thing is, remember, National Programs can be impacted by the underwriting appetite of a carrier.

So we don't know of any significant changes with our carriers right now which would necessitate a movement of a program or something like that. So that's a positive, but any time you have a leadership change in a significant carrier partner and programs, there could be a change in appetite or how they view it.

We think about, particularly in some of those underwriting programs where we have capacity, that we are putting on line, there could be wind, there could be quake, there could be other related things, a lot of it is how do we get more capacity to fill those needs in the future.

So the limit may not be the -- we may have a certain amount of capacity and when we sell that capacity, if we don't get more capacity, then the growth is constrained. Now, we're not going to say specifically if there is a program like that, but we do have some capacity plays where that is possible.

So we are always out looking for capacity to grow our programs, particularly in times of disruption..

And then a quick modeling question.

I think you had said that services revenues would face a 5% decrease in the first half of '20, is that on an absolute basis or relative to 2019?.

So Yaron, on that one, so right now we're giving guidance of 5% down for the first quarter and you can do that versus 2019 for the same periods.

And then also just when you're thinking about organic, one of the items, I just want to make sure we clarified for everybody is, we do not include contingent commissions or GSCs in our calculations of organic. I know some of the other peers put it in, take it out, back and forth. We do not include those in our organic, OK..

We will now take our next question from Josh Shanker from Deutsche Bank. Your line is open, please go ahead..

Andy, I hate to make you repeat something, but earlier when you were going through Slide 10, I didn't quite follow the margin expansion story.

Can you walk us through one more time why underlying margins expanded during the quarter?.

As I said, if you come back -- if you look at for the quarter, right, so we were -- we started at 28.1%, and we finished this year at 27%, so down a 110 basis points. We have picked up 90 basis points on change or the gains and losses on our disposals..

Which is not going to recur of course?.

Correct. Hays was a drag of 150 basis points, and then we were down 50 basis points and that's where -- what we are highlighting is, for the quarter is our non-cash stock compensation cost and then the dilutive impact of the acquisition that we did in the third quarter, those offset the underlying margin expansion that we had for the quarter..

So I mean, going through individual numbers, so I'm looking at -- like ex-Hays, I'm seeing 140 basis points of normalized margin compression and that's covered by the -- am I wrong to think of it that way?.

Yes. So walk us through how you get there, because I don't think we follow that..

So if you didn't have the gain on the disposal, I think you'd be at 26.1% not at 27%. And Hays is recurring of course, and so let's put that in. So that's how -- I feel that ex-Hays, I think you'd be at like a 26.1% plus 1.5%, so 27.6% I guess.

Or ex-Hays you'd be at 27.6% ex Hays I guess, is what I'm -- am I wrong to think that underlying compressed during the quarter, I guess? I don't -- I'm trying to follow it..

So if you're -- no, I don't think we look at it that way is, just if you take and you isolate out the gains on the disposals and Hays, right, that is 60 basis points.

Those are net, correct?.

Yes..

Okay, got it? And therefore, that leaves us with 50 basis points on the other..

But Hays is recurring whereas the gain on disposal is not, so that 150 basis points, I'm going to roll over into 4Q20 to recur again, I guess?.

Why would you do that? We've already made the lap on it. No, hold on a second. We already made the lap on it, though, Josh. I think that's maybe where you got to keep that in mind, this is the last quarter that we are getting the full effect of it as we go into next year when they're more comparative..

Well, I don't think Hays is going to give you an additional 150 basis points of margin compression, but the fourth quarter Hays effect is going to be with you in 4Q20?.

But if this -- let's presume that the business doesn't do anything different, it's net. There is no increase or decrease in the margin then in fourth quarter of 2020 versus fourth quarter of 2019..

Then you'd be at 26.1%, no? Is that wrong?.

26.1% for the fourth quarter, yes..

Of 2020.

If everything is the same, except you don't have the gain on the disposal, you would have EBITDAC margin for 4Q20 would be at 26.1%?.

And then you've got some impact of also the third quarter acquisition that's got some drag on it. Again, you're only going to have that this year..

Let me take it offline. I guess I just want to -- I wanted to walk through how the margins bounce back I guess for next year, but I'll take it offline. And I guess I'm not smart enough, but we'll figure this out. Thanks, Andy..

Just to back up for a second, Josh, as you walk off here on the call.

Are you saying that you're anticipating that margins will be going down next year for the business?.

I don't know, yet. I haven't done my numbers, but I'm going to start at -- I think I'm going to start at 26.1% and figure out the third quarter impact on it, and whatnot. But it feels like the base place to start forecasting 4Q20 is slightly lower than where 4Q19 came in..

Again, here is what we would suggest is, ultimately your call on what you want to do, but don't get -- start at the full year first, OK, and get what you -- the guidance that we've given on a full year regarding how we think about the business, that will then help you by the quarters..

Well, that clearly matters. First of all, not just one year, but many years anyways is what matters. So, but let's continue this discussion offline. But I appreciate all the help..

Thank you. We will now take our next question from Mike Zaremski from Credit Suisse. Please go ahead..

I guess, Powell, in your prepared remarks, you said something along the lines of the large account space is seeing more rates. However, that business is fee based. So I believe you were alluding to not getting as much revenue benefit versus if it was commission.

So I'm kind of curious, is higher pricing in the large account space or very firm pricing, is that a tailwind or is each account really a case by case negotiation and it could be a headwind in certain cases? Just trying to better understand the dynamics there..

So just think about, in large accounts, obviously the numbers are much larger. So if you have an increase in those instances, many of those accounts have risk managers, which their job is to try to get the most comprehensive coverage from the most competitive price.

So that puts additional pressure on that goal, if you want to call it that, if their pricing goes up. So I would say it's very much case-by-case and how that buyer of insurance thinks about the hard market or hardening the market, I should say, firming as I said, not hard market. They think of it as a hard market, but we don't.

And so I would just tell you, I think it's more on a case-by-case basis..

And maybe for Andy, I guess you guys don't see any major headwinds for margins, does that imply the contingent commission outlook is stable?.

No remember, we said that we would anticipate that the GSCs will be down $8 million to $10 million in 2020 and that was because of the one-time GSC of $9 million that we got in the second quarter of 2019. Otherwise, we don't know of any major items out there right now..

Are the contingents more casualty-weighted or property or is there any color there?.

No, I guess, we've never broken them out or looked at in that way, but they are balanced to cost both casualty as well as property..

And lastly, there was the new commentary in the deck about expect competition and pricing pressure for acquisition targets. And, Powell, you gave a good color on that.

So are you -- so does that imply that stock buyback could potentially -- there could be more of it on the table if that proves to be correct?.

Well, as we've said, Mike, in the past, what we've tried to do is, evaluate the potential benefit of all the investment opportunities that exists for us. A buyback we talk about with the Board periodically and we evaluate what that looks like versus investing the money in acquisitions and otherwise. So we don't have a stated buyback policy.

I know that drives many of you crazy, but we will continue to evaluate that in the future. But I don't want you to read into that that says, well, if that's the case, then they are definitely going to be buying back stock. Do not make that assumption.

We will do it when we evaluate the intrinsic value of the Company versus the actual value of the stock at the stated time..

We will now take our next question from Meyer Shields from KBW. Please go ahead..

I wanted to follow up on Mike's question, if I can. So you talked about there being I guess less of an automatic revenue boost in large accounts because it's a fee-based structure.

Given that that's where we're seeing probably the most distortion in the marketplace now, is -- what happens to the extra expenses associated with placing business as it becomes more expensive or more -- maybe requires more effort? Do you get paid more for that?.

No, that sounds good, but no. Sometimes you get paid less. I mean, sometimes you get paid less if they're renegotiating the fee because of competition or something else. But it makes life for our placement teams very exciting, maybe is the right way to say it..

It sounds like excitement we could do without.

Second question, I was hoping that now that you've started acquisitions in Canada, can you sort of update us on how we should think about non-US M&A?.

I mean, we have and will continue to look at opportunities that may exist in countries that we believe might present an opportunity for Brown & Brown. I would make a broad statement by saying, if you look at where we have businesses today, we now have a business in Canada and we have businesses -- or a business in London. We have one in Bermuda.

And so what would be consistent with all of those countries? Well, they are Commonwealth Countries, number one, and in those Commonwealth Countries, they all have a rule of law. So I'm not saying categorically that is the only place we would ever do an acquisition. I don't like this comment of always never or can't.

I really don't like those terms, but to this point, that's where we thought about it and if it made sense, we would consider that going forward.

It's interesting, Meyer, that you would ask that because the competitive landscape for acquisitions in some of those countries is even sometimes more fierce than it is in the United States, if that's possible. Kind of interesting..

We will now take a follow-up question from Mark Hughes from SunTrust. Your line is open, please go ahead..

Just very quickly, you mentioned in the Retail Segment that one of the drivers was higher increases in employee benefits.

Could you talk about what's driving that?.

I don't remember making a comment about higher increase in employee benefits although employee benefits -- healthcare costs are going up, but I don't remember making that in the....

So I'm just reading off the Retail Segment that is one of the drivers you cited commercial auto and employee benefits..

Yes, that's just on pricing for our customers, not us or cost on that, Mark. Just in general I think everyone sees in the marketplace..

Yes, and I think that -- sounds like that's a support for organic, so I was just sort of curious if there's anything new or different going on in benefits that was helping to drive growth..

It continues kind of at the pace that it has. So nothing new or different there..

Thank you..

And then, Cecilia, we'll take one last question if there are any. Otherwise, we'll go ahead and cut off for today, please..

Perfect, sir. We have a follow-up question from Yaron Kinar from Goldman Sachs. Your line is open. Please go ahead..

Just another quick modeling question. The margin impact from the third quarter acquisition, I think you said 100 basis point to 150 basis point positive in the first quarter, then a drag in the second and third quarters.

The numbers you provided, are those on a consolidated basis or for Retail-only?.

Yes, total Company, Yaron..

I want to make one comment as we wrap up, Cecilia, for everybody. Thank you first off for your time today and I know that if you have any questions, then Andy will be more than happy to talk to you about those in detail or other people on our team.

I want to make sure everybody understands that the Hays acquisition in our mind is an excellent acquisition and that is, first and foremost, because they got great people.

So when I look back on acquisitions like Arrowhead and other larger acquisitions where we've got a lot of really good people, those have been very significant in the history of our Company. I think that the Hays team has a number of people like that.

So I'd say that, because Mike Egan and Jim Hays have built a great business and there is a lot of other great people on that team. So I want to make sure that the last comment today is this. We are very pleased with where we are in our entire business.

We are very pleased with the Hays acquisition and we expect great things from that part of our business in the years to come. And like I said, generally speaking, we don't see that many headwinds going into 2020 and we're all really pumped up about what that means for us and the Company now and in the future on our way to $4 billion.

So we thank you for your time and we look forward to talking to everybody again next quarter. Thank you. Have a nice day..