Brown & Brown Inc (BRO) — Q1 2015 Earnings Call Transcript

Thank you, Kristy. Good morning everyone and thank you for joining us for the earnings call for Q1. We’re pleased with our results for the quarter, so let’s get right into the key points. On Slide 4, you’ll see we delivered $404.3 million of revenue for the quarter, growing by 11.2% and 3.8% organically. Each of our four divisions delivered organic growth. The overall market conditions continue to improve with the exception of a few areas, which we’ll cover on the next slide. Our GAAP earnings per share was $0.39, growing by 8.3% for the quarter, excluding the change in acquisition earn-outs payable, we grew our earnings per share by 5.3% to $0.40 a share. As part of our capital allocation plan, we initiated a $100 million accelerated share repurchase program during the quarter. This repurchase is part of the $200 million plan approved by our board of directors in the second quarter of 2014. We anticipate the completion of this repurchase during the second quarter of this year. Upon completion, we will have then $50 million that still may be repurchased under the approved $200 million plan. Lastly, during the first quarter of 2015, we acquired three agencies with annualized revenues of approximately $12.6 million. While there are lots of potential transactions out there, we continue to see aggressive pricing for acquisitions. We continue to be very disciplined in what we pay, as we’re looking for organizations that fit culturally and make sense financially. Slide 5 provides additional color on some noteworthy items impacting the market. We’re seeing some areas with good economic improvement and associated exposure unit growth, such as Indianapolis, Atlanta, Portland, and numerous cities in Florida. They’re doing much better than a year ago. However, any communities with significant oil-related businesses have slowed significantly. We also experienced further uptake in our private exchange during the quarter, but adoption continues to be slow. We continue to see small and medium-sized employers evaluate the public exchanges, technology, and plan design alternatives. Those may include partial self-insurance in order to manage costs. With the excess capital on the market, along with the prolonged period of limited weather events, coastal property rates remain under significant pressure. Also, admitted rates continue to moderate downwards. However, we’re seeing commercial auto rates generally trending up, but that really depends on loss experience. With all of the excess capital on the market and our large distribution network and capabilities, we continue to see interest in our various programs and wholesale offerings. With a lack of weather events, several of our claims processing businesses are operating at historical lows for revenues and operating profits. In summary, we’re pleased with our organic revenue and earnings per share growth for the quarter and this was all made possible through the hard work of our more than 7,700 teammates. Now I’ll turn it over to Andy to discuss our financial performance in more detail.

Great. Thanks, Powell and good morning everyone. Before I get started, I want to let everyone know that we had some adjustments to prior year’s division numbers in order to reflect our current year segmental structure. So if you’re looking at last year’s presentation from the first quarter, you’ll see a few material changes within the divisions. Let me go ahead and get started with our financial results and talk about some of the key metrics for the quarter. On Slide 6, it shows our GAAP results. I’d like to highlight that we delivered an 11.2% revenue growth in the quarter and are very pleased with our 3.8% organic revenue growth. I’ll talk more about margins and key drivers on the next slide. Our earnings per share grew 8.3% and our weighted average number of shares outstanding decreased by 1.3% year-over-year, primarily driven by our share repurchases in the second half of last year. Moving to Slide 7, similar to previous quarters, what we try to present on this slide is a better view of our underlying performance. The amounts presented are the as reported GAAP results, which were then adjusted for the change in estimated acquisition earn-out payables. On the right-hand side of the slide, we removed the results of Wright due to the large size of that acquisition and the lack of comparability with the prior year. As we previously discussed, the revenue associated with Wright is seasonal and the expenses have less variability. Consequently, Q1 is the lowest revenue and margin period for the business. Overall, the Wright acquisition is performing well across its three business lines. Later we will talk about the quarterly performance and outlook. While our total revenues grew 11.2%, when we separate the revenues related to Wright, we grew the top line by 4.2%. Our adjusted pretax income grew by 2%. The additional interest cost associated with our credit facility and bond impacted income before income tax by approximately 3 percentage points. We believe EBITDAC is the most appropriate measure for comparing our performance across periods as it has a close proxy for cash generation. EBITDAC for the quarter was $131.8 million compared to $119.5 million last year, a growth of 10.3%, and excluding Wright, our EBITDAC growth was 4.1%, thereby growing in line with underlying revenues. Excluding Wright, our EBITDAC margin decreased by 10 basis points, which was driven by lower contingents and lower gains on sales versus the prior year. We continue to see EBITDAC margins in the 33% to 35% over the long term. Net income for the period grew 2.9% on an as-reported basis and excluding Wright by 2.7%. This was primarily impacted by the incremental interest expense of $5.8 million in the first quarter compared to the prior year. As a reminder, our credit facility and public bonds provide us with capacities to draw upon for acquisitions when they become available. They extend our maturity ladder and reduce our exposure to rising interest rates. By capitalizing on the favorable credit markets, our blended cost of debt is now 3.3%. Partially offsetting the increased interest expense was a lower effective tax rate of 39.3% for the quarter compared to 39.6% for Q1 of last year. The lower rate for Q1 of 2015 was driven by some tax credits that will primarily only be realized in Q1 of this year. We anticipate our effective rate to be around 39.5% for the remainder of 2015 as we continue to model the impact of recent finalized state tax law changes primarily in New York State. Adjusted earnings per share increased to $0.40 in the first quarter, which was a $0.02 or 5.3% improvement over the prior year. Moving to Slide 8, I’d like to highlight the key components of our revenue performance for the quarter. We talked about our total revenue and when you look at the components, the largest driver was from net acquisitions delivering $36.1 million, followed by organic growth of $12.2 million, and then the changes in contingents in guaranteed supplemental commissions that declined $1.5 million and other revenue that declined by $1.1 million. We realized a $1.5 million decrease for the contingents in GSCs, which were substantially related to our Proctor business that is in our National Programs Division. Please remember that Proctor realized $3.3 million of incremental contingents in the fourth quarter of 2014, as the career completed their calculations early, with about $2 million of this coming from the first quarter of this year, which moved into the fourth quarter of last year. We expect Proctor’s contingents to be realized in the fourth quarter of this year, and that has been informed from the career that they expect the amount to be materially below 2014 due to loss experience. Please take this into consideration when building your outlook for the remainder of the year as the goals for contingents and GSCs does not appear to be in line with organic revenue growth. Moving to Slide 9, we talk about each of our divisions in a bit more detail. Our Retail Division delivered 6.2% growth, partially driven by acquisitions completed within the last 12 months, and our underlying organic growth was 1.6%. Our year-over-year EBITDAC margin decreased by 90 basis points, which I’ll talk more about in a moment. Let’s talk about revenue growth first as we know everyone is always interested in how Retail is doing. Well, there are three main factors that need to be considered when evaluating the performance of the Retail Division for this quarter. First is that there has been a change in the state of Washington regarding a loss governing association health plans. Last year the insurance commissioner changed the state's historical approach to Bonafide Association. As a result, several of our association health plans had to terminate. We’ve lost about $1 million of revenue in the first quarter of this year, which impacted retail organic growth by about 60 basis points and EBITDAC margins by 25 basis points. We expect our Washington association health plan business to be down approximately $1 million each quarter for the remainder of 2015 and have an impact on margins. Second, CAT property rates continue to be under pressure as Powell mentioned earlier. While we are still seeing our commercial lines businesses growing year-over-year, their growth has been impacted compared to last year as CAT property rates are down 10% to 20% or in some cases even more. We’re also experiencing rates for middle lines of business further moderating downward with the exception of commercial auto. And third, we are continuing to see small and medium-sized employers evaluate policy exchanges, technology, and plan design alternatives to manage their costs. As we stated on previous calls, it is not unusual for our reported quarterly EBITDAC margins to fluctuate as we make incremental investments in our businesses that will drive future results. Therefore, we expect divisional margins will face pressure as a result of this activity. Moving to Slide 10, our National Programs division, revenues grew by 29.9% mainly due to the acquisition of Wright. We continue to experience good growth in personal property, automobile after market, Sports and Entertainment, and we continue to see interest from carriers in leveraging our broad distribution platform. Offsetting some of this growth was our Florida Intracoastal Underwriters business which is experiencing intense pressure on rates, which is also affecting contingents. During Q1 of this year, we recognized about $1.4 million of differed revenue at Proctor. Excluding this revenue, organic growth in the Programs Division would have been approximately 2.1%. The primary drivers to the 270 basis point margin compression for the quarter are the seasonality of Wright, which we discussed earlier, and the impact of the shift in contingents for Proctor. Overall, we are pleased with the performance of our Programs Division for the quarter. On to Slide 11, our Wholesale division had another great quarter reporting revenue growth of 3.6%, an organic growth of 7.3%. This differential is related to the sale of Axiom Re that we completed in the fourth quarter of last year. The Binding Authority and Brokerage Businesses both contributed to the positive result for the first quarter and we continue to see growth across most business lines. We are seeing more net new business, and we are leveraging our deep carrier relationships to help provide innovative solutions for our customers, even while facing major downward pressure on coastal property rates in the range of 10% to 20% or more. The Wholesale Division delivered EBITDAC margin improvement of 290 basis points. Approximately 100 basis points of this improvement is associated with the disposal of Axiom Re. This business generates significantly lower margins than the average for the Wholesale Division. Even with this item excluded, the margins improved by close to 200 basis points. Similar to last year, we do expect that margins will fluctuate on a quarterly basis due to investments. So please do not model or expect this type of margin expansion every quarter. On to Slide 12 and to our Services Division, we delivered impressive organic growth of 10.5% for the quarter. This growth was partially benefitted by some non-recurring revenue realized by one of our TPA businesses. Excluding this revenue, organic growth would still be approximately 8.5%, which is very impressive. We realized strong growth in most profit centers with the exception of our claims processing businesses that are dependent on weather events. The largest driver of organic growth is from our social security advocacy business. In addition, our workers compensation claims processing business continues to benefit from a large new client we won in the second quarter of 2014. Please keep this in mind when you are updating your models for the second quarter as the organic growth rate for services will probably be in the low single digits. Our margin expanded for the second quarter as we continue to operate efficient claims processing businesses. So in summary, we are pleased with the top line growth and flow through for each of our divisions.

Moving to slide 13, in the second quarter of last year, we provided ranges of where we expect Wright to perform for its first fiscal year, which is the second quarter of last year through the second quarter of this year. The performance of the underlying business is in line with our expectations. As we mentioned previously, in 2014, the original forecast included $7.5 million of revenues for weather events. For reference, this was based on the 10-year average excluding hurricane Katrina and Superstorm Sandy. Due to the lack of storms, the first fiscal year for Wright is expected to be below this historical level. Please note there is a small amount of CAT revenue included in the projection for the second quarter. With that, let me turn it back over to Powell for closing comments. Thank you, Andy, for a good report. I’d like to conclude our remarks with two topics: one, acquisitions and two, retail. As you heard us say we acquired $12.6 million of annualized revenues in Q1. We’ve looked at a number of acquisitions that did not fit culturally or we could not come to an agreement financially. Sellers were focused on many things, but the money is a big one. As you know, we are disciplined buyers. In 2006, 4% of the announced transactions were done by private equity. In 2013 and 2014, private equity did 44% and 43% respectively. There is a lot of activity in the acquisition space and some are willing to pay amounts we won’t. This is not to say that we cannot do acquisitions, but to give you a flavor of the acquisition landscape; we continue to think they are opportunities, but they tend to come in waves. Now on to retail, we’ve grown retail organically for 12 quarters in a row. Retail internal growth for 2012 was 1.3%, for 2013 it was 1.3%, and for 2014 it was 2%. What are we doing? We’ve made incremental progress over time. If we take out our bottom five retail offices which represent 8% of the retail revenue, our internal growth would be 2.9%. The change in the Washington association health plans is done. We’re down a million in Q1 and expected to be down a million in each of the following quarters in ’15 and that’s by a law change. The other four offices we have an intense focus on to improve their performance. In closing, we feel good about our overall performance for Q1 and each division is positioned for ongoing profitable growth. We are also continuing to evaluate internal investments, external acquisitions, and returns to shareholders in the form of dividends and share repurchases, all with the goal of long-term stock appreciation. With that, I’d like to turn it back over to Kristy, to open it up for questions.

Hi, good morning, just a few questions. The first is, there have been some headlines recently concerning the National Flood Program and I know Brown & Brown obviously had a decent amount of exposure through the Wright acquisition. If you could just comment on what’s going on there, potential exposure, and I guess your outlook on your continued involvement with the National Flood Program going forward.

Okay. Good morning, Elyse. First, we are committed to warn our policyholders, Wright flood, and our partnership with FEMA. This is a complicated situation, but we’re committed to working through the issues to reach the best result for our policyholders. These events, as you know, occurred before we purchased Wright. It is our standing position not to comment on ongoing litigation, but we are working through the issues to achieve the best result for our policyholders.

Okay, just one follow-up question on that. Did that happen before you guys completed the acquisition? Would you be kind of on the hook for any kind of fines to Brown & Brown through the owner Wright proceeding on you purchasing it?

We will be evaluating all forms of expense reimbursement.

Okay and then a couple of other questions in terms of the non-harms stock based compensation. Was it a bit lower on a quarterly basis earlier than you had guided for the year, anything on that or was that changed?

Hi, good morning Elyse. No, nothing unusual in nature, I think the range that we still gave was somewhere around $7.5 million, again it’s going to fluctuate a little bit by quarter, but no unusual underlying changes.

Okay and then if we think about the retail segment and I appreciate the added color to this quarter, obviously we know now the impact of the arms change in Washington, but as we think on just kind of going into colors of the balance for 2015, directionally putting everything together that you said, would you expect it to pick up overall a level of growth from what we saw in the first quarter?

Elyse, like I said, we don’t give specific organic growth guidance. We’ve said that retail business is a low to mid-single digit organic growth business.

Okay, and then on the margin side, I know you’d mentioned and then talking about some of the segments that internal investments that you guys have been making. Is there any way for us to better break out the overall impact that these investments are having on your margins? Is there a way that you can kind of pinpoint that either of those segments on just on a consolidated basis?

We have not come up with a way to do that yet Elyse. Quite honestly, we have been making internal investments in our business since the beginning of time. It’s just we have articulated it to make sure that everybody understands that in order to continue to provide the services and capabilities to our clients, that’s all around people and systems and capabilities. So we really haven’t broken it out and it’s something we’re going to continue to do. We’ve said in the past that we’ve allocated 1% of our total revenues annually to a people's fund, which is a way that we help defray some of the costs at the local office level when we’re hiring people that are originally in their budgets, but that’s the full extent of which we’ve shared in the past.

And Elyse, I would also add to it. If you remember last year, we had a lot of conversations about wholesale, right? During the first half of the year versus the second half, and we were making investments in teammates, and it kind of flows back and forth. Just kind of keep that as the backdrop as we continue to go through overtime, but utilize that 33% to 35% as the range that we’re trying to seek to operate inside upon the EBITDAC margins, okay.

Okay, thanks so much and thanks for taking my questions.

Good morning. Thank you for taking my call. The first question is probably on the acquisition side; you mentioned you see increasing competition particularly coming from the private equity funds. What were you exactly talking about in terms of pricing differential? Is there quite a big gap between what private equity can offer and what you’re willing to offer?

Well, you’ve heard us talk about before that pricing, and it all depends on what your definition of EBITDA is. So I always like to say, there are devils in the details, but when you hear about eight, nine and ten times an EBITDA multiple, what EBITDA are you talking about? At the end of the day, there are certain things that private equity, for example, may be willing to do in the short-term that we would not be willing to do. And so I’m not going to say it’s a multiple amount per se, it’s just an amount that is in excess of what we think the asset is worth, and so in the event that occurs, we pass. We saw a situation recently where we were involved in one - it was not private equity, an insurance company bought something, and it was a business that we thought there was a good cultural fit, but it was not something that was to happen. And sometimes you see insurance companies, as you know, buy businesses to augment their underwriting capabilities or to get premium. So every scenario is different, but what I’d just say is that in the private equity space, there is a lot of money that’s washing around out there and they’re looking to put it to work, and at some point they’ll have to see if the amount that they paid for those acquisitions will pan out or not.

That’s great color and then if you were just slowing down in terms of either market does not give you an opportunity to do more acquisitions, will you achieve the capital deployment because you’re building cash position more to shoulder returns?

Well, as you’ve heard us say before, we constantly talk with our board of directors about the three buckets of one in which we invest, the cash we earn. One is internal investments; two would be external acquisitions; and three, return to shareholders via either share repurchases or dividends or both. And so that’s a constant ongoing discussion and so we have to constantly evaluate the opportunities that are presented to us. As I’ve said in the past, acquisitions are somewhat lumpy and so they come in waves and so if the acquisition - in your case, if the case acquisitions went on – lack of acquisitions went on for a period of time then we would evaluate and look at some of those other options more closely, but having said that, one quarter for example does not make a trend into my mind in the acquisition space.

Okay, last question is to the - like contingents and the lender-placed business. Could you clarify that in the first quarter, your lender-placed business has pulled forward, they had about $3.3 million of revenue and about two of that are coming pulled forward from the first quarter, so that’s why your contingents commissions are lower?

Exactly Kai, so they allowed us to complete their calculation in the fourth quarter of last year and we had higher contingents in the fourth quarter, about $1.3 million plus the $2 million from Q1 that pulled forward, so that’s where the $3.3 million came from. And then the two is why we’re down from the first quarter.

Okay and you also mentioned, I think it might be related. In the National Program, you had a one-off situation about $1.4 million coming from the business as well?

It was, yeah, we had some deferred revenue that we were able to recognize finally. That will not be anything that will recur in nature, so that’s why we want to call it out as a one-time item.

And lastly you mentioned, you said, in 2015, from the lender-placed business will be material lower, could you clarify that?

Yeah, so that was on the contingents Kai. So just as we recognized $3.3 million last year, right now expectations are that we will recognize the contingents in the fourth quarter of this year. But they have come back and told us that they’re expecting for those to be materially lower this year because of loss experience. So we don’t want to highlight that just to make sure that you model it accordingly in the fourth quarter.

That’s not relating to like pulling forward from the first quarter of 2016, okay.

Yeah, that’s about loss experience from the previous year, now playing itself through in the calculation.

Good morning everyone. Following up a little bit on the question of share repurchase and evaluating that. In the past you’ve said that you don’t want to use your stocks to do acquisitions because your stocks are too valuable, but you’ve also said that in the past, that you didn’t want to repurchase shares because I think as Andy put it, at high once said, it’s like eating your young, which kind of puts you in conflict. Given that you’re buying back shares now, why not just have a bigger authorization out there, since it’s not an obligation to buy and how long would you sit on cash before you would do something with it? I guess there are a bunch of questions there, but I want to hear a little bit about the philosophy, about how things have changed at Brown & Brown and I guess why you wouldn’t have a bigger potential appetite out there depending on what happens in the future.

Okay. So Josh, you are correct in the comment about my father making the comment about eating your own or whatever. Having said that, there was also in a period time where purchase price for acquisitions was in a much different place. And so you’ve heard me say over a period of time that we don’t like using the term never or always. Having said that, we continue as we’ve said to evaluate all of the options that we have and in light of some of the increased purchase price multiples on some of the transactions, we have looked at the value of our stock and the possibility of buying some of that back which we have done and we were given an authorization of $200 million last summer with no obligation to buy it as you know. Although some people in the investment community have made the assumption that we will use that entire authorization and we may or we may not. We have $50 million outstanding as we complete this current $100 million ASR. But we will continue to talk to the board about how we deploy our capital and if they see fit relative to giving us another authorization to repurchase in the future, then we will continue to weigh and measure that. But what I’d like to say is this: you cannot anticipate, you the collective, everyone on the phone call and we cannot collectively anticipate at Brown & Brown when we’re going to have opportunities presented to us like an Arrowhead, or a Beecher, or a Wright. So we continue to like to be in a position to be able to do the transactions that come along when they come along. So we will continue to evaluate the stock repurchase and the cash that we have on hand and how we deploy that cash.

And so right now you are generating probably about $350, $400 million of operating cash flow a year, that could be even higher than that, but you also are running with higher debt levels than you have in the past. You guys have tended to be like a low debt balance sheet. Is there any intention on your part that you know you have a low coupon on that debt that you want to retire it for flexibility reasons or can you imagine that that’s a low priority on things that you would do with cash?

Yeah, that’s a low priority on what we would do with cash. We actually set up our debt structure to provide us with flexibility which we believe that we have, and we’re very pleased with what the structure is that we have in place right now. You are correct in saying that we had a lower debt to EBITDA leverage in the past and we as an organization have evolved relative to how we view that. I’ve said publicly that we think that having a 1.5 to 2 times debt to EBITDA would be a comfortable area. Would we go above that for a specific transaction in the short term? We would consider it, but we are continuing to evaluate all those options, but we are very pleased with our debt structure, and that would be a low priority.

Okay. Well, thank you for all the answers and good luck with the rest of the year.

Thank you.

Yeah, thank you. Good morning. More broadly, within the benefits business you’ve talked about the impact of the changes in Washington on your organics growth. How about just a more general speaking healthcare reform? I think Andy, you’ve made some comments recently about how there’s been a headwind on organic because of the changes in commission payouts within the benefits segment. How much of a headwind has that been? How far along are we in kind of working through that? How much longer will it be a drag on the business?

Well, let’s make a broad statement first Mark. Number one, ACA has created great uncertainty and with that we believe it creates great opportunity, but in that it is somewhat still being defined. So to your question specifically, we’ve had some of our small business, small business depending on the state might be defined as under 50 or under 100 or some variation where they’ve gone from a commission level to a per head per month—you’ve heard us say that before. Now, that’s driven more at a local and statewide basis rather than a national basis. So we’ve had a number of states that have gone through pieces and parts of that, but there are still other states that haven’t or they have not adopted it 100% across the board, that is number one. Number two, I know you are very mindful of the changes that people are making in plan design. That plan design could be defined as a higher retention or deductible for an employee or a fixed amount of a contribution like a defined contribution amount and you can purchase whatever health plan you want, more like a 401k kind of scenario. But in the larger group, there continues to be all kinds of uncertainty which creates greater opportunities for growth for us. So what I would tell you is that we are seeing is in the smaller group there are lots of discussions about alternatives, alternatives meaning state exchanges, private exchanges. How can they continue to offer benefits to their employees? Some of which may opt out down the road over time, and we continue to advise our clients as we come down with some of the very interesting regulations that have unintended consequences like the Cadillac Tax for 2018—so more to follow on that Mark, but we continue it’s still a work in progress.

If you are a retailer of low to mid-single digit organic, is benefits a drag on that?

It depends overall. In an office that has a lot of smaller stuff, it might be a slight drag or flat; on an office that has a more medium large to larger accounts. It’s a growth – it’s growing.

On the Wright business, when it rose into organic growth, is it going to be accretive to organic growth and I guess underlying that is if we look at the volume in pricing within the flood insurance? You’re sort of putting the claims business aside in the underlying flood business. Is that growing on a kind of a national basis? Are you taking share and what does that mean when it rolls into your organic growth there?

Right, Mark, if you remember Q1 is the smallest quarter, so the big quarters for flood will be Q2 and Q3 and so it will be a little premature to answer that question relative to that based on factual information. But what I would say is our teammates at Wright are talking to retail agents across the country and working really hard to service and meet their service needs of their flood books and we’re very pleased with the relationships that not only that they’ve developed in the past, but those that they’re working on in the future. So we’ve got to get into, as I’d like to call it, flood season, which really starts in earnest in May.

Mark, probably other things to keep in mind—we’ve had a lot of people ask us about the pricing and should that as a result drive incremental revenues in the business. I think what we would say right now, based upon what we know is, well, the pricing will drive some upside, there are also a lot of re-mappings that are going on around the country. Specifically, just south of—here at Broward County, they just remapped a lot of those that made them no longer required. So we think it looks like it’s about a push at this stage. We just don’t know exactly until we start working through the details, so because we would say don’t bake anything into the model for upside on that one right now until we get through it. We think we got to push there. The other thing I want to just mention. We looked at a lot of everybody’s models for the second quarter, and just to remind everyone, we did this acquisition in May of last year. So there’s only one month of the second quarter that does not have comparative revenues. It looks like a lot of folks have put three months of incremental revenue in there, so there is basically a two-thirds double count. So if you could double check your models on that one. We can also follow up after the call.

Then a quick final question there, share count for Q2; did you have earlier thoughts on that Andy?

If you were to take the—well, when it comes out at the end of this month and you look at our footnote, that should be a pretty good indication for the second quarter. The only movement there would be the final settlement of the ASR, but that should not be a material number since most of those shares were pulled out late in the first quarter.

You don’t happen to have that number, do you?

No, I don’t have it with me right now.

Thanks. Good morning. If we adjust the first quarter contingents for the $2 million pushed forward, it’s up about 1.5%, does that seem like a reasonable representation of what we should see besides the first place business for the rest of 2015?

Yes. Hey, good morning Meyer. I think with our earlier comments is, we probably just were giving some guidance to be a little bit conservative there specifically our FIU business, the Florida Intracoastal Underwriters. We are seeing quite a bit of pressure on continues; there just won the offer of the fact that rates are down and that will cause - that’s going to cause some pressure on the back end of the year. But we’d say probably our recommendation is don’t model on organic growth rates because that is not what we’re seeing right now.

Okay, that’s helpful. A couple of years ago there was the expectation that the aftermarket program in standard auto you were a little bit limited in terms of immediate margin expansion, but that would alleviate over time. Can we get an update on that?

Sure, the answer is we are working towards that and we’re pleased with the performance. You’re correct in saying in the first 18 to 24 months we had a commitment relative to that and relative to staffing levels and some other things. We’re very pleased with the teammates that have come over and the performance so far. We also have the capability now to—we’re expanding in certain instances based on working with our trading partner on their technology platform. So we may not be out in the distribution broadly as quickly as we both had wanted, but we’re getting there. So the margins are improving there. They are not yet at historical margins for the area, but we’re moving towards that.

Okay, and then one last question if I can. The Washington issue, does that reverse itself in 2016 or if we just assume that plans are terminated, you feel the impact this year and then they’re just not relevant?

Yeah, no we don’t see it reversing itself in ’16, Meyer. I think the issue, as we can understand it and talking with our teammates out there is, this is not something that seems to be beneficial to the actual clients themselves. So down the road could there be something else that would present an opportunity? I don’t know, but right now we’re operating that. We don’t think that there is a way to recoup that revenue in the form of the association business that we currently have or is currently being terminated.

Good morning guys just wanted to drill down a little bit further on the employee benefit book. I kind of have a note here saying there was about $250 million in annual revenue. But I was wondering if you guys could kind of quantify I guess the small business unit, which is experiencing some pressure versus kind of I guess the more medium to larger scale lives business and which obviously has some opportunities going forward.

Okay, so Ryan, good morning. If you remember we basically said in the past, it’s about $150 million of health and about $100 million of ancillary lines. So let’s start with that. The second part is, we’ve said, about just over half of that 150 would be under a 100 lives. That’s how we’ve articulated it in the past. We have not broken it out in any other format relative to layers and slices and all that other stuff, but suffice it to say that we are working very hard on solutions for both segments meaning the smaller group and the larger group. We believe that there continues to be an evolution on the small group or technology will, I believe, continue to play a bigger and bigger role. And depending on how and what state you are in and how you have viewed state exchanges versus national exchanges and subsidies, that may play a role into it as well; that does not diminish the fact that on our larger clients, technology is categorically a solution and so the discussion is more than just a discussion around healthcare cost. It’s a discussion around ancillary benefits; it’s a discussion around voluntary benefits. It’s a discussion around wellness. It’s a discussion around a bunch of things. So as you break down, think of $100 million of ancillary of the 150, left just over half of that is under 100 lives.

Oh great, that’s great color. And then just comment my last – so my second one was, are these kind of – the changes in regulation in Washington, is that a unique program to Washington or I guess a unique change in the law or could that impact other states as well that they would have any sort of impact on Brown?

To the best of our knowledge, this is the only state where we have such written associations. Additionally, we are not aware of any similar or related business within Brown & Brown that would be impacted by the law change from an insurance commissioner. However, all of our business remains subject to the ACA, and it is important to note that the interpretation of this law is continually evolving. We, along with others, seek absolute clarity and transparency, as the ACA currently lacks both. This situation creates opportunities but also results in significant disruption.

Good morning, thanks. In the Wholesale Division, how are submission levels compared to maybe six, nine months ago?

Submission levels are up.

Okay, so they’re still robust?

Yeah, they are robust. See, what I would tell you Adam is this; you’ve got significant rate pressure on the CAT property, so that’s on the brokerage side. Remember 60, just under 60% of our overall business is binding authority and there’s downward pressure on that property as well, but not as much as the CAT property.

Okay, one of your competitors, AmWINS, partnered with an alternative capital provider this quarter. Are you pursuing similar transactions in that division?

We always look or are confidently looking at solutions and alternatives in both Wholesale and our Programs businesses. From a standpoint of what they have done and some other competitors, we have not done that in history yet at Brown & Brown. I’m not saying that we would not consider it, but at the present we have not considered it seriously.

Okay, thank you. And then sorry if you say, what’s going on with workers comp rates right now?

Depending on the state they’re either—they could be flat, they could be up slightly depends on the state as I like to say places like California, it’s always the wild, wild west literally and figuratively. You look at places like Florida and other places around the country, it’s a mixed bag, up, down or flat.

Good morning. I had a question on the Wright flood program and some of the press reports we’ve read about what’s going on with congress in that program. And some of the politicians, and I don’t know if you think it’s just politician speak, but regarding the Wright flood, the claims issues about potentially revoking national flood charter authorization. If you view that as at least a potential or as any legitimacy of potential outcome and if so would you guys have any recourse back against the outlined partners in reps and warranties or anything else, if the worst-case scenario you lost a charter for the Wright flood insurance program?

Okay, so the answer to the question is; we have our Wright flood renewal that comes up annually in October, that’s number one. Number two, this is a—as I said earlier, a complicated situation and there are lots of people who are working towards solutions for the constituency and so there will continue to be a lot of—we believe a lot of discussion around this particular topic. We can only suffice to say or commit to number one, our partnership with FEMA; two, to our policyholders and our teammates at Wright flood; and we’re committed to work through the issues as they sit out there to the best result of those policyholders. Anything else would be pure speculation and we wouldn’t want to speculate on that.

But would you have recourse back against the outlines or in the advent of something adverse happen?

Like I said Charles, I would prefer not to speculate on that.

Okay, Kristy. Thank you all very much and we look forward to talking to you after the Q2 release. You all have a nice day and thank you very much.