Brown & Brown Inc (BRO) — Q4 2016 Earnings Call Transcript

Thank you, Cathy, and good morning everyone and thanks for joining us for our fourth quarter 2016 earnings call. I'm on Slide four. For the fourth quarter, we delivered $434 million of revenue, growing 7.1% in total and 3.5% organically. Once again, all four of our divisions grew organically. Excluding the $8.1 million pretax credit adjustment related to non-cash stock compensation that was recorded in the fourth quarter of 2015, our EBITDAC margin for the fourth quarter of 2016 was unchanged from the fourth quarter of 2015 at 30.9%. Our as-reported earnings per share for the quarter remained flat compared to the fourth quarter of 2015 at $0.41 per share. However, when excluding the change in estimated acquisition earn-out payables from the Q4 2016 and 2015, along with the $8.1 million of stock compensation credit in 2015, our earnings per share increased 10.5% to $0.42 on an adjusted basis. Our investment in technology remains on target impacting our EBITDAC margin for Q4 by 40 basis points when compared to the prior year. On to Slide five. For the full-year, we delivered $1.767 billion of revenue, growing 6.4% and 3% organically. For the year, we experienced a decrease in our EBITDAC margin of approximately 50 basis points as compared to the prior year which was primarily driven by our investment in technology. As our reported earnings per share of $1.82 was an increase of 7.1% compared to 2015. Excluding the change in estimated acquisition earn-out payables in each year, our earnings per share increased 8.8% to $1.86 on an adjusted basis. For the year, we acquired over $55 million of annualized revenue which is in line with our 2015 acquired revenues. Andy will provide some details on our financial performance later in the presentation. Overall we're really pleased with our results for Q4 and the full-year of 2016. These results were delivered to the hard work and dedication of our over 8,600 teammates and we really appreciate all of their hard work to make this possible. I'm on Slide 6. During the quarter we continued to see modest growth in exposure units as a result of further improvement in the economy. Still very early days to determine the impact of the new administration, but there is some optimism about potential tax reform and how that might benefit the economy, our customers, and Brown & Brown. There were no real changes in catastrophic property rates for the quarter as they remain down 5% to 20%. Now that the 2016 hurricane season is behind us and insured losses were not material, we believe cat property rates will remain under pressure in 2017. Insureds continuing to evaluate the hurricane deductibles, flood coverage, and flood excess of the NFIP. We continue to see some non-Medicare offerings providing admitted paper options in certain coastal areas. In the admitted market, there are really no changes to rates. Rates are very similar to previous quarters as flat to down 5%. The exception to this is commercial auto where rates are flat up 5% all due to the frequency of claims. Professional liability rates are generally flat with the exception of some lines which were down slightly or even more than slightly. From a retail perspective, we grew 2.2% organically as we continue to see a positive trend in the last several quarters. We see our customers adding some employees and evaluating their healthcare options. Our customers continue to seek ways to manage their overall healthcare costs through plan or formulary design options. We did not see any material impact in the fourth quarter related to state exchanges with the potential for changes to ACA in the air, the first quarter of 2017 will give us a better idea of how companies are reacting to the rate increases and there being fewer options on state exchanges. Last quarter, we talked about the approval by the Florida Department of Insurance in the fourth quarter for worker's compensation rate increase. The approved increase of 14.5% is effective December 1, 2016, for all new policies and upon renewal for all existing policies. There is currently a lot of noise around this topic due to questions regarding the disclosure in accordance with the Florida State Sunshine Laws. As a result we're not sure of what, if any impact, this may have on our Florida worker's compensation business. If the increase stays in place then the benefit would be in the range of $1.5 million to $2 million which we referenced last quarter. In addition during the quarter a number of states decreased worker's compensation rates for the 2017. As a result we don't expect any material benefit or detriment to retail in 2017. For 2017 and going forward we're implementing a new annual incentive program for our middle-market producers in the retail division that is designed to pay for incremental performance. This new annual incentive plan is an addition to our standard 40/20 plan. If a commission producer grows a book of business 5% or more organically they're paid an incremental 5% performance commission on the total book. If they grow less than 5% the incentive does not apply. We expect this program will drive increased organic growth over the coming years by focusing on customer retention and new business. Later, Andy will talk about the financial impact of this new annual plan. We're pleased with the organic growth of 5.3% for our National Programs division. During the quarter we had continued growth across many programs including our lender-placed coverage program in our flood business. The flood performance was positively impacted by approximately $3 million of incremental year-over-year claims revenue associated with the Louisiana and Mississippi flood and Hurricane Matthew. Over the past two quarters we've mentioned that we were anticipating a couple of program changes with our carrier partners which is due to a change in their risk appetite. Several of these changes commenced in the fourth quarter and impacted our growth rates negatively in programs by about 1.5%. Now that the plans are solidified with the new carriers, we have a clear view on the impact for 2017. When we went through carrier changes in the past, it normally disrupts retention and new business during the transition year. As a result, we estimate the change of carriers will result in decreased revenues in 2017 of approximately $5 million to $7 million in national programs versus 2016. Our wholesale business grew organically by 2.9% for the quarter. This is a good performance given the continued rate decline for coastal properties in the range of 5% to 20%. With minimal weather-related insured losses in 2016, we expect continued downward pressure in 2017. We're also pleased with the performance of our Morstan business that we acquired in the second quarter as it's outperforming our expectations so far. The services division experienced good organic growth for the quarter at 6.2%. This growth was driven primarily by storm claim activity in addition to new customers. In summary, we're very pleased with the performance of our divisions for the fourth quarter and the full-year. Now let me turn it over to Andy who will discuss our financial performance in more detail.

Great. Thank you, Powell, and good morning everyone. I'll move over to Slide number seven, which presents our GAAP reported results. For the fourth quarter, we delivered total revenue growth of 7.1% and organic growth of 3.5%. Our income before income taxes and EBITDAC margins declined versus the prior year due to certain credits in the prior year and the change in acquisition earn-outs. On the next page, we're going to isolate these changes to give a better indication of underlying performance. For the quarter, our net income was down slightly and our earnings per share was flat at $0.41 versus the prior year. During the quarter, we purchased approximately 200,000 of our shares on the open market. Moving on to Slide number eight. This presents our adjusted numbers after removing the impact of the one-time stock compensation pretax credit of $8.1 million that we recorded in the fourth quarter of last year 2015, along with the change in estimated acquisition earn-out payables for both years. On an adjusted basis, our pretax income increased by 10.9% and as a percentage of revenues increased by 80 basis points. We grew our EBITDAC by 7.3% and our EBITDAC margin was consistent with Q4 2015 at 30.9%. The incremental storm claims revenue recognized by our flood business, which Powell mentioned earlier, positively impacted our margin by about 40 basis points, which offset the 40 basis point impact to our margins from the investment in technology. Later, we're going to get into a little more detail on the margins for each of our segments. Our adjusted net income increased by 10.3% and diluted earnings per share of $0.42 increased by 10.5% as compared to the prior year. We experienced a 30 basis point increase in our effective tax rate to 39.3% for the fourth quarter of 2016. The effective tax rate increase was impacted by income apportionment based upon the performance in the fourth quarter. I'll move over to Slide number nine. We're going to walk through the key components of our revenue performance for the quarter. Our contingent commissions and GSCs are up about $2 million as compared to the fourth quarter of the prior year. This increase is spread across our retail, programs, and wholesale divisions. We also disposed of books of business in the past 12 months which represented about $900,000 of revenue being recorded in the fourth quarter of 2015. We also recognized $14.2 million in revenue during the fourth quarter of 2016 associated with acquisitions that we completed over the last 12 months, with our largest impact coming from the Morstan acquisition in the second quarter of 2016. By isolating these four categories, our organic growth for the quarter was 3.5%. Moving on to the next Slide, we look at our performance in each of the divisions in a little more detail; we're going to start with Retail. For the fourth quarter our Retail division delivered 4.2% revenue growth. The organic revenue growth for the quarter was 2.2%, which shows a continued trend of improvement. Retail's year-over-year as reported EBITDAC margin decreased by 160 basis points. However, on an adjusted basis, the EBITDAC margin increased 30 basis points over 2015 primarily from increased contingents realized during the fourth quarter of 2016. To arrive at our adjusted margins, 2016 was adjusted to exclude a $1.8 million pretax charge associated with the loss on disposed book of business, along with a non-recurring $3.2 million pretax credit related to non-cash stock compensation. Then the fourth quarter 2015 was adjusted to exclude the $5.5 million pretax credit adjustment for non-cash stock compensation. Our income before income taxes was down $1.2 million due to higher acquisition earn-out adjustments of $2 million year-over-year and this was partially offset by lower intercompany interest expense. Moving to the next Slide, our National Programs division had a good quarter and delivered 5.3% revenue improvement in total as well as organically. During the quarter, our flood business realized approximately $3 million of incremental claims revenue versus the prior year associated with weather-related events. For the quarter, income before income taxes as a percentage of revenue increased from 17.5% to 20.3% due primarily to lower intercompany interest expense charges. Our EBITDAC margin decreased by 50 basis points due to a write-off of a policy administration system related to one of our programs that is switching carriers in 2017. Over to Slide number 12; our Wholesale division delivered total revenue growth of 20.2% which was driven by our acquisitions and organic revenue growth was 2.9%. Our EBITDAC margins are 26.5% for the quarter, which is a decline of 410 basis points from the prior year. This decline was driven primarily by higher continued transaction volumes and lower pricing that we've been discussing over the last few quarters as well as our acquisition in the second quarter of this year. Income from income taxes decreased for the same reasons noted for EBITDAC plus the increase in intercompany interest charges. We'll move over to Slide number 13, our Services division had a good quarter and delivered total revenue growth of 12.6% and organic growth of 6.2%. The majority of the organic growth was driven by our claims offices that had strong Q4 renewals, onboarded new customers, and increased activity related to weather-related events. For the quarter, our EBITDAC margin increased by 260 basis points due to the sale of a claims processing business in 2015 and the acquisition of our higher margin business in 2016. The incremental increase in income before income taxes as a percentage of revenue was driven by lower intercompany interest expenses. On to Slide number 15, we've included our full-year results within a callout for specific items that impact comparability with the prior year. The adjusted numbers should help you with your models for 2017. Our GAAP earnings are presented in our press release and the reconciliations are included later in this deck. From a revenue perspective, we grew by $106 million or 6.4% and organically we grew by 3%. From an EBITDAC perspective, our margins decreased by 50 basis points primarily related to the continued investment in technology. Finally, our earnings per share increased to $1.86, an 8.8% increase which benefited partially from a lower share count driven by share repurchases in 2015 that flowed into our weighted average share count in 2016. For the full year, we increased our dividends by 11%, marking our 22nd consecutive year of dividend increases. On the next page, we have included a full-year analysis of our revenues to help with comparability to the prior year. All right. A couple of quick comments regarding the outlook for 2017. For contingents and GSCs we don't know of any specific items that would materially increase or decrease our contingents but expect for them to remain under pressure in Wholesale and Programs due to lower premium rates and to remain steady within Retail subject to actual claims experienced. Due to the implementation of ASU 2016-09, which relates to stock-based compensation awards, we believe we're going to have volatility in our quarterly and annual effective tax rates for 2017. This new ASU requires that upon vesting of stock-based compensation, any tax implications to be treated as a discrete credit to the income tax expense in the quarter of vesting. The prior treatment required that the tax implication be treated as a reduction in additional paid-in capital. Our estimated full-year impact is a credit to income taxes of $3 million to $4 million. However, based on the vesting schedules, the majority of this impact will be in the first quarter of 2017 and we estimate that the impact in the first quarter will be a credit to income tax of about $2 million to $3 million. So due to the accounting policy change we estimate our first quarter rate with the discrete adjustment will be in the range of 36.5% to 37% and for the full year will be in the range of 39% to 39.3%. Regarding technology, we anticipate margins in 2017 will be further impacted downward an incremental 35 to 40 basis points as compared to 2016, and the 2017 costs are going to be incurred about evenly in both our retail and corporate segments with some incremental spending anticipated in our wholesale segment. Earlier, Powell mentioned our new performance incentive plan for Retail. We expect this plan will deliver a slight positive impact in IGR in 2017 and the cost to implement the program will be approximately 50 basis points impact on Retail margins in 2017. Earlier we also noted that we have a couple of programs going through to carrier changes. With these transitions and taking into consideration that we have $9 million of incremental storm planned revenue in 2016 that were not projected for 2017; we expect the organic growth for National Programs to be negative 1% to 2% on an as-reported basis. With the lower revenue in 2017 and the premium tax credits we recognize during 2016 which will not recur in 2017, our margins in 2017 will be approximately 300 to 350 basis points lower than 2016. We do view these items as isolated as all the other programs are performing well. With that, let me turn it back over to Powell for closing comments.

Thank you, Andy. Good report. We say internally the only constant is change. 2016 was one of those years. Changes in carrier appetite impacted our National Programs. The cat property market continued downward as more alternative capital was trying to find a home. The acquisition marketplace continues to be fully priced with some sellers' expectations outpacing reality. With our new President, there seems to be potential changes in corporate tax rates and in the ACA arena. Finally, with some of our carrier partners, there were changes in their senior leadership. This sometimes leads to a change in their risk appetite. All this change creates challenges and opportunities. We believe these challenges create great opportunities for Brown & Brown. Even with all these changes, we are very pleased with the results for 2016 and as we head into 2017, we are realistic and optimistic about the year ahead. With that I'll turn it back over to you, Cathy for questions.

Hi, yes good morning. I was hoping to first focus on the new Retail compensation program you mentioned. Two questions there. Is the 50 basis point impact, do you expect that to be even throughout every quarter of 2017? And then when you think about this kind of reinvigorating or leading to stronger growth in the Retail segment, do you see that as a 2017 event or are you thinking this plan gets put into effect and we will see greater impact on growth in 2018?

I think Elyse it's Powell over. The one I think that the expense would be even across all four quarters and I do believe that it will drive incremental performance in the year of 2017. It's being implemented effective January 1. So we believe it to have an impact this year.

And then are you targeting a certain growth level I guess compared to the about 2% we saw in 2016 as you think about this program being put into effect?

We are but that's a secret. We don't give growth guidance I'm sorry I know that frustrates you but the answer is yes but we don't talk about it publicly.

Elyse, what we would say is as we spent a lot of time with this plan and going through all the analysis which was multi-months to go through and making sure that we kind of evaluated all factors. We do anticipate an uptick in organic driven off two factors that Powell mentioned. And there will be an investment in the early years but then it starts to pay off over the next three to four years and we would cover everything back which is what we're looking for.

Okay. And then in terms of, I appreciate all the color on the margin. When I look at the margins in the fourth quarter and the full-year kind of ex-tech spend and some of the one-time items I get about 30 to 40 basis points of deterioration in both the Q4 when I back out the non-cash comp credit and then also the full-year and then also excluding the tech spend. So when we back out the tech spend for 2017, is that kind of the level of overall margin deterioration you are looking at? I know we have now this negative impact on the program margins, but any kind of color you can give us on kind of the overall margin outlook that you see for 2017?

Elyse, we would highlight two other things inside of there is one make sure you account for the loss on the sale of the book of business which is about $1.8 million. And then also we had mentioned the write-off on some software during the quarter that was about $1.2 million. So if you put those two together that's why in our commentary, the non-cash stock credit of about $3 million is literally neutralized with those other two items. I think that might have been something that you may have just missed on the way through.

Okay. Okay. One other question. When considering your acquisition outlook, it seems that deals are still fully priced in the market, which you've highlighted throughout 2016. Looking ahead to 2017, which may present a similar acquisition environment, at what point do you consider this in relation to your stock's performance and think about possibly repurchasing more shares?

Well Elyse let's talk about kind of how we think about capital allocation. And I think of it really in four buckets. Organic growth and margin, acquisitions, share repurchases, and having dry powder. So we think about it very long-term and so as I've said before, we constantly evaluate where we believe is the intrinsic value of our stock and compare that to where we're trading and we determine if it's something that we think we should buy at that point in time. We have also been asked what happens if our stock price is fully valued and the acquisition marketplace continues to be fully priced or even goes up. And the answer to that is we stockpile cash on our balance sheet. So we constantly evaluate share repurchase as one of the investment options for the cash that we build up. But as you know we don't have a stated amount that we're going to purchase on a quarterly basis; we're going to look at it opportunistically just like acquisitions, and we're going to do it when we think it makes sense for the company.

Apologies, thanks very much guys. Powell, I think that you had mentioned the flood claims revenue specifically within the quarter. I thought that Hurricane Matthew flood claims would come in a little bit higher than where they did. So I'm just wondering if you could just help us out with what the baseline, you said $7.5 million average 10-year flood claims revenue in the last quarter. What did it end up coming in at for the full-year of 2016? And was there any higher activity level from Hurricane Matthew that maybe will spill over into the first quarter?

Okay. So I'm going to answer Quentin at several things. One, we had $9 million of incremental cat revenue in 2016, number one. Number two, as it relates to your questions which I think is a very good one, the expectation of more revenue, I think is a very fair one, but what you might be surprised to know is there were a lot of people affected that did not have flood insurance. So there were areas in South Carolina and North Carolina and areas all around where you would think based on what you saw on the television that they would have national flood insurance and whatever, many of the people were not in flood claims and they did not buy flood insurance. So that was kind of how we look at it. And once again how, I think your assumption is a fair one, but those affected or some of those affected the most significantly were in areas they did not have flood insurance.

Okay, perfect. Also another thing that's obviously topical and that you guys put in here with the ACA, I know that you don't necessarily want to make a prognostication of exactly what's going to happen, but can you talk about the early conversations you've been having with clients as it relates to just their uncertainty for how they are going to cover their own employees? And potentially does this start to benefit you on a fee-based revenue stream as opposed to just commissions or how should we be thinking about 2017 as this kind of plays out?

First, I believe the discussions with our clients have remained consistent before and after the election of our new President. The focus of these conversations is primarily on managing costs effectively over the coming years rather than just in the short term. While there is speculation regarding changes to the ACA, we expect some modifications, but it's unclear if a complete repeal will happen. It's important to remember that some taxes related to Obamacare may shift, and lawmakers are considering how to address that. However, I wouldn't advise shifting our focus toward fee-driven business versus commission business at this point, as it's speculative. Our goal is to assist our clients, both large and small, in managing their total health insurance costs. This situation does create uncertainty, which in turn provides us with the opportunity to discuss options with our clients and strategize for the future, regardless of how the changes unfold.

Okay, that's great. And just very quickly on the last one is can you just verify, you guys just said you did repurchase 200,000 shares on the open market in the fourth quarter. So thank you for the whole capital allocation strategy and your thoughts around that, but that is an indication that you were out in the market and were actively repurchasing some amount of shares in the fourth quarter.

Yes, we did yeah just a little over 200,000 Quentin.

Thank you and good morning. Just, first, a follow-up question on the new incentive plan for the Retail segments. I remember a couple of years ago you had a similar plan. Could you remind us like how that plan played out in terms of the impact driving organic growth? And also the timing of the new plan, what made you sort of make a decision now is the right time to accelerate that growth?

In the fall of 2012, specifically in the fourth quarter, we experienced a significant increase in our organic growth, which was due to the end of a one-time sales incentive program. While we saw substantial organic growth in the fourth quarter, the first and third quarters did not align with our usual performance, and there was a slight decline for various reasons. We had a positive experience with that program, but it was a single-year initiative. Moving forward, we aim to ensure that every program we implement at Brown & Brown is aligned with the long-term goals of our team and shareholders, as we believe this fosters better customer retention and drives new business. We perform well in acquiring new business and retaining existing customers, but there is always room for improvement. This new incentive aligns our producers with the corporation's goals. We've been considering this for the last six months after discussions with our leaders, and after careful consideration, we believe it's the best decision for our organization and our producers.

Thank you for that. Regarding the potential tax reform you mentioned earlier, do you anticipate that all the benefits will directly impact your bottom line, or do you see chances for reinvestments? Additionally, will a potentially lower tax rate in the near term affect your expectations for acquisitions, particularly if target prices increase?

Okay. So as it relates to the first part, we think that that will be a good opportunity for us to deal with, if in fact something occurs. So the way I look at it, any additional earnings dollars that we received as a result of a tax cut would just go into the bucket that we think about how we allocated for those four things that we talked about earlier. So I wouldn't say that we're going to do more of one versus more of another. I think of it as equal consideration and then we're going to try to invest in the best options for the company, that's number one. As it relates to tax rate, I think there are two parts to think about. Yes, I do think you have corporate tax rate and then you have the potential for capital gains changes as well. And as we've said earlier we believe that the marketplace is fully priced and so expectations of some sellers are unrealistic and with a tax cut either in one or both, I believe that those expectations would probably go up because the bankers will facilitate that. That said, at the end of the day, remember, Kai, we are focused on looking for acquisitions that fit culturally and make sense financially. And so therefore as you've heard we've only done $55 million of acquisition for the last two years and I would tell you that I'm comfortable with that because we didn't find ones that fit culturally and made sense financially. We found a couple that fit culturally last year but financially would not have made sense and that's not our plan. So that is kind of the way we look at it.

That's great. Just follow-up on the acquisition topic, last one is that you've seen increasing industry consolidation going on. You saw the large players starting to get down to the middle market. Do you see increased competition? And also do you see some larger potential company like from PE fund potential for sale? Are you considering any sort of transformational deals?

That's great, okay. So let's start with the first part. Regarding some of the larger firms entering the middle market, I believe you are referring to Marsh, which has generated about $1.02 billion in middle-market revenue as part of its $12 billion business. They have their own strategy concerning their middle-market approach. From my perspective, we don't discuss acquisitions until we have a signed document and purchase agreement, especially for larger deals. However, if you examine the top 20 insurance brokers in the United States, you'll find that six of them are backed by private equity. Over the next three to five years, these firms will likely look to be sold. I'm not sure what their plans are — whether they aim to go public or if they will be acquired by another private equity firm or a strategic buyer; most of their current structures aren't set up for public offerings, so changes would be necessary. We aim to position ourselves to explore transactions of all sizes and shapes, focusing on finding opportunities that fit culturally and make financial sense. Whether these opportunities are larger or smaller, we remain open to exploring all possibilities that are sensible.

I guess the first one on the margins, and I just want to make sure that I understood you correctly when you were giving some of the detail. Were you saying before that the outlook for 2017 is for consolidated margin pressure of 35 to 40 basis points?

On the technology.

Just on the technology piece.

Yes, on the technology, Charles.

Okay. I guess within that I'd like to talk a little bit about the Wholesale division and the 400 to 410 basis points of margin contraction in the quarter. How much of that, or can you give some color on that, is this new kind of business mix of higher volume transactions versus the acquisition? I guess I'm trying to understand because it's such a significant level here in the fourth quarter if this kind of new run rate on higher transaction, how much of this is going to show up throughout 2017?

Hi, Charles, I would say that kind of a broad statement is this probably two-thirds of the impact is volume of business and one-third is acquisition.

Okay. I do appreciate that. That's helpful.

Yes, and Charles, when you are modeling for 2017, please keep in mind a couple of things. As you look at the quarterly margins in retail, you should not expect to see that level of drop every quarter going forward after we complete a full cycle. So, remember this when you are doing your modeling. Regarding the Morstan acquisition, we strategically acquired this business knowing it had margins lower than our average, but we expected them to improve over the coming years. It is performing really well, and we are very pleased with it. Over time, we will continue to enhance our margin as Morstan works to improve.

Okay. And then I guess on the new compensation program and, obviously, when you did the one-time deal back in 2012 there was a significant kind of fourth quarter to boost as you picked up. I guess I'm still just trying to understand a little bit more clearly, like is it just for the margin hit? Like I guess why the success you saw with the kind of 5% maybe it's back-weighted. But improved organic growth back in 2012 but why the reversal are now coming back around. Like what is it just market opportunity or it seems like this has the opportunity to have organic growth 100 or 200 basis points higher for you guys. And I don't know if it's just a risk weighting on versus margin dilution on how you are thinking about that on the organic growth versus margin pressure within the Retail segment on this compensation program.

So Charles, we implemented our current plan of 40/20 in 1982. And what we have always tried to do is set producers to write lots of new business and retain the business that they have. And once when we started evaluating it and talking to other folks internally we thought that over time that this would be a positive to the company over the next several years. That said there's going to be some more expense in year one that we won't overcome all of that expense and we understand that. So as Andy said earlier this is something that we thought a lot about and we, I know you know this, but we don't make rash decisions. We think about how we can do this over the long-term and so remember the goal is to be even better at retaining our existing customers and writing more new business and we believe that this plan captures both.

All right. And then just finally on the share repurchase that 200,000 shares in the quarter, I know traditionally you guys do your capital management on an ASR basis. Was this kind of just offsetting some stock comp or something or is there a change in philosophy versus open market practices versus ASRs kind of going forward?

No, Charles, no change in the philosophy. We had utilized both of the approaches in the past. In early 2014 we did open-market and then you after that time we do a lot of ASRs. In the fourth quarter of this year, we just saw an opportunity to pick up some shares in the open market and decided to go ahead and do that. I think we will continue to look at all the different ways that are out there in order to hopefully run the most efficient and effective plan that we can from purchasing back the shares as well as doing in a cost-effective manner.

Excellent. I appreciate the answers. Thanks a lot guys.

Thank you.

Thanks. Good morning. Can you hear me okay?

Yes. Good morning.

Great. A couple of different questions. Number one, in the Retail business how is exposure growth now compared to six months ago and 12 months ago? Is it equal? Is it getting better?

It really depends on the region and the industry. In Florida's construction sector, there has been significant activity and improvements recently, even more so than six months ago. However, this isn't the case everywhere. Therefore, it's difficult to categorically state that there's a 10% or 5% increase. It varies greatly by location.

Okay, thanks. And then in the Wholesale business how are submissions running in the fourth quarter compared to a year ago?

They're equal to or up.

Adam, that's where we talked about volumes in the business, so we're seeing a lot of submissions coming into us.

And what's driving that? Is that more internal your sales effort or is that a reflection of the market or both?

I think it's a combination of both. Looking back, around 20 years ago, the non-admitted market was in the single digits. Today, that figure is now in the low teens, indicating significant growth in the non-admitted marketplace. Our brokers and production underwriters are actively soliciting business because we offer products that not only help retailers write new business but also retain their existing accounts. Additionally, the E&S market continues to evolve in its quest to remain relevant and grow, influenced by the influx of alternative capital targeting areas with high margin opportunities, except in cases where there are storms.

Okay. Okay, that's helpful. Then in the Retail business you mentioned some potential pressures next year, additional tech spend and then you have the incentive program. On the other hand, if organic growth does pick up, can you get some margin leverage from that to offset some of those pressures?

So when the guidance we gave on the 50 basis points Adam that was a blended based upon the incremental organic; a lot depends upon how the program runs out. We've run a lot of different scenarios. But we think that's probably reasonable for what we know right now.

Okay, okay. And then final question Florida homeowners, which I realize isn't huge but you have some of that business. Is the competitive nature of that market impacting your growth?

I'm sorry, but we couldn't hear the first part.

Sorry about that. Florida homeowners market continued to be pretty competitive; is that impacting you?

Yes. So let's talk about that. We have Florida homeowners so you could have a negative potential impact in certain areas in Retail, you can have a positive impact in Wholesale, or in Programs. But it's all about product and do you have, what you have available and there are different segments of that more main street business versus the high net worth or mass affluent marketplace. So I think the answers are slightly different for each one of those areas. But it continues to be a very unique place to do business particularly for the main street homeowners business around the state.

Good morning. I had a question from a tax standpoint, and I'm connecting a few things that you said across the call and trying to pull it together. If we talk about tax reform in general and then looking at your customers, and then I also want to bring ACA into it, you said that your customers are hiring, more employee headcount is increasing. But from an opportunity to expand their insurance program if they had, if the tax reform comes through and they have more earnings dollars for themselves, are they underinsured still at this level? Is there a need to increase coverage or would it be additional coverage is trying to sell new products?

Think of it, Ken, think of it as if they and this if an, if, if they leave the money in the business and invest i.e. to expand the business then the exposure units go up which in turn our revenue and that relationship would grow. So if think about it let's say that you had a contractor and that contractor bought three new trucks. So the three new trucks go on to the policy and let's assume that they were able to get two new projects so their payroll which is going to be their exposure units are going to up because of those projects which is where they're going to use those three trucks; that's good for them and that's good for us.

Absolutely. Considering the current customer base, there was a time when people might have thought they were underinsured. However, as of today, would you say that most of your customers are well insured or fully insured, or are there still some who are underinsured in certain areas?

It’s difficult to determine definitively, but we are in the solutions business, providing options to our clients to help them make informed decisions about protecting their assets. Clients do have the option to forgo certain coverage, which might apply to a few specific accounts. Overall, I believe they are adequately insured. There are always circumstances that warrant discussions with clients about changes in their operations or risk appetite, which could lead to additional coverage or adjustments in their plan designs, such as switching from fully insured products to those with deductibles in property and casualty. Overall, my assessment is that they are adequately insured.

Okay and the last question I have, and this may be making a bit of a reach of a connection, is if there is the change in healthcare in your conversations you've had so far with corporations, do they feel obliged to make sure that there is a health product that may have been expanded in the recent years rather than what was there five or six years ago? So any savings from a tax reform some of that maybe they may feel obligated to plow that back into their business for their employees?

I think our clients those that we have spoken to feel like it's a competitive advantage to have is a broad statement, a competitive advantage to have a competitive health plan, and so it depends on the industry, it depends on what is normally offered versus not offered. So if we're talking about a Technology Company, their health plan design and expectation is probably much different than general contractor. It is much different. And so I think though generally speaking, business owners feel like health insurance is something that they want to provide, they feel they have to provide it, they also think it is either competitive advantage or a disadvantage, a substantial disadvantage if they don't have it.

Thank you, Cathy, and thank you all for your time today and we look forward to talking to you at the end of our Q1. Good day.

Thank you.