Brown & Brown Inc (BRO) — Q2 2017 Earnings Call Transcript

Thank you, Tracy, and good morning, everyone. And thank you for joining us for our second quarter earnings call. I am on slide four. For the second quarter, we delivered $466.3 million of revenue, growing 4.4% in total and 1.6% organically. Our EBITDAC margin decreased to 120 basis points from Q2 of ’16. Andy will provide more color on our revenue and margin movements later in the presentation. Our as reported earnings per share for the second quarter of 2017 decreased to $0.46 from $0.47 in the second quarter of ‘16. When excluding the change in estimated acquisition earn-out payables for both years, our adjusted earnings per share remain steady at $0.49. Overall, Q2 was a good quarter and we’re pleased with the overall performance of the business year-to-date. I’m now on slide five. The second quarter looked much like the first quarter from an economic expansion perspective across most industries and geographies. We experienced continued slight growth in exposure units, which we have mentioned in the past is a key driver for our organic growth. In the first quarter, we talked about optimism regarding the potential for Healthcare Reform. As we mentioned, that optimism slowed during the first quarter and has continued to slow during the second quarter, and when we talk with our customers and potential customers, they feel relatively certain that any changes in healthcare will more than likely change how they look at or approach healthcare coverage for their employees. There are many possible outcomes that could have an impact on employers and their plan designs, most significant would be if the deductibility for healthcare costs was materially reduced or eliminated. We’re also keeping an eye on what changes could occur to Medicaid reimbursement and what this might mean at the state level, as well as if there is any impact upon community rating. At the end of the day, there is a lot of confusion and unknowns. If this change occurs, it provides an opportunity for Brown & Brown to work closely with our customers to help them understand what the changes might mean to them and how they can navigate those changes. The amount of available capital and appetite to deploy this capital has not slowed. It remains relatively constant with prior quarters. Risk bearers continue to look for creative ways to retain their renewals and drive new business. Previously, we talked about how we’ve generally been experiencing consecutive decreases in premium rates across most lines. In the first quarter, we mentioned that coastal property rates were down in the range of 2% to 10% compared to the first quarter of ‘16. We cautioned that one quarter doesn’t make a trend. In the second quarter of this year, we saw coastal property rates down 5% to 15%. The second quarter was a big property renewal period, so we wanted to see how rates were trending. While rates were down 5% to 15%, this is still better than the prior year when rates were decreasing in the neighborhood of 5% to 25% down. As a general statement, we’re seeing some carriers starting to draw a line regarding how much further they will lower their premium rates. This is not true in all markets and specifically, Southeast Florida remains very competitive. As it relates to other lines, commercial and personal auto continues to increase 1% to 5%, which is being driven primarily by the frequency of claims and distracted drivers. For most other lines, rates are generally flat to down slightly. So now let’s talk a bit about the performance of our four divisions. From a retail perspective, we grew 1.1% organically. As a reminder, we mentioned in the first quarter that we had about 100 basis points of timing benefit that was expected to be recognized in the second quarter. During the quarter, we continued to realize solid new business and good retention, excluding some larger one-off losses that were primarily related to customers being acquired, and our employee benefit business grew nicely again. When we look at our performance for the first six months of this year, our average organic growth rate between the first quarter and second quarter is about 2.5%. This compares with an average organic growth rate of 1.3% between the first quarter and second quarter of 2016, so we’re pleased with our improved performance and we're working towards making it even better. Regarding our 5 for 5 Incentive program, there is a lot of positive energy related to the program and our producers are working really hard to deliver the best results, so they can achieve their targets. It’s still too early to determine exactly how things will ultimately turn out for the year, but at the midpoint of 2017, the program appears to be performing in line with expectations. The performance for our National Programs division was in line with our expectations, led by strong growth in our lender-placed business. Our earthquake programs and our all-risk program continues to build momentum. The growth from these and other programs was substantially offset by continued downward rate pressure on our coastal property programs and the impact related to carrier changes for a couple of our programs. As we mentioned previously, when we have a carrier change, retention normally decreases, new business slows, and margins decrease. Then once a new carrier is in place, revenue will stabilize and then start to grow, and the margins will begin to increase. Remember, these changes will result in decreased revenues for National Programs in 2017 of approximately $5 million to $7 million for the full year versus 2016. The largest part of this impact will be in the second half of this year. Later in the presentation, we’ll talk about our new Core Commercial Program with QBE, which started this month, July. Our Wholesale business had an excellent quarter growing organically 6.2%, driven by strong new business despite continued declines in coastal property rates. During the quarter, we again realized growth across almost all lines of coverage and most of our businesses. Our binding authority and personal lines businesses performed really well again this quarter. Our brokerage businesses continue to improve nicely as we grow more new business and rate decreases were less than the prior year. The Services division experienced slightly negative organic growth this quarter. Our advocacy and workers’ compensation claims businesses grew nicely during the quarter, but this was more than offset with the lack of claims related to storms, as there was minimal activity in the second quarter of this year as compared to the prior year. In summary, we’re pleased with the performance of our four divisions for the second quarter and the first six months of 2017. So now let me turn it over to Andy, who will discuss our financial performance in more detail.

All right. Thanks, Powell. Good morning, everyone. I’m over on Slide #6, which presents our GAAP reported results. For the second quarter, we delivered total revenue growth of 4.6%, excuse me, 4.4% and organic growth of 1.6%. Our income before income taxes decreased by 90 basis points and our diluted earnings per share decreased by 2.1% to $0.46 versus $0.47 in the second quarter of last year. These financial metrics were impacted by our change in acquisition earn-outs, which we’re going to discuss on the next slide. Our weighted average number of shares increased by 1.1% due to shares issued as part of our long-term equity plan and our employee stock purchase program. Our goal each year is to minimize the impact of these programs via periodic stock repurchases throughout the year. During the second quarter of this year, we repurchased approximately 260,000 shares and lastly, our dividends increased just over 10% for the quarter. During the first quarter, we also successfully, excuse me, during the quarter we also successfully completed an amendment and extension of our bank credit facility. The new agreement is for five years with a term-loan of $400 million and revolving credit facility of $800 million. In the past three years, we paid down the original term-loan by $125 million, with $68 million of this paid at closing in June. The terms are relatively consistent with the prior agreement and therefore we do not expect any material changes to our interest cost. We continue to like the structure of this facility as it gives us the capital capacity and flexibility to support the growth of our business. We’d like to thank all of our banking partners for their ongoing support. Now move over to Slide #7, this presents our adjusted numbers after removing the impact of the change in acquisition earn-out payables for the second quarter of each year. Since these items are non-cash and can increase or decrease by quarter, we believe it is helpful to evaluate the business excluding these adjustments. For the quarter, our income before income taxes and EBITDAC increased by 50 basis points and our net income grew by 1.2%. A higher growth rate of adjusted net income as compared to adjusted income before income taxes was driven by a slightly lower effective tax rate this quarter of 38.8% versus 39.3% in the second quarter of last year. The lower effective tax rate was primarily impacted by the new accounting treatment for stock compensation that we discussed in the first quarter of this year plus a few discrete items. For the full year, we continue to expect our effective tax rate to be in the range of 39% to 39.3%. In a few slides, we’re going to walk you through the primary drivers of the margin changes. Moving to Slide #8, we’re going to walk through the key components of our revenue performance for the quarter. Starting with total revenues, our other income increased by $800,000. Our contingent commissions and GSCs increased $4.7 million as compared to the second quarter of last year. This growth was driven primarily by incremental contingents in our programs division, resulting from book growth along with the receipt of certain contingents that we did not qualify for in the prior year due to previous loss experience. Our total core commissions and fees increased by 3.3% year-over-year. When we isolate the net impact of our M&A activity, our organic revenue growth was 1.6% for the quarter. Moving over to Slide #9, similar to the first quarter, we thought it would be helpful if we include a walk of our quarterly EBITDAC margins from last year to this year and highlight the main drivers. We do not anticipate providing this level of detail each quarter unless it is beneficial to understanding our numbers. On an as-reported basis, our margins decreased by 120 basis points year-over-year. We had the premium tax refunds that were recorded in the second quarter of last year, which resulted in a 60 basis point decline as compared to 2016. Then we had an $800,000 gain on the sale of our book of business in 2016 that increased the prior year margins by 20 basis points. We view these first two items as non-recurring as they only impacted the prior year. For the current quarter, the impact of our investment in technology was about 70 basis points. As it relates to the investment in technology, the programs are progressing along as expected. We previously mentioned that we anticipated the largest incremental year-on-year increase to occur in the second quarter of this year. This is due to the fact that we had minimal investment in the second quarter of 2016 and then our investment began to increase in the third quarter of last year. For the full year, we still estimate the margin impact will be in the range of 40 basis points to 50 basis points versus 2016. Next is the impact from the new 5 for 5 Incentive Plan within retail. As Powell mentioned, this program is still in the early days, but it is performing financially how we thought it would, based upon the results in the first half of the year. The impact for the quarter is up slightly versus the first quarter as we have some producers on pace to deliver higher performance for the full year. We’re accruing the cost based upon full-year projection of growth by producer and as a result, there will not be a direct correlation of the expense and revenue in each quarter. As a reminder, we anticipate this program will impact our margins the most in 2017, less in 2018, and it will breakeven in 2019. Within other is the net effect of the increase in contingent commissions and guaranteed supplemental commissions, the continued impact of leveraging our revenues and the results of our strategic purchasing and cost management programs. We will move over Slide #10, we will look at the performance of each of our divisions a little more closely, we’re going to start with retail. For the second quarter, our Retail division delivered total revenue growth of 1.9% and 1.1% organic revenue growth. As mentioned in the first quarter of this year, there was approximately 100 basis point benefit of revenue that we expected in the second quarter of this year. Our income before income taxes was down $1.2 million due to higher year-over-year acquisition earn-out adjustments of $1.1 million, a prior year gain on a book of business sale of $100,000. The incremental expense associated with our 5 for 5 Incentive programs, as well as our technology investments. These items were partially offset by lower intercompany interest charges. Retail's year-over-year as reported EBITDAC margin decreased by 180 basis points, primarily due to our incremental investments in the 5 for 5 Incentive Plan, as well as technology, and we also had the prior year’s gain on the book of business sale. Moving over Slide #11. For the quarter, total revenues for our National Programs division increased by 4.5% and 70 basis points organically. During the quarter, we received new or increased contingent commissions due to our improved performance for a few of our programs. As a reminder, we expect material downward pressure in the second half of this year on organic revenue growth related to carrier changes and $8 million of incremental storm claim revenues we recognized in the second half of 2016. Later, we are going to talk about the revenue and income impact of our new Core Commercial Program. For the quarter, income before income taxes increased by 5.4%, due to lower intercompany interest expense charges. Our EBITDAC decreased by 3.5%, primarily due to our Flood Insurance Program receiving one-time premium tax refunds of approximately $2.8 million during the second quarter of last year. This was partially offset by increased contingent commissions during the second quarter of this year. On to Slide #12, the Wholesale division delivered total revenue growth of 17.5% driven by acquisitions and organic revenue growth of 6.2%. Our income before income tax margin increased by 130 basis points to 27.9%. This was driven by increased organic growth and continued control of expenses. This increase was partially offset by higher intercompany interest expense. Our EBITDAC margin increased 190 basis points to 34.7% for the quarter. This increase was driven by the same factors we just mentioned, excluding the impact of intercompany interest expense charges. On to Slide #13, the Services division revenues were down slightly versus the prior year due to lower storm claim activity. For the quarter, our EBITDAC margin increased by 260 basis points, primarily due to managing our expense base and growth of our advocacy businesses. The incremental increase in income before income taxes was driven by lower intercompany interest expense. We do not expect this level of margin increase every quarter, but we are very focused on operating highly efficient claims businesses. With that, let me turn it back over to Powell for closing comments.

Thank you, Andy. Great report. Before we get to closing comments, we wanted to talk about our new Core Commercial Program that we’ve launched in partnership with QBE. This is now our third lift-out of a program. In 2012, we lifted out the automobile aftermarket program from Zurich and in 2013 we lifted out the non-standard auto program from Everest. We believe it is our proven track record of running efficient programs, our underwriting capabilities, our technology, distribution and our talented teammates that enable us to help our carrier partners seek better returns on their programs. We’re excited about the potential for this new program as it gives us a broad based business owner policy and a commercial package policy. This program will be licensed in all 50 states and will generally target middle market companies with annual premiums of $100,000 and below. We’ve also increased our nationwide independent agency distribution and we’ve added more than 50 new teammates. As part of the lift-out, we have a long-term commitment from QBE as they like the business and the potential outlook. From a financial standpoint, we will recognize revenues of about $6 million to $8 million in the second half of 2017 and we will have a net P&L investment of $1 million to $3 million. In 2018, we expect the revenues will increase to about $15 million to $17 million and our net P&L impact will be an investment of $2 million to $4 million. During this time period, we will be building our technology to support the program, then when we transition off QBE’s technology platform, the margins by the end of 2020 will be in line with the overall margins of our National Programs division. In closing, we remain optimistic about the outlook for the remainder of the year. The economy appears to be moving upwards slightly and rates appear to be moderating slightly. Our new Core Commercial Program will give us some organic growth in the second half of this year to help substantially replace the Cat claim revenue from 2016. We’re working hard to get a lot of our core technology programs done by the first quarter of next year and further work to implement our uniform retail agency management system. We were successful in closing a couple of acquisitions before the end of the quarter and we continue to look at a number of transactions that help us further grow and expand our capabilities. We have a lot of great activity going on throughout the company and are making progress in many of our initiatives to drive the business forward. I would like to thank all of our teammates for their efforts. We appreciate everything they do each and every day for our company and our team. With that, let me turn it back over to Tracy for our Q&A session.

Hi. Yes. Good morning. My first question on, so going back to Powell, some of your comments on the retail organic growth, I mean, I know some part of the slowdown in the quarter was due to timing, but now going back to the first quarter, at least to me it seems like if you excel timing-wise it would have more or less been looking for growth to kind of de-stable or pick up from there given the retail comp program? Can we just get a little bit more color on what drove the sequential slowdown and then, if, would you expect I guess growth in the second half of the year just based off of how you see your business now to be stronger than what we saw in the first half of the year?

Okay. So, Elyse, as you know, we don’t think one quarter, you can have ups and downs in a division or in our business. Having said that, as you heard me say, the average for the first half of the year was 2.5% organic growth versus 1.3% organic growth last year. So we are pleased with the overall performance, retail and the direction that it’s going. We were down a little bit this quarter and so, in your vernacular, we grew 3% in Q1 and we grew 2.1% in Q2. As you know we don’t give organic growth guidance and we haven’t in the past, we’ve said that we believe that the business is a low-to-mid single-digit organic growth business in a steady state economy. But I know you are looking for some nugget of information and there is not really a nugget; when I say that, it is, we are continuing to execute the plan, we are doing better by a factor of almost double this time this year versus this time last year and we continue to work to improve it. So there is not one thing, it’s just we are down a little bit versus the first quarter in Q2.

Okay. Great. And then in terms of the outlook for the contingence, they were higher this quarter than last year. Do you have some visibility into how those will look in the back half of the year?

Hi. Good morning, Elyse. It’s Andy here. No. As we’ve really said on the previous calls, we don’t have that level of visibility. We would expect them to continue to probably be flattish just based upon kind of what we know out there. It just depends upon performance every individual carrier partner and/or how it’s currently going underneath on there, so they do kind of moderate up and down.

And then I guess going back let me look at the pushes and pulls in that slide nine, when you show the EBITDAC margin and obviously, the biggest 90 basis point really stem from the change in attendance year-over-year. I guess, we’re talking about the back half of the year most of the margin delta between ‘17 and ‘16 really just be reflective of the IT investments and the retail incentive plan, and then just also some of the color you gave surrounding the programming division?

Yeah. Those will be the three main areas. Just again, keep in mind, the programs and as we mentioned before, when we’re going through the carrier changes, as well as the flood claims, those generally come with a higher margin associated with them, so that will put pressure on the margins in the back end of the year.

Okay. And then as we think about 2018, I know you did provide some commentary about the retail comp program still impacting margins then? When you guys gave us the outlook for this tech program, it was a two-year to three-year investment horizon. Are you expecting the program to impact margins when we get into 2018 or should we look for less of an impact on your margins from the tech program next year and just be thinking about that retail program still impacting margins?

I think I have two topics inside there, Elyse. So, let’s start first with technology. As we said that was probably a three-year investment program. It’s continuing to move along the path the way that we anticipated. So there will probably be some impact in 2018, as we get towards the back end of the year, we’ll be able to give a little better guidance as to what that looks like. The main piece that we’re focused on next year is the unified platform for retail agency management. So we’re going to work through that. And then retail, as we mentioned before, the largest investment is in 2017, then an investment starts to shrink in 2018 and then it breaks even in 2019, okay. So, said differently, there’ll be less margin impact in 2018 than what there was in 2017, okay?

Okay. That’s great color. Thank you very much.

Thank you.

Thank you and good morning. The first question on the 5 for 5 Incentive program, could you give us a little bit more detail about how the program had been progressing, was your producer behavior under the new program? And what is your 40 basis points to 60 basis points basic impact on the margin side, what that imply in your sort of estimate how much that will help on organic growth side?

We're very pleased with the progress our producers are making across the platform. This doesn't imply they weren't hard at work previously; they certainly were. However, there's a financial incentive linked to achieving a net growth of 5% or more in their book, which we find encouraging. Regarding organic growth, it's speculative at this point in terms of expected outcomes for the year. Some producers consistently grow their books each year, so the added incentive may not change their behavior significantly but will reward them for their continued success. On the other hand, there are producers who may not experience substantial growth annually, and this incentive could motivate them to increase their performance. We'll need to see how that plays out over time. For instance, a producer with a stable or slightly fluctuating book could be encouraged to push for additional growth. We typically don't discuss the anticipated organic growth tied to this program, similar to how we don’t provide organic growth guidance for our business. However, one might notice that our average organic growth in retail for Q1 was 2.5 this year compared to 1.3 last year, which could provide some insight, although I’m not suggesting it should be a definitive comparison. Ultimately, our aim is to achieve more rapid and profitable organic growth, and we believe this initiative plays a crucial role in that effort. We're very happy with the results so far.

So that’s great. The margin impact for next year, you would – and breakeven in 2019 assuming the program will continue in the current form?

That’s correct – yeah. We – it is intended and will be an ongoing program. And you are correct in how you stated that, yes.

Okay. Great. Second question on the QBE, potential growth opportunity there, you mentioned by 2020 will be similar margin to your National Program division. So what assumption you’re assuming on that, basically in terms of the topline, how much contribution could there be coming from the – how fast can the business grow?

Well, remember, any time you have a transition when it comes from a carrier and/or platform. There is a little bit of transition time. So ultimately, I believe that there – we’re not talking about the growth numbers just like organic growth, but we do believe that the business can grow and we are excited about their risk appetite and working with the independent agents that they have actually already developed a really, really good business with. This business is primarily based up right outside of Madison, Wisconsin, and so we have a bunch of new teammates that have joined there and once it gets into our system, we’ll be able to comment on growth and how it’s doing, just like, if we are talking about those that are contributed in the program space like lender-placed and the earthquake just in this particular quarter.

And Kai, when you’re thinking about the out years and our comments on margin, most of that is actually associated with moving on to our technology platform that’s where we get the benefit out of, it’s not off the significant growth in the revenues.

That’s correct.

Could you provide some insight into the run rate revenue from the core commission fee in relation to maintaining a similar margin as your National Program, considering your investment, cost structure, technology platform, and personnel?

Sorry, Kai, can you – yeah, can you repeat that one more time for us?

Yeah. Sure. Just say like given your investment you’re making sort of run rate expenses in this new platform, what kind of like revenue topline would result in that similar margin as your current National Programs?

Basically, it will be very similar to what we’ve said, which we are expecting next year full year revenue of $15 million to $17 million. So stated more simply with little or very little or moderate growth in the program, we think that that occurs in the margin...

Okay. So because of leverage out there on expense…

Correct. Exactly.

Okay. Great. So last if I may, you saw the sort of recent acquisition by USI of the Wells Fargo’s Brokerage business. I just wonder from industry perspective do you think it will become a strong competitor in both organic growth, as well as for additional acquisition in the space?

Since they are private equity owned, we lack clear insights into their organic growth profile, and I am uncertain about that. They previously acquired around 40 businesses or offices from Wells Fargo, which seems to have been successful for them and likely contributed to the substantial amount they paid for the Wells Fargo business. Only time will reveal the outcome. I believe they will have significant time to integrate, but I could be mistaken. We encounter them occasionally in the acquisition arena, similar to other firms. There are approximately 26 private equity-backed firms, and on any given day, any one of them could emerge and offer a considerable amount for an opportunity. However, depending on the management style at the bank, there is likely to be a transition between how things were operated at Wells and how they will be managed under Mike Sicard and their current leadership, which will likely be different. They will need to navigate through that process.

Okay. Thank you so much for all the answers.

Thanks, Kai.

Hi. Good morning.

Good morning.

Just following up on the Arrowhead/QBE deal, could you talk a little bit about how that deal came about and are there any opportunities to do more similar deals with other carriers going forward?

Okay. So what I would tell you, Sarah, good morning, is in each of the lift-out opportunities, everyone’s a little different. But we were talking with our carrier partner and they had been evaluating either the cost structure, the profile of the business, the direction of it or whatever. It could be a bunch of variables and they basically said, would it be better for us, this is the carrier, to actually partner with somebody like Arrowhead, Brown & Brown, in order to distribute this and be more efficient across our system? Can we get better results partnering with Arrowhead than we can ourselves? So having said that, that’s how each of these, in different ways, that’s sort of come about. Also as I can’t stress this enough, the quality of our teammates in Arrowhead and across programs, we believe is second to none, number one. Number two, our technology we believe is second to none. Number three, we’ve done several of these, so we have a history of doing this successfully, which is unique. And to your second question, we believe that as a result of all the other capital, I don’t even call it alternative anymore, other capital out there and the way carriers are thinking about trying to write new business that there are a number of carriers that have very high fixed expense structures, which will have to evaluate other opportunities in the future. So do I think there is an opportunity for us in the future, yes. Do we know of one, no. Do we have one right on deck, no. And if you think about it, they happen like once every couple of years. And so it’s a long process, this isn’t like something, somebody just decides to do there, it’s an incredible amount of work that goes into doing what we’ve talked about. And I’ll tell you, I talked to six or seven of our teammates yesterday that were directly involved in the heavy lifting of move of this partnership with QBE, and they did an exceptional job. And so, like I said, we look out at it as an opportunity, we’ve done this now three times, this is third. We would like to think that there are opportunities in the future but only time will tell.

Okay. Great. And just, so I can further understand, what is it about this structure that makes this structure more cost-efficient for the insurer?

Okay. So, let’s say that you have a large standard insurance company. You pick the name, I won’t name anybody and their fixed costs, their expense ratio is 35% to 40% or 32% to 40%, and they know to be competitive going forward. It probably needs to be more like a 28%. I just pulled that out of the air. And so with the same amount of losses is there a way for them to let us put it on our platform and run it more efficiently than they can? So I know you know this, but home office overhead loads and charges can rack up or erode a margin in a program in a big company. And so when you bring that to us, it’s fully allocated and it operates on its own more efficiently, and we can drive some of that efficiency through our technology, as Andy talked about, our investment in that technology will enable us to bring profitability that over time, more profitability to it. So, like I said, you know more about insurance company financial structures than I do. But I can tell you that running a very high expense ratios presents a challenge for all of those leaders going forward and opportunities for us.

That’s great. Thanks for the answers.

Thanks, Sarah.

Yeah. Good morning, everyone.

Hi.

I have a couple of related questions. When you disposed of Axiom Re, you changed your reporting approach by differentiating between GAAP EPS and adjusted EPS. Going forward, I assume that you will also adjust for earn-outs and excessive expectations. Can you share your thought process behind the shift from viewing GAAP as the best representation to now preferring adjusted figures? Additionally, when considering the quality of the deals you are acquiring, how do you evaluate your team's capability to exceed expectations? To what extent have the expected earn-outs matched up with any surprises?

I’d like to just talk about that at a high level from a standpoint of, and Josh, I think you know this, I’m not a CPA, so I’m sitting next to one, but I am not a CPA. So relative to GAAP and adjusted earnings, my analysis is there have been things that have occurred in the last several years, which start to make the GAAP number a little bit more opaque than it was. So for example, a change in estimated acquisition payable is a non-cash item based on an estimate that you are putting up or making adjustments in our case on a quarterly basis versus just putting up the entire estimated expense. And so, I think, it has, that’s why we moved to EBITDAC and others have moved to EBITDAC to try to eliminate that, so it’s clearer for you and everybody else to see. Anytime we adjust the number, and I’m the first to say, adjustments are what our ongoing expenses versus one-time in nature. And Andy and I and others on our team have big debates about that. When you look at other companies, I’m not talking about just insurance brokers, I’m just talking about companies in general and how they present their numbers. Having said that, we – maybe we are the most conservative on our estimates on the earn-out payables, but we do an adjustment on a quarterly basis and maybe I should ask you the question and all the other companies that you follow, those that do acquisitions, do they not have any adjustments on a quarterly basis and if so, how do you view that?

Well, some doing, some don’t. Look, my bigger concerns that if I vouch for Brown & Brown is hiring the highest quality teams, shouldn’t I always expect them to beat the earn-out goals and then there would be a recurring earn-outs to be had in quarter-to-quarter-to-quarter. I mean, how do those being put in quality teams on the books, who do you see the expectation as a general business practice comply with the non-recurring nature of adjustment based on earn-outs?

Yeah. I’m going to let Andy answer the GAAP answer to that. But I’m going to answer the reality of that. When we hire – when we’ve acquired team organizations, we do think that they are very high-quality people, so no debate on that. Having said that, that does not mean that every single one of our transactions they maximize the earn-out and so remember, we’ve set the amount based on the estimate when we do the transaction and then adjust up or down on a quarterly basis. What you just described, Josh, I believe, is you’ve described a method, which I don’t know if it’s GAAP or not we’ll let Andy say that to us, but is basically saying that all earn-outs should be maxed out upfront and therefore in the event that they didn’t exceed that amount at the end, there would actually be a credit. Am I right Andy?

If you follow that approach.

Yeah. I just want to make sure.

Yeah. That’s not…

Yeah.

If I took all the earn-out adjustments over history, they net to zero or they net to positive?

I could not give you that answer right here on the spot, Josh, if we go back in history. But we can figure that we’ll go back and look at. Here is what happens on all of these and I think your point about high-performing teams is well made. When we go to the acquisitions, we’re looking at the quality of the team that we’re bringing on, as well as the historical performance of that business and we’re setting the expectations accordingly. One of the things we don’t do is, we don’t give everybody away a layup when you come in. That’s just now how we operate. And so as we go through we’re trying to project generally over that earn-out period, two years, three years, what we think that business is actually going to produce, some business does come in and just absolutely crush it and they’re well over our pro forma. So therefore we take a charge to the P&L. If that’s a highbrow problem, if they’re well over our numbers. But we try to get that as best as we can. Sometimes we miss it a little bit on either side. So, and that’s why you can’t see it up and down. But I don’t want you to think or we don’t want you to think that we’re walking away from GAAP that is absolutely not the case. We still believe that GAAP numbers are very important. It’s just these are – it could be the one area where we’ve got the most volatility up and down.

Well, I hope it mostly up for you guys, because we want to see it happen, assume it’s always up, then we have a question about whether I get the – we should assume that you guys, I haven’t said that, I assume that high quality delivery and I’m wondering how that relates to making changes in the reported EPS…

Yeah.

… but great job. I’m not trying to say anything. I am just trying to understand my own forecasting whether or not I should say, we’re going to win every quarter is a good and that’s what I am trying to figure out.

Hey, Josh, you think, we would just clarify. The other reason why we also break this out is, I would say, almost all of our analyst, I can’t say every one of them, but almost every one of them do not forecast any adjustment for acquisition earn-outs. Some put some of the interest accretion inside of it and some put zero. So if we don’t break this out, we’re actually comparing an apple with an orange then.

Totally reasonable. Congratulations and good luck in the future. Thank you.

Thank you, Josh.

Thank you.

Thanks. Good morning, everyone. Wholesale is doing pretty well this year. It seems like it’s running organically above last year, what’s the drivers of that?

Well, remember we have – there are two parts to that business, there is binding authority and there is transactional brokerage.

Yeah.

And we with a very good team of people in both segments of that business. As you heard me allude to earlier the Cat property rates are not going down as fast, they still are going down, but they’re not going down as fast as they once were and we continue to do a good job for our binding authority partners across the country, and it’s quite honestly a lot just getting in, a lot of opportunities and binding a lot of those opportunities. I know that sounds pretty basic. But Tony Strianese and his team, Kathy Colangelo and Neal Abernathy, they’ve done a great job of putting the great group of people together and giving them the products to sell to their retail customers. So, we’re very, very pleased with wholesale, not only this quarter, but that’s the highest growing business in our company in the last five years or six years.

Yeah. Yeah. Tony is obviously doing a great job. So what was the level – what’s the level of volumes in the transactional side of the business, is that mid single-digit or so?

Wait a minute, is volumes of transactions or?

Sorry, submissions, volumes of submissions in the transactional business?

Yeah. The answer is, I don’t know the right at the top of my head the volume of submissions. I know that it is an enormous number. But I can’t comment, I am sorry, I don’t know how much it’s up or down. I can tell you that it is categorically up though, I could say that for sure…

Okay.

...quarter-over-quarter year, yeah.

So the transactional side is also doing well in addition to the binding authorities side?

Yeah. They’re both doing well. Remember, the bigger the premium on an account, the more attention that it attracts, and therefore, I think it’s fair to say, it’s probably under the most rate pressure. So a $1 million premium is going to be different than a $4,700 premium.

Right. Right. Okay. On the benefit side, I know you don’t break it out separately, but ballpark, is that doing on average, as well as the retail business, over the better or over the worse?

Well, hypothetically we don’t really give guidance, but it’s doing quite well and we’re very pleased with it, how’s that.

Yeah. That definitely helps. And then you alluded to this but I just want to get the better picture, so would you say that exposures are doing well. Our audit premiums up this year compared to last year?

Yes.

Yes. Okay. Thanks a lot. That’s helpful.

Thanks, Adam.

Thank you.

Thanks, Tracy. Thank you all very much and it’s great to talk to you. We’ll talk to you next quarter. Good day.