Brown & Brown Inc (BRO) — Q1 2018 Earnings Call Transcript

Thank you, Debby, and good morning, everyone. Thanks for joining us for our first quarter 2018 earnings call. I am on slide four. For the quarter, we delivered $501.5 million in revenue, growing 7.8% overall and 5.7% organically, with the latter excluding the impact of the new revenue recognition standards. For convenience during this call, we will refer to this adoption as the new revenue standard. Our EBITDAC margin was 31.2%, down 160 basis points, primarily due to the gain from the legal settlement received in the first quarter of last year. Later in the presentation, we’ll discuss the movements of our margin in more detail. Our net income per share for the first quarter of 2018 increased to $0.32 from $0.25 in the first quarter of 2017, driven by the impact of the new revenue standard and the ongoing benefit from federal income tax reform. Our net income per share, excluding the change in acquisition earn-out payables, was $0.33 for the first quarter, representing a 50% increase compared to the first quarter of last year. Additionally, we completed acquisitions during the quarter with annual revenues of approximately $9.5 million. We’re pleased with our top and bottom line results for the quarter and are experiencing strong momentum across the Company. Later in the presentation, Andy will provide more detail on our results, excluding the impact of the new revenue standard. I am on slide five. Before diving into the results for the quarter by segment, I wanted to share some general comments about the economy and rates. Economically, we continue to witness expansion across most regions and industries. Customers are feeling optimistic about their future prospects and are investing in their businesses. Many construction projects, both large and small, are emerging in communities nationwide, and companies are hiring. Regarding rates, as we’ve noted in previous calls, we approached this period with caution concerning how much rates would rise following last year’s weather-related events. The impact on rates has been quite modest, remaining generally flat to slightly up, excluding auto and certain coastal properties. Earlier in the quarter, we observed rate increases between 5% to 15% for coastal properties, which depend significantly on loss experience. As the quarter progressed, increases moderated to more of a 3% to 7% range, with loss-free accounts typically at the lower end or even seeing reductions. While those properties have experienced losses, they might be in the high single digits to low double digits or higher, depending on the extent of the damages. Ultimately, there remains a substantial amount of capital in the market competing for a limited number of risks, and we might see rates ease downward further during the second quarter and the storm season this summer. On the other lines of coverage, both commercial and personal auto continue to see the largest rate increases, ranging from 5% to 10%. Many carriers’ auto portfolios are performing poorly, prompting them to implement rate hikes. Professional liability and general liability rates have remained mixed but are essentially flat. Rate increases for employee benefits continue to rise, with small groups under 50 often facing the highest increases of 5% to 15%, while larger groups have seen more moderate increases in the 2% to 5% range, reflecting loss experience variations. In terms of technology investment, we are making solid progress, and our programs are on track. Our technology investments focus on several areas: standardizing certain systems across the Company, upgrading our core infrastructure, reducing inefficient technology spend, and enhancing our data insights to better serve our customers and team members, ultimately accelerating our business growth. I am very pleased with the progress our team is making as they invest significant time and effort into these crucial initiatives. I’m on slide six. So, let’s talk about the performance of our four segments. From a retail segment perspective, we grew 2% organically for the quarter. Last year in the first quarter, you may remember, after calling out for timing, we grew 3% organically. We had some sales that didn’t come to fruition in the quarter within our employee benefits businesses. We believe these should close later in the year. We did realize improved year-over-year performance within our commercial line of business. Our national programs segment had a great quarter, growing 12.5% organically. This was driven by several programs including growth in our core commercial program, additional revenue related to processing the final hurricane claims from last year, increased sales activity in commercial and personal earthquake, growth in our all-risk program, and continued momentum in our lender-placed business. Regarding our core commercial program, we recognized about $4 million of revenue this quarter. We’re pleased with the operational and financial performance of this program. It’s in line with our expectations, which we shared during our second quarter 2017 earnings call. I would like to recognize our team for doing a great job in transitioning this program from one of our carrier partners. As a reminder, we’re in the investment phase; and as a result, there will be an impact on margins in 2018, with the most significant impact in the first half of this year. We expect margin expansion in the second half of this year as compared to ‘17, and that should continue into 2019. For the quarter, we realized approximately $3 million of claims processing revenues associated with the 2017 storm events. At the end of the quarter, we closed substantially all of the claims from last year. Our wholesale brokerage segment delivered solid organic revenue growth of 6.1% for the quarter. We realized growth in both our binding authority and transactional brokerage businesses, as well as across most lines of coverage, industries and geographies. Rates across most lines are flat to up slightly with cat property generally 3% to 7% up, depending on loss experience. As I said earlier, we’ve seen them down, and we’ve seen them in the double digits, depending on loss experience. Our services segment had great results with 8.3% organic revenue growth for the quarter. This was driven by many of our businesses that won new customers and expanded relationships with existing customers. We realized growth in our claims advocacy businesses as well as our claims management businesses. In summary, we are pleased with the performance of our business for the quarter. Now, let me turn over to Andy to discuss our financial performance in more detail.

Thank you, Powell. Good morning, everyone. On the following slides, we’re going to present our GAAP results, then our adjusted results excluding the impacts of acquisition earn-outs and one-time items, and then we’re going to exclude the impact of the new revenue standard including for the calculation of organic growth. We believe this presentation will help in the understanding of our underlying performance year-on-year. We plan to use this format for the remainder of 2018; then in 2019, we will be on a comparative basis. Moving on slide number seven, this presents our GAAP and certain non-GAAP financial highlights. For the first quarter, we delivered total revenue growth of 7.8% and organic growth of 5.7%, driven by organic growth in all four segments. Our income before income tax increased by 6.7%; our EBITDAC grew by 2.8%; our net income grew by 29.5%; and our diluted net income per share increased by 28% to $0.32 versus $0.25 in the first quarter of last year. The growth in our financial metrics, except for organic revenue growth, was impacted by the adoption of the new revenue standard this year and a $20 million legal settlement we received in the first quarter of last year. The growth in net income and diluted net income per share in excess of revenue growth was driven by leveraging our revenues in a lower effective federal tax rate, resulting from tax reform last year. For the quarter, our effective tax rate was 23.3% as compared to 36.8% last year, benefiting from the 14% decrease in the statutory federal corporate income tax rate. Remember that in the first quarter of each year we normally have a lower effective tax rate due to the benefit associated with vesting of stock grants to our teammates. For the year, we continue to expect our effective tax rate to be in the range of 27% to 27.5%. Our weighted average number of shares outstanding decreased approximately 1% compared to the prior year due to the stock repurchases we completed in the second half of last year. As a reminder, we executed a 2 for 1 stock split on March 28 of this year. And lastly, our dividends per share increased to $0.075 per share or 10% compared to last year. Moving over to slide number eight. This slide presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the first quarter of each year and the legal settlement last year. Since the change in estimated acquisition earn-out payables is non-cash and can fluctuate by quarter and the previously mentioned legal settlement was nonrecurring, we have historically evaluated the business excluding these adjustments as we believe it provides a better understanding of our year-on-year performance. However, for 2018, we will also be excluding the impact of the new revenue standard, which is shown on the next slide. For the quarter, on an adjusted basis, our total revenues grew by 12.7%, with a little less than half of this growth resulting from the adoption of the new revenue standard. Income before income taxes increased by 25.7%, growing faster than revenues due to lower depreciation and amortization. Our EBITDAC increased by 17.3%, benefiting from a $2.5 million gain associated with an earn-out for the business we sold in 2015. Our net income grew by 52.5%, driven by the lower effective tax rate for the quarter. On an adjusted basis, our net income per share was $0.33 as compared to $0.22 in the prior year, growing 50%. Moving over to slide number nine. This presents our results after removing the change in estimated acquisition earn-out payables for both years, the legal settlement last year, and the impact of the implementation of the new revenue standard for the first quarter of this year. We believe this presentation provides the most comparative basis when evaluating our performance year-over-year. For the quarter, on this basis, our revenues increased by 6.5%; income before income tax increased by 10.6%; EBITDAC increased by 6.4%; and our EBITDAC margins were flat year-over-year. Our net income grew by 34.2% and our diluted net income per share was $0.29 as compared to $0.22 in the prior year, growing almost 32%. Higher growth in income before income taxes was driven by lower depreciation and amortization, and our net income growth as compared to total revenue growth was driven by leveraging our revenues, disciplined expense management, and the lower effective tax rate. Moving over to slide number 10. This slide presents the key components of our revenue performance. For the quarter, the change in other income was driven by the legal settlement last year. Our total commissions and fees increased by 12.6% as compared to the prior year. Our contingent commission decreased by $18 million as compared to the first quarter of last year. This was driven primarily by the adoption of the new revenue standard that requires contingent commissions to be recognized upon the effective date of the underlying policies rather than received from our previous treatment. Excluding the impact of the new revenue standard, contingents were flat year-over-year as decreases were less than anticipated, we qualified for some new contingents, and we had some favorable timing. When we released earnings last year, we provided guidance that we expected a continued decrease for the full year, about $6 million to $8 million. Since they did not decrease as much as expected in the first quarter, we are now projecting the full year decrease to be in the range of $3 million to $5 million. Guarantee supplemental commissions were not impacted by the adoption of the new revenue standard. Core commissions and fees increased by $45.6 million associated with the implementation of the new revenue standard. This impact was primarily within the retail segment, which we will discuss later. The total revenue impact for the first quarter related to the adoption of the new revenue standard was about $27 million, which is in the range of the previous guidance that we provided on our Q4 earnings call. And then, excluding the impact of M&A activity and the new revenue standard, our organic revenue growth was 5.7%, driven by growth in all segments. We will move over to slide number 11. To provide some insight into the components of our EBITDAC margin, we’ve included a walk of our quarterly EBITDAC margin from last year to this year and highlighted the main drivers. The legal settlement benefited our margins last year by approximately 270 basis points. The new revenue standard benefited our current quarter margin by approximately 120 basis points. Later in the presentation, we will discuss the impact of the new revenue standard on future quarters. As we discussed in the past two quarters, we are in the investment phase for our core commercial program that we launched in July 2017. The investment this quarter impacted our margin by approximately 50 basis points, which is in line with our expectations. For the current quarter, the impact on our investment and technology was about 30 basis points. As we mentioned on last quarter’s call, there might be some impact to our margins in the first half of this year, but we do not anticipate any impact on a full-year basis as compared to 2017. Please refer back to our technology slide that we included in our fourth quarter results for any guidance on future projections. Nothing has changed during the first quarter that would impact these expectations. The incremental effect of the year-over-year change and the net gain on disposals contributed about 50 basis points to our margin, and this was driven by a gain we realized from an earn-out we received from business sold in 2015. Lastly, the business increased margins by about 20 basis points from organic growth and continued disciplined expense management. On the following slides, we have presented the results of our business segments on an as reported basis as well as excluding the impact of the new revenue standard. A reconciliation by segment is in the appendix to this presentation. Moving over to slide number 12 now. By segment, we’re going to start with retail. This segment is one of the most impacted by the adoption of the new revenue standard as we moved approximately $30 million of revenues and almost $19 million of profit from future quarters into the first quarter. This movement was primarily to recognize revenues upon the binding of coverage rather than our past practice of recognizing revenue upon the later date of either billed or effective and to recognize contingent commissions throughout the year rather than when received. As a result, we’re going to have a significant change in our revenues and margin for the first two quarters of the year and a smaller impact to the third and fourth quarters. Later in the presentation, we will provide a little more of an update on this. For the first quarter, our retail segment delivered total revenue growth excluding the new revenue standard of 3.9% and 2% organic revenue growth, driven substantially by all lines of business. For the quarter, EBITDAC declined by 4% or 230 basis points, driven by our investment in talent to help support future growth, increased non-cash stock-based compensation as our equity plans are performing higher than expected, resulting in incremental costs. A large portion of this is one-time in nature and we had increased intercompany allocations for technology as well as our investment to upgrade our agency management systems. Our income before income tax grew by 5.3%, benefiting primarily from lower intercompany interest. Moving over to slide number 13. Our national programs segment had minimal impact this quarter associated with the new revenue standard. For the quarter, total revenues excluding the impact of the new standard increased by 10.4% and 12.5% organically. As discussed earlier, organic revenue benefited from approximately $4 million of revenue related to our core commercial program and approximately $3 million of claims processing revenue associated with hurricanes Harvey and Irma. Isolating these items, our organic growth was still 5% for the quarter, driven by a number of programs. Our EBITDAC grew by 11.7% due to continued leveraging our revenues and disciplined expense management that helped offset the net investment in our core commercial program. For the quarter, our income before income tax increased 59%, impacted by the EBITDAC drivers we just mentioned as well as lower intercompany interest expense. Moving over to slide number 14. The wholesale brokerage segment had a significant impact associated with the adoption of the new revenue standard, primarily for the recognition of contingent commissions. Historically, we received most contingent commissions in the first quarter. These will now be recognized throughout the year. Excluding the impact of the new revenue standard, total revenues grew 8.6% and organic revenue growth was 6.1%. Excluding the new revenue standard for the quarter, our contingent commissions were up year-over-year but benefited from some timing. Although the underlying performance was better than anticipated, we do continue to expect downward pressure for the remainder of 2018. This is the primary reason for our full year guidance of a $3 million to $5 million decrease in contingent commissions that we mentioned earlier. Our EBITDAC increased by 7.8% for the quarter, when excluding the new revenue standard. The growth was slightly slower than total revenues due to lower contingent commissions, increased non-cash stock compensation costs which are driven by higher performance versus original targets, and higher intercompany IT allocation. Income before income taxes grew 3.3%, impacted by the same factors contributing to EBITDAC growth and higher estimated acquisition earn-out payables. Over slide number 15. The services segment excluding the charge associated with the new revenue standard delivered revenue growth of 8.4% and organic revenue growth was 8.3% versus the prior year. For the quarter, our EBITDAC increased almost 41% through solid revenue growth, leveraging our revenues, disciplined expense management, and the gain associated with an earn-out from the sale of a business in 2015. Excluding this gain of $2.5 million, EBITDAC grew almost 13%. Our income before income tax increased by almost 64%, benefiting from EBITDAC drivers and lower intercompany interest charges. Moving over to slide number 16. On this slide, we’ve included an updated outlook for the remaining quarters associated with the new revenue standard. We’ve broken down the impact between core commissions and fees, contingent commissions, employee compensation and benefits, and then other operating expenses. Hopefully, this will help everyone with your modeling. On a full-year basis, we now expect revenues to increase $8 million to $11 million and income before income taxes to increase $7 million to $9 million as a result of implementing the new standard. With that, let me turn it back over to Powell for closing comments.

Thank you, Andy, great report. In closing, we’re really pleased with the performance for the first quarter, driven by the efforts of all of our teammates across the Company. I’d like to make several broad comments about the Company in conclusion. We are a sales and service organization, which is going through a digital transformation. We continue to evaluate emerging technologies and innovative companies that can help us improve the customer and teammate experience. Not unlike the cyclical nature of organic growth, our spend may vary by quarter. It’s an exciting process, but a bit daunting at the same time. We’re optimistic about our investment in teammates; those as well may vary by quarter. With all the capital out there today, it is presenting new challenges for our carrier partners. We’re well positioned to continue to work closely with them to develop additional solutions for our customers. Our Company, as you know, is defined by our culture and our teammates. We’re proud of what we’ve built. Our culture defines us as a company. We’ve not done as many acquisitions over the past three years as our historical averages. However, I’m pleased with the $9.5 million we’ve done year-to-date, but we’d like to do more that fit our culture and make sense financially. I’m confident there will be plenty of opportunities to invest in our business in the future. Apparently, many people out there think of us as a retail broker only. That could not be further from the truth. Retail represents, as you know, just over 50% of our total revenues. We’re a diversified insurance broker. It’s this diversity that reduces the volatility in our results and increases stability and consistency. National Programs represents 26% of our revenue. This is where we’ve been granted delegated underwriting authority to assume risk on behalf of our carrier partners within a defined box. Several examples of programs would include earthquake, wind in coastal communities, professional liability on dentists, et cetera. Wholesale represents 15% of our revenues. In this business, we sell property, casualty and professional liability that standard markets don’t want or cannot price as competitively. Examples include a coastal frame apartment complex with $25 million of total insured values, the liability on underwater demolition contractor, or the directors and officers liability on a small struggling technology company. Our services segment represents 9% of our company. In this segment, we have businesses that include third-party claims administration for workers’ compensation and all lines liability and claims adjusting businesses that support our programs. It’s this combination of our four segments and the underlying businesses that provide stability and consistency in the delivery of our financial results each quarter and each year. With that, let me turn it back over to Debbie for the Q&A session.

Hi. Good morning. My first question, I want to start out in terms of just thinking about the overall margin profile. If we exclude the impact of the legal settlement and revenue recognition, your adjusted EBITDAC margin was about flat year-over-year. I know there are some items you call out. And as we think about forward numbers for the balance of the year, we’ll still have the impact from the Arrowhead program. Is that what we should really be thinking about in terms of maybe an impact from that program and then adjust for the revenue recognition impact in your margins kind of flat or slight improvement overall? Can you just help us tie your comments together in terms of the margin profile you see for the balance of ‘18?

Yes. I think you’ve hit on some of the key areas. Let me just kind of run through these for everybody. So, make sure you incorporate the revenue recognition because that is a little bit higher from a benefit than what we anticipated before. We’ve given the guidance on core commercial. So, again, continue to use that for the full year, making sure you adjust for the contingents. Again, we had projected those to be down 6 to 8, then on 3 to 5. Technology should be flat year-over-year. Those would be the biggest items.

And then, in terms of the retail comp program, I know you guys had called out some headwinds last year. Did that not have enough of an impact to call out that hit this year?

Yes. You may remember that when we launched the program, we indicated that the biggest financial impact would occur in the first year, followed by a compounding effect of higher organic revenue growth in subsequent years. Therefore, the margin impact would be less in the second year, and we projected that by 2019, we would reach approximately breakeven.

So that’s at the end of ‘19.

Yes, the end of ‘19. So, the plan is performing exactly the way we anticipated.

Okay. Regarding retail organic growth, I appreciate you highlighting the differences among your various businesses. However, the growth did slow in the quarter. Could you break down the growth between employee benefits and your commercial business to highlight the differing trends, particularly since it seems that employee benefits contributed to the slowdown? Also, I noticed we experienced increased growth in the fourth quarter. Do you think some organic revenue may have been pulled forward as certain brokerage firms aimed to meet their targets under the compensation program for the full year?

Okay. I have a few comments, Elyse. First, last year in retail, our reported organic growth by quarter was 4% in Q1, with 1% due to timing; it was 1.1% in Q2; 2.5% in Q3; and 4% in Q4, resulting in a total of 2.9% for the year. While we report every 90 days during earnings calls, we assess the business performance over the entire year rather than just those three months. Secondly, while one could infer there may be a connection to a sales incentive, it is ongoing and not a one-time event. Our analysis does not suggest any instances of revenue being pulled forward. Thirdly, in Q1 of 2017, we saw 3% organic growth, whereas this time it was 2%. We do not separately report the performance of employee benefits versus commercial lines; we focus on the overall business performance. Hence, it was 2%, down from 3% last year, and we achieved 2.1%, or effectively 1.1%, in Q2 of the previous year. We believe there are solid growth opportunities ahead for both our employee benefits and property and casualty businesses.

Okay. Thank you. And then, one last question, Andy, in terms of the tax rate, you said that for the full year it’s 27 to 27.5, even with the lower Q1 rate. So, does that mean you’re expecting something that’s higher up in the 20s, like maybe 29% or so for the balance of the three quarters, to get to that full-year level? Did I understand that correctly?

Yes. So, couple of things on that. So remember, the first quarter of every year, we’re almost always going to have a lower effective tax rate, as we talked about last year, because of the tax benefit on vesting of equity grants. And then, it jumps up in the back end of the year. So, yes, the rate will go up in the second through fourth quarters. As we talked about at year-end, remember, just because there’s the drop in the federal rate, there are two other components to it. We lose a portion of the deductibility for the state and then there is also the elimination of entertainment costs in there as well as comp over $1 million for the 162 officers. So, that’s what gives us the blended on full year we think around 27, 27.5.

I wanted to ask about your comments on M&A at the end. Are you suggesting that you might be feeling more positive about M&A opportunities now compared to a quarter or two ago?

No, the answer, which is the same answer four years ago is the inventory and pipeline is good. And I don’t believe anything till it’s closed. I’m just trying to make sure that people understand that we are very conscious of our capital allocation commitments and look for a balanced approach. And we’re always looking. And sometimes there are opportunities for us to close. And sometimes there’s not as many. But, at the end of the day, we think inventory overall is good. And I’m not trying to signal one thing versus the other. I’m basically trying to say, I believe that we’re consistent in our activity. We sometimes close more than others. It’s all about cultural fit and making sense financially.

And just to clarify again on 5 for 5. Did that have any margin impact this quarter? And again, there is a point there that you should get back in 2019 some of the margin you lost in 2018 or that there will be some incremental pressure in ‘19, sorry, in ‘18.

Hi Arash, it’s Andy here. There was no impact from the retail performance incentive plan in the first quarter. We expect some margin improvement in 2018 and continuing into 2019. Thanks.

And then, lastly, on services, to what extent were the claims processing revenues you planned out, this quarter, was any of that weather-related or was it all ex-weather?

Yes. There isn't a significant amount of information regarding weather-related factors. As we mentioned, this period was marked by winning a lot of new business, which was excellent. Additionally, we successfully expanded our relationships with existing clients.

But there was $3 million in the national programs.

National programs, but not in services.

Let’s make sure you heard that.

Yes. And that $3 million was from the 2017 hurricanes, right?

Correct. That is why I wanted to ensure we are clear on where that was, just make sure it's in national programs.

Thank you and good morning. First question, just drill down a bit more on the margin questions. So, it looks like there would be no full year impact on IT spend. And Arrowhead, it looks like there is going to be margin contraction in the first half, but expansion is second half. And you’ll grow organically like 5% or more, which is about 3% the threshold people think, they will have margin expansion. So, shall we expect margin expansion versus 2017 for the full year?

Wait a minute. Are we saying that in programs?

No, overall.

Let's take a moment to reflect. The 5.7% organic growth we experienced in Q1 is just one quarter. Historically, we've indicated that our business operates in a mid to low single-digit organic growth range during steady economic conditions. While we do face some margin pressure due to investments in core commercial programs and other initiatives, it's important to clarify that even though national programs grew by over 12% in Q1, that doesn't guarantee the same level of growth for the next quarter.

And Kai, just make sure, when doing the comparative year-on-year, don’t forget about the legal settlement that we had in the first quarter. So, that was 270 basis points for this quarter but it’s going to impact the year-over-year, adjusted or not.

I’ll just try to figure out, because last year, if you adjust for the legal settlement, then probably you’re running around 31% EBITDAC margin. Just wonder for 2018 will that be sort of higher than that, or there still continue going to be some pressure in the near-term on that margin?

Well, remember, when Andy mentions that the technology investment will be flat, we will still be making those investments. So, it’s not an increase; it’s the same amount.

Yes. It’s not a year-over-year impact.

Okay, great. And then, follow-up on the national programs. If you’re excluding out the 3 points from the flood and 4 points from these core programs, Andy you mentioned that the underlying 5%, very strong still. So, how much of that do you think is sustainable coming from either pricing or new business?

One, it’s from new business, so Kai, just so you know. And the program that we listed across the board, in addition to a lot of our other programs, but all of them are having success in writing new business and retaining a good amount of the renewal business. Having said that, we talked about earlier the amount of other capital in the marketplace. And when we have the underwriting authority on behalf of one carrier, we’re assuming risk for them. And so, we have to be mindful of new entrants into any market at any given time which could impact the growth trajectory of that individual program. So, it’s hard for us to tell, because it is always kind of in a state of flux. Some markets are pulling out, some markets are coming in, and actually, other capital is coming in looking for returns and what we referred to as uncorrelated asset classes. So, hard to estimate. I mean, I wish I could give you a more specific. But, just remember, the program business is a wonderful business and we’re very excited about it and are looking to invest in it, just like all four of our businesses. And there are other entrants that can come in on a quarterly or a yearly basis; they can peck away a little bit at your business. And so, you got to adjust and modify throughout the year, but it’s very hard to give you an estimate that we’re going to grow x percent next quarter. We like the trajectory. We’re very pleased.

Thanks for the color. And lastly on acquisitions, I just wonder has tax reform impacted potential sentiment in terms of valuation of the deals, as well as higher interest rates, would that impact any sort of potential valuation from private equity funds?

Well, we haven’t seen any indication of a change in the way others view acquisitions yet. So, it’d be purely speculation on our part. At this point, we haven’t seen any slowdown in interest from other firms. And many times what you have is you have a group of strategics and or a small handful of strategics and maybe a couple of firms that are all maybe in the general range, financially. And then, if you have one new PE firm, they do something way outside the box sometimes. So that’s not uncommon Kai, as we’ve talked about before. And so, will interest rate impact that? Logically, it makes sense, if you have a lot of variable debt, but we haven’t seen that yet.

Any kind of the technology investment is having a positive effect on organic growth?

Yes. The answer is, through some of the technology, we’re having better visibility into our businesses, which enable us to act upon that in soliciting business. So, yes, I can think of individual instances where it’s helped us get business. So, having said that, are you going to say, well, we implemented this program, so therefore we are going to grow X percent? No, that’s not. But I know anecdotally of instances where we have written business because of our new technology and investments in technology.

In the national programs business, you've shown a lot of enthusiasm. Can you describe whether there is a pipeline and if you are seeing more opportunities now compared to a year ago?

No, Mark, we can’t characterize that. I don’t want to give you the impression that we’re prioritizing that investment over the others. Coincidentally, we’re looking to invest in all four of our segments. Over time, we see many unique opportunities due to the diversity of our business. That said, the retail space is the largest market, so we will see, in sheer numbers, more retail business in a year than probably anything else. However, we also see a good flow of program business as well. As you know, people sell for different reasons at different times, and we are always cultivating opportunities. One of the many positive aspects is that we are recognized in the industry for our strong leadership, exceptional relationships with our carrier partners, effective technology, a mindset focused on getting things done, and great distribution. When you combine all these factors, it can be appealing to a partner interested in joining us.

Understood. And then, just final question, in ramping up the margin outlook. If your technology was slightly dilutive to margins in the first quarter, in the first half, presumably it will be accretive. So, it will be a tailwind in the second half, plus national programs up in the second half, plus the sales incentive which was flat this quarter, picking up a little bit of momentum, so on all fronts presumably, second half tailwind on margins. Is that the right way to think about it?

Well, hold on a minute. Once again, that’s a very logical outlay of thought. And having said that, I want to make sure that we go back to my comments about investments in technology and investments in people, which is by the way the most important thing, can vary by quarter and by two quarters or three quarters. So, if we operated in a vacuum, I think that may be a fair statement. But, we don’t operate in a vacuum. So, remember, that would be assuming that we didn’t think that there were investment opportunities where we might have a little pull down because of X or Y or we have a technology spend that we end up doing in the latter half of the year that would have been in Q1 and Q2 of next year. So, I would caution you on saying that, not because we go into saying margins are going to be down, quite the contrary. We don’t think so. We are actually excited about the profile going forward. But, I want you to understand that we are investing in our business for the long term and there are opportunities there. And we’re going to see that when we think it’s the right opportunity for our company.

And Mark, we have those. We will call them out if they pump up.

I want to go back to some Elyse’s question about retail versus others. Obviously, you for legitimate reasons have been irritated when people look at your overall growth and instead look at your retail growth. But, what does that say about the insurance industry? We’ve seen this decoupling before. Are people changing the way they buy that we should expect over a materially long period that your national programs business will outgrow your retail business?

I don't think that assumption is accurate. First of all, I believe we are held to a double standard. Let’s discuss that double standard. We have industry-leading margins and outstanding cash conversion and free cash flow, yet we face criticism. And while that’s fine, we're okay with it; we can handle it. We are critiqued for having a slightly slower organic growth rate in retail, which accounts for 50% to 52% of our revenue. That’s acceptable. We're examining this, but when our margins are twice that of others, my point is that we are focused on what’s best for the Company in the long term. Remember, I have historically stated and will continue to do so that we began as a retail business. Many of you have heard me express that I believe we have plenty of growth opportunities across all our segments. However, our retail business may historically represent 60% to 70% of our total revenue, though it could vary. Nevertheless, we maintain a diversified business. Ultimately, Andy and I, along with the senior leadership team, are committed to growing free cash flow, which we can reinvest in the business in three areas: investing in our teammates, pursuing mergers and acquisitions, and returning capital to shareholders through dividends or share buybacks. I view it a bit differently. Perhaps I’m not as sensitive as some might think; I often find it amusing when I see analyst reports criticizing us for a low organic growth rate of 2%, despite the fact that our Company grew organically by 5.7%. I would argue that we had a very strong quarter, and I’m thrilled that our teammates are doing excellent work for our customers. That said, you, not you Josh specifically, but the group might see things differently, and you're entitled to your opinion. I feel confident that over the past two or three years, our retail business has continued to improve, as shown by the year-over-year organic growth. I don't get hung up on quarterly results. I'm very excited about some of our internal initiatives that I believe will drive future growth. So once again, perhaps I’m not as sensitive as people suggest, but I do find it somewhat amusing because this is not a quarter-to-quarter business, and I think sometimes people fail to grasp the complexities and challenges of growing a retail business given the competitive landscape and evolving market conditions. It's all good, that's all.

One more, that was very thorough. In terms of back when this has happened before when you had good growth in national programs and weaker growth in retail, a lot of it was ascribed to a sentiment issue that you used the word bunker mentality on several conference calls in the past. Do you see any wavering in the retail markets in terms of desire to purchase insurance now?

No. Let’s talk about that bunker mentality. The bunker mentality was between 2008 and 2011, and that was discussed about how people were thinking about and viewing investing in their business. And as I said in our prepared remarks, I think owner sentiment and more specifically CEO and owner sentiment of private businesses is positive, very positive, and people are buying things to help them grow their businesses, i.e. vehicles or production equipment, and, and, and. So, no, I don’t see that. Number two, remember, we do have some businesses and programs, most notably, the lender-placed business that did grow substantially as a result of the slowdown in the economy. And so, you have some businesses that are countercyclical, maybe is the right way, I would say that. But no, I actually would tell you that my personal opinion on retail is great. And I have very, very positive and high enthusiasm about the future performance of retail, one. Two, ecstatic about the programs growth for the quarter; I think they crushed it. Wholesale, nobody’s asked about wholesale, they’ve only grown 6.1%, again for another quarter in a row. And so, with Tony and his team, they’ve grown in excess of 4% for six years in a row, and I think it’s 5% five out of six years. And I’m really very pleased with services. So, no, not a bunker mentality; no, we’re not seeing hesitation from people to buy less insurance; it’s just continue to be competitive.

Hey, good morning, guys. Calling in for Greg Peters. I just had a quick one on the contingents, just hoping if you guys could comment on the couple million bucks improvements for the outlook for this year and how we should be modeling the contingents for the remaining three quarters. Like, should I still expect them to come down in the second quarter?

Mark, by the way, take your full-year estimate wherever you are now, and if you had adjusted that down by 6 to 8 from 2017, you’d now want to make sure that you’re only going to be down about $3 million to $5 million on a full-year basis. And remember, what we said on the way it works with the new revenue standard is that gets recognized substantially throughout the year, relatively evenly by quarter. It’s not perfect but it’s a good proxy. You’re going to primarily see that year-on-year downward pressure in wholesale is what we’re expecting right now.

Is it reasonable to assume that the quarterly year-over-year comparison will not be lower for the rest of the year on a consolidated basis?

Yes, it’s going to be down $3 million to $5 million, Marco.

It was down 18.3 this quarter. That’s what I’m trying to say...

That’s the movement. We recognized a significant portion of our contingents in the first quarter historically. With the new revenue standard, we now recognize that over the course of the year. Essentially, we are moving $18 million into future quarters. This is why it makes sense to view it on a full-year basis initially. Once you have an idea of what '18 will look like, you can spread that across the year and determine how the quarters will break down.

How much of your win-related property book in programs and wholesale renews in June and July? And is that business somewhat dependent on reinsurance conditions?

It’s spread out all over the year. And actually, Adam, I don’t have a specific number for you, but I would tell you that it is preferred to not have your policies renew then. So, many people try to move out of win season, i.e. pre or post, so 5, 1 or before or 10, 1 and after. So, the answer to the question is, as you know, insurance companies, some have multiyear reinsurance plans in place, some renew 1, 1, some renew July 1. But everything we’ve seen and everything that we’ve heard is very modest increases if at all because of always additional capital. So, in our win book, we see some up and we see some down, but it’s not highly dependent right around one date right and win season. I will tell you in some of the public entity business, we have some business that comes up in July, some of that 10, 1, but it’s spread out over the year.

And then as far as homeowners in Florida, what’s the average rate you’re seeing today?

It depends actually, because there are some new entrants in the higher-end market. So, when I say that homes, $700,000 and up, new construction, so we are seeing rates in some instances where we’re reducing rates nicely on the homeowner. Automobile, depending on the carrier, as I said, is under pressure. Smaller, I don’t have the exact rate off the top of my head in the 200 and $700 range. But, there seems to be ample capacity out there to provide that to not only our customers, but prospective customers.

Good morning. Thank you for fitting me in. I don't mean this to be critical, but I appreciate the strong revenue momentum you are experiencing. I am curious from a broader perspective, specifically regarding the growth in revenues. Considering the current low unemployment rate, should we anticipate a reduced benefit from that factor over the next year? Perhaps it is not as significant a benefit now. It almost feels like the opposite of the bunker mentality, suggesting that it might be more challenging for business owners to grow as quickly as they would like.

I view it a bit differently, Mike. First, we have consistently communicated that two-thirds to three-quarters of our organic growth is driven by increases in exposure units, while the remaining one-third to 25% is generally influenced by rate changes. Secondly, looking at a specific business sector, for instance, in many cities in Florida, there's a significant amount of construction happening. Contractors are currently overwhelmed; although they are struggling to hire many new workers, they have an ample backlog. They are expanding their operations and securing new contracts and projects. Hence, I see it from a different angle. I appreciate your perspective, but I believe that the demand for labor will exert downward pressure on wages, leading companies with substantial business to strive to attract and retain top talent for their products and services. If we consider the macroeconomic indicators, current global GDP is just below 3%, and forecasts suggest a slight decline next year unless unexpected international issues arise. There are numerous factors at play, including actions from the Federal Reserve, Bank of Japan, and Bank of England, regarding bond buybacks and the implications of rising interest rates, which we anticipate will persist. The Fed aims to control inflation, which it is managing to do. However, if you observe the communities we operate in right now, everything appears to be progressing well, which I believe is promising for future exposure increases related to our business.

Thank you, Debbie. And we wish everybody a great day and we look forward to talking to you next quarter. Good day.