Good morning and welcome to the Brown & Brown, Inc. First Quarter of 2017 Quarter Earnings Conference Call. Today’s call is being recorded. Please note that certain information discussed during this call including information contained in the slide presentation, posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company’s anticipated financial results for the first quarter of 2017 and are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors. Such factors include the company’s determination as it finalizes its financial results for the first quarter of 2017 that its financial results differ from the current preliminary un-audited numbers set forth in the press release issued yesterday and the factors that the company may not have currently identified or quantified and those risks and uncertainties identified from time to time in the company’s reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company’s business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and in the company’s filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Shannon and good morning everyone. Thank you for joining us for our first quarter 2017 earnings call. I am on Slide 4. For the first quarter, we delivered $465.1 million of revenue, growing 9.6% in total and 3.5% organically. Our total revenue growth includes a $20 million legal settlement that we have with the shared partners for the first quarter of this year. Our EBITDAC margin increased 10 basis points from Q1 of ‘16 on an as reported basis. Our adjusted EBITDAC margin decreased 270 basis points from the prior year, when excluding the net amount of $18.8 million associated with a legal settlement. Andy will go into more of this later. As our reported earnings per share for the quarter increased to $0.49 for the first quarter, our as reported earnings increased to $0.49 for 2017 from $0.44 in the first quarter of ‘16. When excluding the change in estimated acquisition earn-out payables from both years along with the net legal settlement and adjusting for the prior year for the impact of adopting the new GAAP guidelines or guidance for stock-based compensation, our earnings per share decreased 4.4% to $0.43 on an adjusted basis. Overall, we feel Q1 was a good quarter as our organic revenues growth improved nicely and we continued to invest in our business, which will help drive further organic growth and margin expansion in the future. I want to take a moment to thank all of our teammates as a result – as these results would not be possible without all of their hard efforts. I am now on Slide 5. The first quarter was an interesting one, as we entered it with a lot of optimism about what the new administration might do to further improve the economy. As the quarter continued,…

Great. Thanks Powell. Good morning, everyone. I am over on Slide #6. This shows our GAAP reported results for the quarter. In the first quarter, we delivered total revenue growth of 9.6% and organic growth of 3.5%. Our income before income taxes grew by 8.2% and our diluted earnings per share increased by 11.4% to $0.49 versus $0.44 in the first quarter of last year. Our weighted average number of shares increased by 1.5%, mainly 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 share programs via periodic stock repurchases throughout the year. And lastly, our dividends increased just over 10% for the quarter. Due to the impact of the legal settlement we received, we are going to spend most of our time discussing our financial performance on an adjusted basis. On Slide #7, this presents our adjusted numbers after removing the impact of the cash proceeds and the associated legal costs related to the legal settlement, the change in the acquisition earn-out liabilities and the new ASU related to accounting for stock-based compensation. During the quarter, we received $20 million and incurred about $1.2 million of legal costs for a net benefit of $18.8 million related to the aforementioned legal settlement. Excluding these items, our revenues increased by 4.9%, our income before income taxes decreased by 5.5% and our EBITDAC declined by 3.6%, with net income declining 3.3%. In a few slides, we are going to talk to the primary drivers of the changes in our margins, which are primarily one-time in nature or recorded last year. Moving over to Slide #8, we are going to go through the key components of our revenue performance for the quarter. Starting with…

Thank you, Andy, great report. As we move in to Q2, we watch the potential for ACA reform and tax reform with great interest, as I know you do. Rates overall are flat to down slightly. One quarter does not make a trend. Cat property rates saw declines of 10% or less. A word of caution there are lots of large property schedules that renew in Q2, so we will see how rates hold or decrease in Q2. The M&A environment continues to be very competitive. We continue to search for firms that fit culturally and make sense financially. In the current environment, we have seen a number of deals that do not make sense to us financially. In closing, we entered Q2 with cautious optimism about the year, what the year might look like. We have lots of great activity going on throughout our company and are making progress on many of our initiatives to drive the business forward. With that, let me turn it back over to Shannon for the Q&A session.

Thank you. [Operator Instructions] And our first question will come from Elyse Greenspan with Wells Fargo.

Hi, good morning. First off, I was just hoping to just get, tie together some comments you guide made Powell, you mentioned cautious optimistic, I guess commentary about the economy and then you guys did point to the improvement in retail, so backing out the one-time as you said around 3%, I mean how do you envision the back three quarters of ‘17, I mean I know Q1 ‘16 was the easiest comp for that business last year, so how do you envision the growth trajectory, given the economy that we are sitting in today, kind of the organic, should it pick up from the 3% in the remaining three quarters of the year or how do you kind of see that playing out?

Okay. Elyse, I appreciate the question. And as you know, we don’t give organic growth guidance. So we are going to say that somewhere between zero and mid single-digits. And so having said that, we watched the economy as closely as you and everybody else does. But as I said, one quarter doesn’t make a trend.

Okay. And then in terms of the margins for the quarter, if you back out the one-timers from last year in the tax spend and the retail program, the margins were about flat on an overall basis, how do you envision margins playing out through the remaining three quarters, I know there is some headwind given the lack of flood business in the back half of the year, but how do you envision the margin trajectory I guess ex-TAC in the retail cost for the balance of the year?

Elyse, if I could clarify, you are talking at the total company level, correct?

Yes.

Yes. What we would say on those is that we would expect that the tech in the 5 for 5 program will continue to put some pressure on margins in the back end of the year. And then also just as a reminder, we did have some of the tax premium refunds in the second quarter of last year that will also put some pressure on those. And with the carrier changes in national programs, again that will put some pressure on the margin in the back end of the year.

Okay. And then on tech side, you mentioned 40 basis points to 50 basis points, it had been 35 basis points to 40 basis points, so you are increasing I guess the spend that you are expecting for ‘17, from your comments today?

Yes, a little bit on there. Elyse, I think as we get better visibility to the programs, as they gain momentum, we are going to kind of tighten up our range a little bit. So not any major movements, but that’s kind of the ballpark we see right now.

Okay. And then you didn’t say – I am assuming you guys didn’t repurchase any stock in the quarter. As you do have some cash on the legal settlement, and given I guess where you see acquisitions prices today, has anything changed on your view in terms of capital management and allocation in terms of share repurchase?

Nothing has changed, Elyse. We continue to evaluate it and we talked to our Board about it when we are together, but there is no change in the way we look at capital allocation.

Okay. Thank you very much.

Thank you.

[Operator Instructions] Your next question will come from Kai Pan of Morgan Stanley.

Thank you and good morning. Just a follow-up one on the sort 5 for 5 program and it looks like you pay additional like close to $2 million of additional compensation accrual for the quarter, which kind of imply 5% additional like $35 million of commissions, I just want to make sure if my math is right and how do you accrue for these incentive programs?

Yes. Let’s see if I can clarify a little bit on, Chi. So the way the program works is that anybody that is able to grow the book over 5% for the full year 2017, we get that. As we mentioned, when we rolled this plan out at the beginning of the year and we talked about on the year end call, is there is going to be some of our producers that are already over 5%. So you do have – it’s not that you have got your full year because I think what you are trying to do is presume that if you take your 2% kind of divide it all the way, you got an incremental 35 but we don’t actually work that way.

Okay. And will that be accrued throughout the year, every the quarter, you will have additional accrual, depending on the performance?

Yes, depending upon performance, correct, yes.

Okay. So and then on the margins side, is that the 40 basis points from tech and the 40 basis points from the incentive program, assuming that will continue, would that be sort of like the basic run rate basis?

Well, on tech, we said it’s going to be 40 basis points to 50 basis points. And we can’t say yet on the 5 for 5 accrual because we have to watch it every quarter.

Yes. And listen if we can’t, let’s clarify on the technology spend. Is it can be up and down during the year and let’s explain what we mean by that. It’s because we started into the programs during last year and the spend picking up in the back end of the year. We are going to have, at times a higher impact in the first half of this year. Then, as we start to lap the expenses, the impact will be less. So you probably don’t want to take into a straight line across the border, you will probably expect that the second quarter will be a little bit higher.

Okay, that’s great. And lastly, on your cash balance, you now reached close to $550 million, the highest probably in the company history, so just wonder how much cash you need to keep on the balance sheet to run your day-to-day operations and what’s your – like how [indiscernible] to the excess capital or cash you would keep on balance sheet for an extended period of time and how do you plan to deploy it?

Yes, Kai, we haven’t disclosed what we think the required working capital is in the company. We have got sufficient amount of cash as well as access to whatever capital that we need. And then I would like to address the second point which I think is the most important. Kai, I believe that I said this last time, but if I didn’t I will clarify it for everybody. We have been very clear that we are deploying our capital on three ways: one, through hiring new teammates and growing our business organically; two, by acquisitions; and three, to return it to shareholders through either dividends or share repurchases or some combination thereof. We are going to pay out about $70 million in dividends this year to our shareholders. So having said that, I have been asked that what happens if in fact acquisitions were very, very expensive going forward for a protracted period of time and if we evaluated our stock price and we thought the stock price was fully valued at the time. And the answer to the question is that we are going to stockpile cash on our balance sheet. And so if anybody wants to criticize somebody at Brown & Brown, you can criticize me. But we are not going – we do not have a whole burning in our pocket and I know you know that and we look very, very closely at our acquisitions and how we deploy that capital and we will continue to do so. It’s interesting, because as I alluded to in my prepared remarks, some of the acquisitions that we see out there, we know that the numbers don’t make sense, but we are a forever company and those companies are going to be flipped in 3 to 5 to 7 years and they don’t build cultures in that period of time. We have only been doing this for 77 years and we think we really have a strong culture and we will continue to maintain that. So, I anticipate that we will have opportunities to deploy our capital fine over the intermediate to longer term, but it’s very possible we could continue to stockpile cash on the balance sheet. As you know, last year, I believe that we added $72 million to the cash on hand year-over-year. The prior year, we paid out about all of the cash that we earned. So that’s it.

Okay, that’s very clear. Thank you so much.

Thank you.

And our next question will come from Mark Hughes of SunTrust.

Yes, thank you. Good morning. The Social Security advocacy business you have had good success there. Any color you can provide on whether that’s new clients, more claims coming from existing clients or you are just having more success getting those benefits for your clients?

Well, remember, there is two clarifications. We work on behalf of insurance company partners to get these settled. And sometimes, well, I shouldn’t say sometimes, it is very highly dependent on the way those claims are processed with the federal government. So when I say that, Mark, sometimes that, things seemed to be going in a good pace and a flow and we get a lot processed and then there are sometimes, i.e., when there is a question about funding for the federal government, when things slow down and we have talked about that in the past. So I would basically say that we continued to enjoy and work really hard on behalf working for our carrier partners on this in this regard. And I think that success breathes success when you do a good job, then you have the opportunity to earn more business from those partners. But there is not one thing that’s just sticking out that saying this is happening which is dramatically changing our results there.

Right. So at least from your perspective, the process is working smoothly, you might say in Washington on this topic?

Well, I don’t know if I’d say that, I think that you might have been a little bit overly zealous in your response there. I would say that today things are still being processed. And if you could give us more clarity on what’s happening at Washington, we would all like to know. But I am cautious about saying something that broadly.

Right. On the – Andy, you have talked about the – you have got some tough comps on the storm claim business. Is there kind of an elevated revenue or revenue number above trend that you have in mind when you think about the kind of the potential pressure in the second half?

Yes, Mark. So we had called out – we said we had about $9 million of incremental storm claim revenue last year over 2015, which almost all primarily fell in the second half of the year. So during our calls last year we had called out about $4 million in the third quarter and about $3 million in the fourth quarter. And then there is a little bit kind of first and second quarter but that big chunks are back into the year.

Thank you very much.

Thank you.

Thanks a lot.

And our next question will come from Josh Shanker of Deutsche Bank.

You guys reiterated that 33% to 35% EBITDAC margins are expected normal and obviously you are below that right now. Well, when you are talking about the wholesale business, you had big growth but huge decline in operating leverage due to a change in business mix. Isn’t that change in business mix kind of [indiscernible] sort of thing that certainly affects the long-term margins of the business? How do we get back to 33% to 35%?

Okay. Well, let me talk broadly about the business and then I will talk specifics in terms of divisions. Number one, obviously, as you know that we had a decrease in profit sharing for the quarter. So that in and of itself has a significant impact, number one. Number two, in the specifically in the wholesale segment, the wholesale segment of our business, we have – we did an acquisition last year that has lower than historic margins, which we have to move up over time, which we are doing. We also seem to have more flow of activity, but the compression in rates is making that more costly to service and that is probably the way to say it. And so that’s – and our profit-sharing overall has been down in a wholesale to the prior year. If you look inside of programs, we have articulated that we have several programs that are actually changing carriers, which is going to have a revenue impact of what you stated $5 million to $7 million. We also have said that in our coastal property programs, rates have been going down and continuing to go down, so that has compressed our margins in those particular programs as well. In retail, as we said, we had a very good quarter, but we continue to invest in the business, i.e., hiring people. And we had a good quarter also in services. So when you put all that together, I would say that’s the clearest I think we can make it in terms of the pressure points on the business kind of across the way. Andy, you got anything else to add on that?

Josh, when we give the ranges, we are not saying that we are going to be there in 2017. That’s kind of what we call our what should be the interim range and we can be above, just as we have talked about our organic we should be in the low to mid single-digits and kind of a normal stable economy. Well, that’s different things going with rates etcetera. That’s where we do believe we can operate the business. We have been able to do that over the last 10 and 20 years as we have grown the business substantially. You might see outside of that every now and then, but we think we have got the right operating framework.

Should we be there in 2019?

There is too much speculation. I mean, we don’t know what the economy is going to be doing, what rates are going to be doing or any of that. What we are trying to do is we are trying to grow the business organically and add with good acquisitions where we can find them and obviously grow the profit-sharing and the profit-sharing has been under pressure because of losses and rate decreases.

That makes sense. And one other question about the 5 for 5, in your experience, is there any difference in the stickiness of business acquired via standard procedure versus acquired during an incentive plan?

Not that we are aware of.

Okay, thank you very much. Good luck.

Thank you, Josh.

[Operator Instructions] Your next question will come from Adam Klauber of William Blair.

Good morning. Thanks. Wholesale business was very strong, I guess what was the level of submissions, and do you think you are taking market share in that business?

Well, I am not trying to be funny, Adam, but we had a lot of submissions, but I am not going to say that we – I think the important thing that you know is, one, we have a lot of activity in wholesale. So as Tony Strianese says you got to put the lot of hamburgers particularly in binding authority and personal lines, number one. Number two, we referenced that the CAT property, the large transactional wholesale rates were not down as much as we anticipated. I also caution you to say that one quarter doesn’t make a trend. We were very pleased with the performance in Q1 of wholesale and I would say that I am only speaking on behalf of myself, but I was pleasantly surprised, because I anticipated further rate pressure in CAT property.

Okay, that’s helpful. And then as far as rate, is that business expanding? I know it’s growing, but you are expanding the distribution or you just be able to grow that business?

Well, I think that it’s a combination of both. Remember, we are servicing retail agents across the country, so we can service existing agents and we can make – we can work with new agents or writing new policies on behalf of existing or new agents. So we think that there are growth opportunities in a bunch of different ways there and we are very pleased with how right slide is doing.

Okay. And the benefit, I know you don’t break that out or give exact, but is that grown in the range of the overall retail, better, worse or just some idea how that business is growing, some ballpark idea would be helpful?

It’s growing nicely. I don’t mean to be flippant, but we don’t give the exact number, but I am very pleased with where we are for employee benefits.

Yes. Just ballpark is helpful. Okay, thank you very much.

Thank you.

And it does appear we have no further questions at this time.

Okay. Well, thank you all very much and have a wonderful day. We look forward to talking to you at the end of Q2. Thank you. Bye-bye.

That does conclude today’s teleconference. Thank you all for your participation.