Good day. And welcome to the Brown & Brown Incorporated Second Quarter Earnings Call. Today’s call is being recorded. Please note that the certain information discussed during this call included information contained in the slide presentation, posted in connection with this call and including answers given in response to your questions may relate to the further results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to further events, including those relating to the company’s anticipated financial results for the second quarter and are intended to fall within the Safe Harbor provisions of the securities laws. Actual results or events in the further are subject to a number of risks and uncertainties, and may differ materially from those currently anticipated or desired or referenced in any further 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 second quarter that its financial results differ for the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that company may not have currently identified or quantified as 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 the new information, further events or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to most comparable GAAP financial measure can be found in the company’s earnings press release or in the investor presentation for this call on the company’s website at www.bbinsurance.com, by clicking on the Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. Please begin.

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 – on-- for 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 is 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 of the deductibility for healthcare cause was materially reduced or eliminated. We’re also keeping an eye on what changes could occur to medicate reimbursement and what this might mean at the…

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…

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 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 transmission 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 hardly at a lot of our core technology programs done by the first quarter of next year and further work to implement our uniformed 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 grow -- 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.

Thank you, sir. [Operator Instructions] We will now take our first question from Elyse Greenspan from Wells Fargo. Please go ahead.

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 now, 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 and 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 up on 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 that 90 basis point really stem from the change in attendance year-over-year. I guess, we’re taking 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 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 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 backend 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.

We will now take our next question from Kai Pan from Morgan Stanley. Please go ahead.

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?

Okay. So, first off, we’re very pleased with what’s happening with our producers across the platform. So, that does not mean that they weren’t working hard before, because they were working really hard before. But there is also a monetary reward attached with a desired performance of growing their book on a net basis 5% or more. So, we’re very pleased with that, number one. Number two, as it relates to the organic growth and what we think it will be purely speculative right now versus what the actual outcome is, Kai, for the year. Here’s what I would say when we went in. There are some producers that grow their book substantially every year. So, I don’t think that the additional incentive is going to drive a different behavior. It will reward them more for that desired behavior. Then there are other producers who may not be able to grow their book as much each year, which may give them further incentive to do so and ultimately only time will play that out. But you could have somebody who has had their book flat or just up slightly or down slightly over the last couple of years for a whole bunch of reasons and maybe that helps them drive their book forward to give them additional growth. And so we have -- we do not talk about the anticipated organic growth associated with it just like we don’t give organic growth guidance on our business. I will say, you could draw a parallel, I’m not saying you should, but you could a draw parallel that are average organic growth in Q1 in retail is 2.5 this year versus 1.3 last year. That might be something you could do, but I’m not saying you should. But ultimately at the end of the day, our goal is to grow our business more rapidly organically and profitably, and we believe this is part of the solution to doing that. We’re very pleased with it.

So the – 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 and 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, in 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 the 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 winter place and the earthquake just in this particular quarter.

And Kai, when you are thinking about the out years and our comments on margin is 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.

Okay. Great. Just -- if you can comment on, I just wonder given your investment things sort of cost structure and technology platform and the people, how much sort of was kind of run rate revenue core commission fee which sustain the similar margin as your National Program?

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

Yeah. Sure. Just say like a 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 be coming a strong competitor in both organic growth, as well as for additional acquisition in the space?

Well, since as you know they’re private equity owned, we don’t have a good visibility into their organic growth profile. I don’t know what that will be. Obviously, they bought I think was 40 businesses or 40 offices out of Wells Fargo before and I think that that has been successful for them or was successful for them, obviously enabling them to pay whatever they did which was a big number for the Wells Fargo business. And so, it -- only time will tell. I would think that they’re going to have quite some time to integrate that, but I could be wrong. We run into them periodically in the acquisition space. It’s just like a number of other firms. There is about 26 private equity backed firms as you know, Kai. And on any given day, any one of those people can pop their head up and pay a big number for an opportunity. But, once again, banks depending on how it was run in the bank, there will be probably a transition and how they did it at Wells and how they’re going to do it under Mike Sicard and the rest of their leadership probably going to be a little different. So they’re going to have to just work through that.

Okay. Thank you so much for all the answers.

Thanks, Kai.

[Operator Instructions] We will now take our next question from Sarah DeWitt from JPMorgan. Please go ahead.

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 so with other carriers going forward?

Okay. So what I would tell you, Sarah, good morning, is in each of the lift-out opportunities and 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, 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 then we can ourselves. So having said that, that’s how each of these and in different ways that’s sort of come about. Also as and 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 any more, 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’d happen like once every couple of years. And so it’s a long process, this isn’t like something, somebody just decide 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 a 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 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. 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, 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.

We will now take our next question from Josh Shanker from Deutsche Bank. Please go ahead.

Yeah. Good morning, everyone.

Hi.

I have a couple of interrelated questions, so back when you guys dispose of Axiom Re, are you -- kind of change how you did your reporting, you made a difference between GAAP EPS and adjusted EPS. And going forward, I guess, when you have earn-outs and excessive expectations you’re adjusting that out as well. I wanted to know a little bit about your change in thought process on why you used to think that GAAP was the best representation, now adjusted is better? And two when we think about the quality deals that you’re acquiring, I’m sure you think of your teammates as the kind of teammates will exceed expectations, to what extent for the earn-outs expected versus the earn-outs been surprising?

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, with -- 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.

It would be, yes.

Yeah.

Yeah. That’s not…

Yeah.

The question I have, 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 is do 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 of the side. So, and that’s why you can’t see it up and down. But I don’t what 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.

[Operator Instructions] We will now take our next question from Adam Klauber from William Blair. Please go ahead.

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 is 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.

There appears to be no further questions at this time. [Operator Instructions] There appears to be no further questions in the queue. I’d like to turn it back to yourself for any additional or closing remarks.

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

This concludes today’s call. Thank you for your participation. You may now disconnect.