Q4 2019 Earnings Call
Good morning, welcome to the Brandon fourth quarter earnings calls today.
Please note.
Nation discussed during this call, including information contained in the slide presentation posted in connection with this cool.
I'm just given in the response to your questions may relate to future results and events.
Before.
Such statements reflect your current views with respect to future events.
Those relating to the company's anticipated financial results for the fourth quarter and are intended to fall within the safe Harbor provisions of Securities laws.
Actual results or events in the future subject to a number of risks and uncertainties.
Differ materially from those currency anticipated or just sorry or restaurants in any forward looking statements made just because of the number of factors such factors include the company's determination.
Its financial results for the fourth quarter, that's its financial results differ from the current preliminary numbers.
Numbers set forth in the press release issued yesterday.
Factors that the company.
Oh.
Those risks.
Identified from time to time in the company's reports.
She's an exchange commission additional discussion of these and other factors affecting the company's businesses and prospects as well.
Sure regarding forward looking statements is contained in the slide presentation posted in connection with this cool.
It's companies filings with the Securities and Exchange Commission.
We disclaim any intention or obligation to update.
Any forward looking statements whether as a result.
Further events or otherwise.
These are certain non-GAAP financial measures used in this conference call a reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measures can be found in the Companys earnings press release, we're in there. That's your presentation for this call on the company's website at <unk>.
Josh <unk> insurance dotcom.
By clicking on Investor Relations and then college are also said.
With that said I don't know turned the corner over to power.
President and Chief Executive Officer, you may begin.
He Cecilia good morning, I want to thank you for joining us for the fourth quarter 2019 earnings call.
I'd like to take a few minutes and make some born comments about how we think about business.
2018, we crossed an intermediate goal $2 billion in revenue in 2019, we deliver almost 2.4 billion and revenue.
You May know our next financial goals 4 billion on rather than we do not have stated timeframe to get there, we'll get there by adding talented teenage growing organically and acquiring businesses that fit culturally it makes sense financially.
We had just wanted to achieve our next intermediate goal, we could have done that last week last month.
Your.
Acquiring businesses and running businesses or two distinctly different skills.
Furthermore, overpaying for a large acquisition does not create value for key legs for our investors.
I didn't mention in the past approximately 25% of our company is owned by team it.
So I don't want to an office and our teenage job.
You might ask me, how what's up with the stock I know, there's teammates own brown <unk> Brown and work on planes you well.
We believe that shows great alignment inside the company and that will ultimately yield positive results for all shareholders.
The achievement of our overall, the regional and local goals or not possible without great teammates.
Just on delivering solutions to our customers, we're always searching for innovative ideas to help our customers succeed.
We have over 10000 teammates they are the most important ingredient to our success.
Thank you nice armed with new capabilities are always seeking to improve the customer experience of Brown <unk> Brown.
Oh, we do that in the future.
One way will be through the better use of data and digital capabilities by partnering with the appropriate tech firms to help us drive innovation in our company.
Knowledge. He is a very high calorie for Brown, <unk> Brown and myself and 20 Twond.
Private equity or very aggressive in our space, they're betting that straight stayed flat or go down towards zero each owner sponsor hopes they can grow the business organically and flip it at a higher exit multiple.
It's philosophy out there.
When p. buys p. based on slated to EBITDA and expected synergies, there's not much room for error if any.
Our investment thesis is for ever.
Our focus on capital allocation, we focused on capital allocation return on invested capital and cash flow from operations, which enable us to reinvest our earnings into the business each year.
While many are focused on quarterly results were focused on next year three years from now in five years from now.
Our customer focus solutions business.
As a disciplined capital allocation approach.
We consider cash flows in key benchmark. In addition to total shareholder return versus major indices that are publicly traded peers.
For the past five years, we've exceeded the average total shareholder return of the other public brokers, but more than 50% the S&P 500 by more than 125%.
I raised the points because all of us at Brown about proud of our results not just in 2019 or the last five years, but since inception.
We are disciplines to solutions provider, but allocates capital effectively we're pleased with our past performance.
Pumped about the future.
Now moving on to slide number three.
For the fourth quarter, we delivered 570 million in revenue growing 13.8% in total we grew organically 5.2%.
Very pleased with the strong organic revenue growth and I'll get into more detail on a few minutes about the organic revenue growth for each segment.
Our EBITDAC margin was 27%, which is down 110 basis points versus the fourth quarter 2018.
Our net income per share for the fourth quarter was 27 cents, increasing 3.8% as compared to the same period in the prior year on adjusted basis, excluding the change in acquisition earn out payables. We delivered 20 cents of net income per share growing 7.7% or shoot for 18.
During the quarter, we acquired five businesses with annual revenues of approximately $19 million.
I'm now on to slide four.
For the year, we grew revenues at 18.8% and delivered organic revenue growth of 3.6%.
The one time non cash $8 million, just that we report and the third quarter of last year within our National program segment.
At a negative impact of 50 basis points on our 2019 organic revenue growth for the year.
We're very pleased with the continued improvement in our organic revenue growth, we delivered and 19, our EBITDAC margin was 30% down 60 basis points compared to 2018, which was primarily driven by the addition of the Hayes business.
Net income per share for the full year 2019 increased 14.8% to $1.40 from $1.22 in 2018.
On an adjusted basis, which excludes the change for the earn out net income per share increased 13.8%.
Later in the presentation, Andy will discuss our financial results in more detail.
For the year, we closed 23 transactions with approximately 105 million of annual revenue.
We had another good year of M&A activity as we added many excellent business isn't teammates that culturally.
With ground grouse.
[noise] I'm on slide five.
For the fourth quarter premium rates continue to increase or as we say previously our funding.
We are we while we experienced some acceleration in premium pricing has compared to the last few quarters. We do not believe this is a broad based card market.
As we discussed during the year risk barriers are seeking rate increases and these are sticking in certain areas and not sticking and others.
We've seen more significant increases in large accounts. However, these will not necessarily impact our organic growth as many of the larger accounts are on a fee basis.
In general there's a continued upward trends for most lines. The amount of increase continues to be driven by the loss experience for the account or certain classes of business. The launch of the most notable increases include but are not limited to transportation habitational.
Still property, both wind and quake and excess liability or otherwise known as umbrellas.
As we've mentioned before accounts with losses are generally seeing rate increases well above those accounts with minimal or no loss experience.
Commercial auto remains well the one line and Ah coverages consistently realize that 5% to 10% rate increase we're seeing these rate these increases across almost all carriers workers' compensation raised in most states remain down to 5%.
Other lines typically are increasing 2% to 5% as it relates to the CNS placement for cat prone properties, including wind and quake, we realized increases in the range of 5% to 20%, but there can be outliers most professional liability line for private companies were flat to down 10%.
Public company being though and you know typically are up 5% to 10% or more.
As it relates to casualty pricing and the adverse loss development that being realized across the industry. It's pumping carriers to review the adequacy ever pricing if the loss development trends continued upward. We believe there will be more pressure increase casualty pricing over the coming quarters.
[noise] the N.S. space remains the area, we continue to see a number of cares being more selective in certain lines or geography, and therefore, we're seeing a more pronounced impact on you know us rates versus the admitted markets.
In general while risk bears have been able to get rate increases there has been upward movement from where we were a year ago for most lines.
There's still a lot of capital on the market in competition for accounts with low loss experience remains.
In the current environment, we do not think he's conditions will abate for at least the first half of 20 Twond.
We're pleased actually we're very pleased with the progress we've made on many companywide initiatives throughout 2019 feel we're in a great position to continue growing the business in 2020.
I'm now on slide number six let's talk about the performance in all four segments. Our retail segment delivered organic revenue growth of 7% in Q4, we like to congratulate all of our teammates within the retail division for delivering the strongest organic revenue growth we've seen in may.
Many years.
Our gross for the fourth quarter was driven by good new business improved retention and some rate improvement.
Full year basis, the 4.7% organic revenue growth represents continued incremental improvement over the 3% organic revenue growth, we realized for the full year in 2018.
Finally, we're pleased with the performance of Hayes for their fall first full year.
Our national programs segments grew 10.7% organically in the fourth quarter, delivering another really strong quarter.
The organic revenue growth. This quarter was also one of the highest was delivered in many years when you exclude the impact of flood claims.
Our growth was driven by continued strong performance from earthquake program. So lender placed program and many of our other programs performed very well.
For the full year, our national programs segment grew 3% organically. So one the one time 8 million dollar noncash adjustment recorded in the third quarter of last year within our lender placed business negatively impact and the full year organic revenue growth by approximately a 180 basis.
Born.
Overall is a great quarter enough and then.
The full year, Thank you, Chris Walker and all of the team and national programs.
Our wholesale break brokerage segment delivered another solid quarter, what organic revenue growth of 7.9% driven by strong performance in our brokerage business and increasing rate rounding out another great year with organic revenue growth of 7.4% in 2019.
Thanks, Tony strains and all of the team at wholesale for delivering another great year.
The organic revenue for our services segment decreased 19.4% for the quarter, We mentioned last quarter, we expected revenues and margins declined by 5% to 10% <unk> services segment in Q4, being driven by our security advocacy business and a terminated customer contracts and none of our claim processing businesses.
Additionally, organic revenue growth for the services segment was further impacted for the quarter by lower weather related and general property claims.
We've seen the path or services segment can have more volatility and its revenues based on claims activity or number of our businesses.
While we experienced good growth over the last few years 2019 was one of those years, we did not have a lot of claims activity contributing to the services segment decline of.
6.3% organically.
Now, let me turn over to Andy to discuss our financial performance in more detail.
Thank you found good morning, everyone.
Consistent with previous quarters, we're going to discuss our GAAP results certain non-GAAP financial highlights and then are just too results. Excluding the impacts of change in acquisition earn outs over on slide seven for the fourth quarter, we deliver total revenue growth of $17 million were 13.8%.
Ganic revenue growth of 5.2%.
Mark income before income taxes, EBITDAX increased by 1.3%, 9.2% respectively.
The lower growth in pretax income was driven by increased interest amortization expense associated with our acquisition activity as well as an increase in the change in acquisition earn out payables, a $5 million as multiple businesses experienced stronger than anticipated performance.
Later will walk through the detailed movement of our EBITDAC margin and the impact of Hayes.
Our net income increased $3 million were 4.1% on a diluted net income per share increased by one cents were 3.8% to 27 cents.
Our effective tax rate for the fourth quarter, 2019 was 25% compared to 27% in the fourth quarter 2018.
The lower effective tax rate was driven by our state tax footprint and corresponding unfortunate along with a tax rate change in Florida.
The average number of shares were generally flat compared to the prior year as we purchased shares and mitigate the impact of our stock incentive plan.
And lastly, our dividends per share increased to eight and a half since were 6.3% compared to the fourth quarter 2018.
Moving over slide number eight disliked presents or results after removing the change in acquisition earn out payables for both years.
We believe this presentation provides a more comparable year on year basis.
Our income before income taxes on an adjusted basis grew 6.2% or slower than EBITDAC due to the incremental interest and amortization expense associated with the acquisitions we completed.
Since 2018.
Moving on to slide number nine dislike presents the key components of our revenue performance for the quarter, our total commissions and fees increased 13.6%.
Our contingent commissions and been guarantees the whole foods.
Missions for GE Cds increased by 2.5 million as compared to the fourth quarter 2018.
Which was partially driven by our acquisition activity.
When we isolate the net income net impact of M&A activity, our organic revenues increased by 5.2% to the fourth quarter.
Oh, the slide number 10.
Some additional visibility into the major drivers EBITDAC margin.
It includes a walk through from 2018 to 2019.
During the quarter, we had a couple of disposals that resulted in a gain benefited our EBITDAC margin by 90 basis points.
In line with our expectations Hayes negatively impacted on margins by approximately 150 basis points for the quarter due to the phasing of revenues and profit.
Points with the new revenue standard I'll talk more about financial performance at Hayes and a few minutes.
Other reflects the margin change we experienced across the remainder of our business.
The main drivers were higher noncash stock compensation cost and the dilutive impact of an acquisition. We completed in 2019 that recognizes substantially all of its revenue in the first quarter of each year.
Excluding these items, we experienced margin improvement for the quarter.
On a full year basis, excluding the impact of pace, we expanded margins driven by higher organic growth.
Increase contingents in G.S. sees managing our expenses and realizing benefits from our previous investments, which more than offset the impact of increased noncash stock compensation expense.
Moving over to slide number 11.
Our retail segment delivered total revenue growth of over 22%.
Driven by acquisition activity over the past 12 months and organic revenue growth of 7% driven by growth across most lines of business.
Our EBITDAC margin for the quarter decreased by 140 basis points due to the phasing of profit from pace.
The margin impact associated with an acquisition completed in the third quarter last year 2019.
And higher noncash stock based compensation cost.
All these items more than offset gains we realize from current quarter disposals.
When we isolate all these items, we experienced margin improvement for the quarter.
Our income before income tax margin declined by 530 basis points due to higher intercompany interest expense amortization and incremental acquisitions are not expense and the drivers of the EBITDAC change as noted previously.
We never slide number 12 or national programs segment increased total revenues by $14.2 million were 11.8% and organic revenue by 10.7% strong performance.
Number of our programs, including commercial residential earthquake.
Lender placed in our sports and entertainment programs as well as increased contingent commissions.
Income before income taxes increased by $11.9 million or 46.5%, primarily due to leveraging revenues and lower intercompany interest expense.
EBITDAX increased by $9.9 million were 24.9% due to higher revenues and continued expense management.
Moving over to slide number 13.
Our wholesale brokerage segment delivered total revenue growth of 5.9%.
Ganic revenue growth of 7.9 or contingent commissions for the quarter were down due to an adjustment in the prior year that did not recur in 2019.
EBITDAC margin decreased 80 basis points as a result of lower contingent commissions and she sees which more than offset margin expansion driven by higher organic revenue and expense management.
Our income before income tax margin decreased 20 basis points due to the same factors driving EBITDAC margin.
Which was partially offset by the benefit of lower intercompany interest amortization expense.
Oh, the slide number 14 total revenues for our services segment.
Fine due to a decrease in organic revenue, which was partially offset by acquisition activity.
The lower organic revenue growth was driven by our social security advocacy businesses and lower weather related and property claims and inc. terminated customer contracts that we mentioned last quarter.
From a margin perspective, the EBITDAC decrease was driven by lower revenues.
We anticipate this segment's revenues will continue to decrease approximately 5% for the first half of 2020 continuing to be impacted by her social security advocacy businesses and the customer contracts. It was terminated in the third quarter 2019.
Over on the slide number 15 dislike presents our GAAP results for the full year of 2019 in 2018.
The 2019, we delivered $2.4 billion or revenue growing 18.8% and earnings per share of $1.40.
EBITDAX increased 16.5% in the EBITDAC margin declined by 60 basis points.
Excluding the impact of Hayes, we experienced full year margin improvement, which we're very pleased with.
Our full year effective tax rate was 24.2% decreasing 140 basis points versus 2018.
For the year, our share count remained relatively flat decreasing by 30 basis points from the prior year.
Moving over to slide number 16 dislike presenter results excluding the change in estimating acquisitions are now payables for both years.
Our adjusted income before income taxes grew by 12.7%, which is slower than growth EBITDA due to higher interest and amortization related to the acquisitions, we completed since 2018.
Our adjusted net income grew by 14.7% and adjusted earnings per share increased 13.8% to $1.40 as compared to 2018.
Finally, a comment regarding the efficiency, which we convert revenues to cash.
Full year basis, we converted 28.4%.
Revenues to cash flow from operations, which is a 20 basis points higher than last year.
On a full year basis or cash flow from operating activities has grown 19.5% as compared to total revenue growth.
Turning point change.
We'll go to slide number 17, we'd like to provide some additional information regarding the quarterly and annual performance.
For Hayes for the fourth quarter things delivered revenues of $52 million, which is just about $4 million above the top end of the expected range for the quarter.
EBITDAX for the quarter came in at about $8 million, which was at the lower end of the range.
From a full year perspective revenues were $221 billion, which was just above the top end of our initial guidance of 200 and turn to $220 million.
The deck for the full year was $50 million, which was in the middle of our estimated range.
Diluted net income per share excluding the incremental change and estimated acquisition earn out payable was two cents for the full year and was in line with our expectations.
Well, we moved the closing comments, we've got some additional guidance regarding certain line items for 2020.
We want to provide some guidance regarding third quarter acquisition that was previously discussed that were recognized substantially all of its estimated $20 million to $22 million in revenue in Q1, just corresponds with the effective dates and the policies that places.
As a result, or the new revenue standards. This acquisition will impact our quarterly profits in 2020.
The positive impact or EBITDAC margin in Q1 is expected to be in the range of 102 150 basis points and then we expect about a 30 40 basis points of compression in the second quarter, and then about 15 to 20 basis points that compression in the third quarter versus the same periods and the problem.
Sure.
We anticipate chia seeds will decrease $8 million to $10 million in 2020 as compared to 2019, primarily as a result of the onetime GST of approximately $9 million.
Realizing the national programs segment in the second quarter 2019.
As we discussed before or stock compensation cost has been increasing as a result better performance.
We expect our stock compensation cost increase during 2020 by approximately $6 million to $8 million over 2019.
Based upon our current rate outlook.
Interest expense is projected to be relatively flat year on year.
And then our amortization expense should be in the range of 100 $205 million for 2020.
Keep in mind that both of the both the estimated interest expense amortization, our excluding any additional acquisitions of borrowings that may occur in 2020, So you need to make your own assumptions regarding these items.
We expect our effective tax rate for 2020 to be similar to 2019 wall that projected annual rate will be similar we do anticipate more effective rate in the third quarter to be in the range of 14, a 17% and they're all other quarters to be increased versus the prior.
Our year end 2019, the anticipated variants in the third quarter is driven by the tax benefit associated with the vesting of stock incentive awards with that let me turn it back over to power for closing comments.
Thanks, Andy for Gray reported in closing I want to make some comments regarding a number of topics and how we're thinking about our business some opportunities in 2020 and beyond.
As it relates to the economy, we expect the growth rate and corresponding impact on exposure units to be relatively similar.
From a in 2022 to 2019. This is barring a major negative changes and trade relations or another matter that could impact the overall economy.
From a rate perspective, we anticipate premium rates will continue to increase slightly during at least the first half 2020, however, I'd like to repeat we do not believe we have pardon market conditions, but rather a firming of rates for many lines.
This is.
Driving certain risk bears either constrained capital or pull out of certain lines or geographies entirely.
On M&A front, we expect competition all main aggressive until interest rate increase materially we expect he will more like more than likely continue to leverage deals higher than strategic players, we're going to remain discipline, but our approach as its proven very successful over the years.
We will buy businesses that makes sense financially and fit culturally there are plenty of opportunities that fit the profile.
We've been talking about the increasing importance of in technology and the use of data.
We firmly believe these will have a material impact on the delivery of insurance over the coming years, let me be clear I'm, not saying that technology will displace the importance of a customer talking what their broker regarding the transfer of risk we're talking about how will interact with customers during the buying a renewal experience.
Moving to convert friction a simple transactions as well as how we use data to help create new products with our carrier partners. We will also be focusing on how we can be more efficient and therefore direct more time towards the winning and retain and additional customers.
Since we're not a technology company, nor do we have all the answers we will more than likely partner with Im sure Tech companies. So we can leverage their innovation in concert with our industry expertise and beta.
Allocating capital is the most offset in the most optimal way remains top of mind for all of our leaders.
We're fortunate to generate over $600 million attack and anticipate this will grow more in the future [noise] as we've stated before our goal is to support all of our available capital and more if the right opportunities are available.
So we can continue to deliver industry, leading financial metrics cash flow conversion and ultimately shareholder value.
Increasing and investing in our teenage remains a key priority for our company.
As it is through our talented team that we're able to serve our customers. We believe we have the right operating framework and culture to stimulate additional profitable growth in 2020 and beyond.
With that I'd like to turn it back over.
Yeah to open up to an area.
Thank you.
Wish to ask a question at this time.
One.
[noise] these into the mute function on your telephone installs.
<unk>.
I wanted to ask a question.
Your first question from Greg pieces from Raymond James Your line is open. Please go.
Great. Good morning, everyone I wanted to circle back I have a couple of questions but.
Paul you were talking about technology and I'm.
I'm just wondering in the in the context of you're not being a technology company do you anticipate that 2020 that you're going to be spending more technology related initiatives across the.
Franchise relative to 2019 or how should we think about that in terms of an expense headwinds.
Yeah. So a good morning drag and the answer to the question is as you saw we named Steve Boyd I'm, the head of technology innovation data and digital strategy last year, and we continue to evaluate.
I'm not only things like security, but we talk about the way we are actually.
Doing business internally, so we're not at a point yet to say exactly what that is but the answer to the question is we do believe that there's going to be more investment.
And we're going to do it in a thoughtful way I don't want anybody on this call taking something out of context like we're going to just go throw $25 million on bucket, that's not what we're thinking.
But we are thinking about technology in several ways. There are the ways to keep the lights on and running like electricity and then there's protecting from the bad guys as I call. It and then there is there's two parts of innovation there is.
On using something that would actually be emerging which would be kind of a fast follower concept and then there's also a component which might be on that leading edge concept, which is the smallest bucket. So we I feel really good about our team and some of the.
New people that Weve had join us or joining us and the technology area to help us think about.
Doing business more efficiently, where our teenage can focus more time on serving our customers. So I'm I'm excited about it.
Oh, Okay. Yeah go ahead.
Hey, Andy here, maybe one other thing just to think about that somewhere to what we did back in the first quarter 2016, if we had a large technology investment.
To you we would come talk with all our investors about that but we don't see anything like that on the horizon right now.
Thank you for saying that because I would I is we're sitting here thinking about just your EBITDAC margin for 2020, and I know you provided some guidance around what the acquisitions is gonna do.
Down 60 basis points for the full year in 19 versus 2018 do and Hayes is in that do think that we sort of stabilize do you think it's going to be better. In 2020 are you know directionally can you give us some some ideas of what where do you guys are thinking about that.
Yeah, great, let's let's let's come back in 19, just for a for a second.
When we look at the margins for the organization a you're right. They are down if you just pull out Hayes by itself.
Our underlying margins.
Up.
When we came into 2019, so our goal was to increase our margins a little bit for the business.
Exactly what we delivered.
So that so we feel real good about where the world today.
So really important mixture of when he plays out.
All kinds of other moving parts under leases there they almost all net out back and forth.
We increased underlying margin. So can really pleased with 2019 as it relates to 2020, we don't see any major headwinds coming at us that we know about right now not that things could never change, but as of today no. We don't see anything and feel really good about the trajectory of the business.
Great. Thank you for that answer let's pick it back to the revenue side.
And and Paul I know you commented about exposures and the outlook for exposures.
Retail was really strong as you pointed out.
Can you give us an idea of how much you know not only for the fourth quarter for the year was exposure versus rates and do we should we be thinking about some pretty.
Difficult comps as we move through 2020 on organic because of the success you had in 2019.
So we don't a will break out the exact amount of the organic revenue growth for rate and exposures.
But as I've told you you know kind of it's a it's a it's a balancing act from a standpoint of.
From an exposure standpoint, we would say anecdotally that our customers are doing better generally across the board, which is no surprise to you number one and you heard my comment earlier about the rate in the market idle I believe and continue to believe that were very.
He consistent what we said the retail business not unlike the overall business.
As a low to mid single digit organic growth business in a steady state economy that could be positively impacted slightly by other impacts I eat a rates increasing.
In the area, where we are today, but we're not giving guidance on organic growth as you know I will say this though.
I could not be happier with the progress that we have made in our retail business and for that matter the entire business over the last three to four years.
Great and the final point, just stuck free cash flows conversion rate is there any sort of headwinds that we should be concerned about as we think about the conversion rate for 2020, and that's my last question.
So let's just.
Clarify so Greg we look at cash flow from operations is one of those key metrics.
Yes, no major items that we know about the one thing that can.
Kurt back and forth is the movement and the fiduciary cash because that.
And they roll some cash from operations so depending upon that movement. That's the only item that can cause noise up and down on some years or otherwise no nothing.
Great. Thank you for your answers.
Uh huh.
Isn't that take your next question from M.C. Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks. Good morning, My first question, we've been hearing a lot in terms of the pricing environment within Florida getting better as they move through 2020 on no given your exposure there on Pal I was hoping you can kind of talk about what your first the happening in Florida.
During the here and then also how that that that could potentially on impact your organic revenue growth and provide a tailwind.
Potentially even beyond the first half the here.
Okay. So, let's let's talk about Florida in a couple ways as you know Florida is.
Got the most coastal exposed.
Building construction.
In the United States.
Meaning exposed within one county.
Other than new York's things.
So Texas would be number two so the last time I saw this number it was a trillion.
300 billion or something and a huge number it's kind of staggering.
So.
First of all we talked about the the impact of CNS market and how that would impact potentially residential and commercial accounts that were seeing and we said earlier that generally speaking we're seeing rates that are in that 5% to 20% range. So that's a component.
Number two I would tell you that in the state of Florida, there are lots of a takeout companies.
And those take out companies.
Our de populating the citizens as many of you know and there are as we understand a number of those companies that are being under watch demotech and others. Today, we don't know exactly what that will mean for that space and yet but.
Some of the losses that have occurred in the past couple of years.
Our developing in a manner.
Or may have hit their reinsurance layers in some way that were not otherwise anticipated having said that you know when we became a public company and 1993.
The majority of our business was in Florida today at 2.4, just roughly $2.4 billion revenue, our Florida exposure as much less.
So I say that because remember in a business that in retail which is roughly these are all rough numbers of a billion for maybe a 180 million of it isn't retail.
And so we don't breakout the amount property, we have and we also have some nice size wholesale in them and Florida as well, but they're writing business all over the country in cat prone areas. So at least I would caution you by saying that we're going to get some huge who live.
From the so called Florida effect, we're all really happy you know to live in Florida for a whole bunch reasons and and run our business from here, but I'll. Just tell you that I think that I would want you to look at the Florida effect as similar to around the country with a full light.
Upside to it but nothing something where you need to go tweak something substantially I I would caution you have about that.
Okay. That's very helpful. And then in terms of stuff, which tell segment I know you guys don't like to give guidance, but if I recall correctly I thought probably going to hear as Mike pointed to the second quarter of 2019 is being on your strongest quarter for that segment just given Brett.
Back in some of the shift between the key wanting to teach you now the fourth quarter ended up pretty sharp on just on this keypad and some time as you pointed out so I'm just curious what they like new business. When you all something one off that two wells on the you know the 7% in the quarter and that might have.
It was lifted that number relative to your prior expectations.
Okay. So I think just to clarify your earlier comment I think it was the first quarter as opposed to the second quarter.
That we talked about and number two I think that there is.
[laughter].
I have Andy sitting right next to maybe you guys have trouble, but I always think that six a six clouds the issue versus makes it clear, but I'm not a CPGA and I'm not I'm you know Pete Kobs, So having said that.
I would tell you that we had at just the damn good quarter.
And that means we wrote a lot of new business, we have clients that or some of them you know, sometimes our clients get purchase, but we had clients that were buying businesses.
We had exposure increases we had things do system really good quarter and I also would say I mean, you know to manage your expectation the leases this one quarter or doesn't make a trend and we said that.
You know I look at it if you look back at the organic growth of retail in the last four years.
And I might be all on the four years ago, but I think it goes something like this one hate to 730 for seven.
We're pretty happy about that.
And we think that that is a big reason a the stock price has reacted accordingly. In addition to our acquisitions and are executing our plan and the other divisions and this and that and all this other stuff, but again.
We're really pleased with it.
That's helpful. And then just lastly on the margin side on so if I calculate it correctly and I'm sorry to beat that number. It seems like you improved your margins by about 20 basis points in 19 axes. So can you just commenting 2020.
The right level of improvement to think about for all of Brown and Brown and then Andy goes on quarterly impacts for 2020 from that one acquisition. That's how the overall company bite and then we would see nearly all the all that much like your impact in retail.
Ah, Yes, let's take the last part of the question first and then we'll come back around yes that is correct.
Is the movement on the total company, so maybe a way to think about that as once you've modeled in.
When you think.
Next that then lay those potential just moves in there.
And the yet and then for that over into a into retail when a proportion of basis.
And then yes on underlying companies, we talked about earlier, yeah, we were up X Hayes about 20 to 30 basis points.
And just asking about the right level, it's margin improvement and we think about 2020.
Yeah. We currently we don't give outward guidance as as you know, but we don't see any major headwinds coming at US right now for 20 that at this stage.
So we don't have any reason why they would go backwards. Let me let me let me interject one thing there at least here's the thing and this doesn't help you with your model.
But what I would tell you is this we are working really hard and we're having a lot of fun and we're going to be investing in businesses that we think.
Fit culturally and makes sense financially and that includes hiring good people you know that would build businesses and all kinds of things. So I want to just make sure that.
I know you're trying to come up with an absolute number and this is what it's going to be is going to pop out. The other end in your model and we acknowledge that I just want you to understand that.
We are growing the top line and the bottom line and if you look at the performance in the last year or last three years or like five years. Our goal is to continue to do that so.
So I just say that because that doesn't mean you can just plug one number into the model and it's got a pop out the other end I just want you understand that we're going to try to invest the money. The best way, we think impossible to yield the best long term results that may not be Uh huh.
One quarter or one year for that matter and sometimes six so six as Andy referenced earlier impacts the way when we buy something all the sudden impacts the overall.
Company in terms of an acquisition and that's fine we're going to work through it but we're just trying to make good acquisitions acquisitions and hire more people to.
I get the 4 billion.
Okay. Thank you very much I appreciate all the color.
Yeah. Thank you.
We will now take your next question from Mark Hughes from Suntrust. Please go ahead.
Yes. Thank you good morning.
We Hayes acquisition incorporated than organic this quarter or something close to this quarter last year.
Yeah, Yeah. Good morning, Mark It was it wasn't clear is only for the 45 days so didn't have a.
Overall major impact just from a waiting standpoint in the quarter.
And as we think about that Vicki bigger impact in Q1 can you say kind of what the growth trajectory here since then or.
The answer and the answer is we don't talk about the growth trajectory of individual businesses. We're very pleased with the performance of Hayes and the future. What we think the future performance of Hayes, but we're not going to comment on that that's all wrapped up in my comment around the load.
Mid single digit organic growth over in a steady state economy.
The the larger than the effect from behave the lower contribution in the fourth quarter was that just to change and earn out the cause of course or some other factor.
No nothing unusual there mark when you know when we close out the third quarter, we'd anticipate we said there was more than likely at least the fourth quarter would have some noise inside of it we anticipated that it would be a penny loss in the fourth quarter. They came out to be two cents shooting a two cents.
As a penny of that is the incremental acquisitions announced what kind of landed right on where we were a war too focused on the individual margins by quarter for the business. We're really focused on the total just because as we went into it we took our best shot up the quarterly as and when we looked at the full year, we turned out.
ER top into while revenues and kind of weighing on margins, we feel really good about how pace performed this year.
And then the stock comp you said I think up six to 8 million if I'm looking at it probably just off of the cash flow looks like that's about half the pace of increase of 20 million King Beth.
Correct.
Yes.
Okay very.
Very good thank you.
Thanks, Mark here.
We will now take our next question.
From Goldman Sachs. Your line is open.
Hi, good morning, everybody.
First question is more VR Mark. Good question, you talked about different lines of business somewhere you're seeing a little more from England others.
Are there areas that you're seeing disruption. This morning are difficult the pacing a program.
When he said difficulty, meaning you're unable to get coverage is always you're referring to yeah, yeah, or maybe you have to shrink the overall size of the program.
Right. So I think there's really two instances that come right them on to give you. An example, there had been historically some.
Writers of large property, particularly engineered property risks who are pulling back their limits. So by doing that then you start to have two so they might put up a billion dollars EUR $2 billion or something and all the sudden if they pull back then they're layer.
That property.
And so the cost is going up I'm, not saying that categorically and all instances and can place it but sometimes they may not buys high limit because of cost pressures or things like that that would be an example, that'd be one so same property, particularly large limit engineered risk.
The second that comes to mind would be umbrella business, particularly on things like transportation or very very heavy products exposure.
So if you had a transportation account you're on and it let's just say for sake. This discussion.
You had one market right 25 million dollar primary umbrella and then you had another market right. Another 25 million inside a 50 million dollar umbrella.
I would tell you that it's best to my knowledge. There are very few people on a transportation account that would put up more than 10 today. So all of sudden the price of the 10 might be as much as the price of the 25 or more last year. That's the first thing and then.
There may get to a point, where the pricing is such that nobody wants to offer the price at the higher levels, just because they don't think they're getting enough rate for it or what they will give.
For quote wouldn't be bought because people don't think that it it's work that much so.
There are few instances that I'm aware of where you have difficulty in placing accounts, but for the most part what I'm aware of is were pretty successful for our clients, but we watch that very closely.
That's very helpful color and my second question National programs organic growth seems like the last few quarters type turned to corner spin on.
On a very positive trajectory or are the headwinds that you faced a earlier this way this year and late last year or those kind of done at this point.
Well remember I think that you're correct in saying number one national programs and the team has the business in a really good place. So the first thing. The second thing is remember national programs can be impacted by the underwriting appetite of a carrier. So we don't.
No of any significant changes with our carriers right now, which would necessitate a movement of a program or something like that so that's a positive but anytime you have a leadership change in a significant carrier partner in programs there could be a change an appetite or how they view. It you know we.
Think about Oh, you know, particularly in some of those are underwriting programs, where we have capacity.
We're putting online that could be when that could be quake that could be other related things.
A lot of it is how do we get more capacity to fill those needs.
In the future so the limit may not be the.
It may have a certain amount of capacity and then you sell that capacity, if we don't get more capacity than the growth is constrained.
Now, we're not gonna say, specifically, if there's a program like that but we do have some capacity plays where that as possible. So we're always out looking for capacity to grow our programs, particularly in times of disruption.
Got it I understood. One quick modeling question I think it said that services revenues.
3% to 5% decrease from the first half of 20 is that on absolute basis or relative to 90.
Yeah. So Ah you earn on Dallas or were right now, we're giving guidance of 5% down for the first quarter.
And they do that ER versus 2019.
Thank you for the for the same for the same periods.
And then also just when you're thinking about organic yeah. I was just want to make sure. We clarified for everybody is we do not include a contingent commissions or G.S. season, our calculations organic and there's some of the other.
Peers put it in take a while back and forth. We do not include as an organic okay.
Got it thank you so much.
[noise], leaving that take or next question, Josh Shanker from Deutsche Bank. Your line is open please.
Thank you, yeah and get to make your peak something but earlier when you were going through slide and I Didnt quite follow up the margin expansion story.
Can you walk us through one more time why underlying margins expanded during the quarter.
Especially if you come back.
If you look at.
For the quarter right. So we were we started that a 28, one and we finished this year at 27.
I sit down 110 basis points, we picked up 90 basis points on a change or the gains and losses longer disposals.
Which is not going to recur of course.
Correct.
Asia was a drag of 150.
And then we were down 50 basis points, and that's where we're highlighting is.
For the quarter.
Those are noncash stock compensation cost.
And then the dilutive impact of the acquisition that we did in the third quarter.
Those are offset.
Underlying margin expansion that we had for the quarter.
So I mean going through individual numbers, so I'm I'm looking at like X Hayes.
I'm seeing 140 basis points, you normalize margin compression and that's covered by the am I wrong to think that way.
Yeah.
Oh, yes, so walk us through how you get there because.
I think we fall into that so so if you didn't have the gain on the disposal.
I think you'd be at a 26 worn out of 27 right.
Mhm.
And Hayes is recurring of course, and so let's put that in.
Uh Huh, so that's why I I feel there there would that X.
So.
Next phase I think you'd be at located.
20.
26, one plus one and a half so 20 656 27.6 I guess.
No.
ER.
I'd say, it's you'd be at your <unk> you'd be at.
26, you'd be at twice the Semex A's I guess, it's why don't I jumped <unk> I am I wrong to think the underlying compressed during the quarter I guess.
I don't I'm trying to follow or I'm sorry.
Well if your.
No I think we look at it that way is just if you take India isolate out.
Gains on the disposals and Hayes right that is 60 basis points those are net correct.
Yep.
Okay got it.
And therefore that leaves us with 50 on the other.
That's right, but phases recurring where's the gain on disposal not so the 150 I'm going to roll over into Fourq, you 20, Joker again I guess.
Why would you do that.
He is actually lapping.
<unk>, we we already made to lap on it there Josh I think that's maybe where you got to keep that in mind. This was the last quarter or that we're getting the full effect of it as we go into the worst year when now comparative.
I don't think Hasan give you an additional 150 basis points of margin compression, but TV fourth quarter Hayes effect, it's got to be with you wouldn't for quarter four couponing.
Yeah, but is this.
To assume that the business doesn't do anything different.
It's net there's no increase or decrease in the margin then in fourth quarter 20 versus fourth quarter of 19.
Got you would be a 26 want no.
That wrong.
At a 26, one for the fourth quarter, Yeah of 20.
If everything is the same except you don't have the gain on disposal you'd have <unk>, but even Jeff Martin for Four Q2 20 would be a 26 one.
Right and then you've got some impact of also the third quarter acquisition. That's got some drag on it again, you're only going to have that a this year.
Okay, Oh, I'm, sorry, I'm I guess I just want him.
I want to walk through how problem aren't Martin bounce back I guess for next year, but I'll take it offline I remember I guess I'm.
I'm not not smart enough what figure this out by Sandy.
Are you just backup for a second as you walk off here on the call are you, saying that you're anticipating that margins will be going down next year for the business.
I don't know yet I haven't done my numbers, but I'm going to started I think I'm supposed to start a 26 want and figure out the third quarter impact on it.
And whatnot, but it feels like the base place to start for forecasting for Q2 0 is slightly lower than where.
Fourq your 19 came in.
The forget here's here's what we use it just is ultimately your your call what you all do but.
Don't get.
Started the full year first.
Okay.
And get what you the guidance that we've given on a full year regarding how we think about the business.
That will that help you by the quarters.
All right rather than the bare clearly <unk> not just one year, but many years anyways, it's what matters.
So, but I'll, let slip can be this discussion offline about I appreciate all the help.
Thank you. Thank you.
Your next question from like Salmon ski from Credit Suisse. Please go ahead.
Hey, Thanks for fitting me in.
I guess a powerful in your prepared remarks.
You said something along the lines at the large account spaces seeing more rates. However.
Yes. This is fee based so I believe come out of Youre alluding to not getting as much revenue benefit versus it was commissioned.
Kind of curious is is her pricing in the large accounts space or very firm pricing is that a tailwind or hours. Each account really a case by case negotiation it could be a I had one in certain cases.
Just trying to better understand the dynamics there.
Right. So just think about.
In large accounts, obviously the numbers are much larger so if you have an increase.
In those instances many of those accounts have risk managers, which their job is to try to get the most comprehensive coverage for the most competitive price.
So that puts additional pressure on that goal you want to call it that.
Ah if their pricing goes up so I would say, it's very much case by case and how that buyer of insurance.
[noise] thinks about the hard market or hardening market I should say farming as I said not hard market. They think of it as a hard market, but we don't.
And.
So I would just tell you I think it want to case by case basis.
Okay. So that's that's helpful and Hum maybe for Andy I guess, you know you guys don't see any major headwinds for margins so that does that imply contingent.
The contingent commission outlook as you know stable.
No remember, we said that we would anticipate that she sees will be down $8 million to $10 million in 2020 and that was because of the one time G.S.C. of $9 million that we got in the second quarter of 2019.
Otherwise, we don't know of any major items out there right now.
Okay and.
Or the contingency for casualty weighted or property or is there any color there.
No no I guess, we never role, we never broken them out or looked at them that way, but they're out there balance to cost you know both casualty as well as property.
Okay, and then lastly.
Now there was the no commentary and deck about expect competition and pricing pressure for acquisition targets and power you gave a good color on that sorry are you know so does that imply that you know stock buyback could potentially be more of it on the table yeah. If if that's a.
So be correct.
Well as we've said like in the past, what we try to do as a value rate.
The potential benefit of all the investment opportunities that exist.
Exist for us a buyback we talk about with the board periodically and we evaluate what that looks like versus investing the money and acquisitions and otherwise.
So we don't have stated buyback policy I know that drives many of you crazy but.
Okay.
You laid that.
You know in the future, but I don't want you to read into that that says well if that's the case and they're definitely going to be buying back stock do not make that assumption, we will do it when we evaluate.
The the intrinsic value of the company versus the actual value of stock at the stated Taiwan.
Okay. Thank you for the insights.
Thank you.
Your next question my issue Okay.
Right.
Thanks, I wanted to follow up on like the question if I can.
He talks about the being I guess lots of an automatic revenue boost in large accounts.
Because see big trucks are given that that's where we're seeing probably most distortion in the marketplace. Now is what happens to the extra expenses associated with placing business.
I'd becomes more expensive or more requires more effort you get paid more for that.
No.
Sounds good but no.
Sometimes you know cage less I mean, sometimes you get paid less of as if they renegotiating the feed because of competition or something else but.
It makes.
Life per our placement teams very exciting maybe as a REIT, let's say it.
It sounds like you couldn't we could do without.
A question I was hoping that now that you started after this has been kind of that can you sort of update us on how we should think about non U.S. M&A.
Sure I mean.
We have and will continue to look at opportunities that may exist and.
Countries that we believe.
Might present, an opportunity for brown <unk> Brown I would make a broad statement by thing if you looked at where we have businesses today now the business in Canada, I only have businesses or business in London, we have one in Bermuda.
And so what would be consistent with all of those countries well, they're Commonwealth countries on number one and in those Commonwealth countries. They all have a rule of law.
So I'm not saying categorically that is the only place we would ever do.
Acquisition I don't like the comment of.
Always never or can't.
I really don't like those terms, but.
To this point, that's where we thought about it and if it made sense, we would consider that going forward.
That's interesting my or that you would outside because.
Competitive landscape.
For acquisition and some of those countries is even sometimes more fierce.
In the United States, if that's possible kind of interesting.
Okay, no if they get the favorable.
Take a follow up question for Mark Hughes from Suntrust. Your line is open.
That's a very quickly you mentioned in the retail segment, but what are the driver and slips a higher increases in employee benefit could you talk about what's driving that.
But I don't I don't remember, making a comment about higher increasing employee benefits, although employee benefit health care costs are going up but I don't remember making mountain.
So I'm just reading off the retail segment, what a good drivers permanent new sites, a commercial auto and employee benefits.
Oh, Yeah, that's just on pricing for our customers not bus or cost on that Mark just in general I think everyone sees in the marketplace right. Yeah, I think that sounds like that's a support for organic close to sort of curious if there's anything.
Different going over there the benefit I was hoping to drive growth.
No nothing it's it continues today the pace that it has so nothing new or different there.
Thank you.
And then see it will take one last question if at all or any otherwise, we'll go ahead and cut off for Texas.
Perfect.
Question.
Cannot.
I'm sorry.
Okay.
Thanks, just another quick modeling question the [noise] the margin impact from the third quarter acquisition. You took after the end of tissue based on positive in the first quarter than a drag in the second third quarters. The numbers you provided are those on a consolidated basis or food care alarming.
Yes total company here.
Okay. Thank you.
Let me a I want to make one comment as we wrap up Cecilia for everybody. Thank you first of all for your time today.
And I know that if you have any questions and Andy be more I'm happy to talk to you about those in detail or other people on our team.
I want to make sure everybody understands that.
The Hayes acquisition in our mind is an excellent acquisition and that is first and foremost because they've got great people.
So when I look back on acquisitions like Arrowhead and other large acquisitions, where we've gotten a lot of really good people.
Those have been very significant in the history of our company I think that the Haynes team has a number of people like that so I'd say that because might he again and Jim Hayes had built great business and there's a lot of other great people and that team. So.
I want to make sure that are in the last comment today is this.
We are very pleased with where we are in the entire our entire business. We're very pleased with the Hayes acquisition, and we expect great things from that part of our business in the years to come.
And like I said generally speaking.
We don't see that many headwinds going into 2020, and we're all really pumped up about what that means for us and the company now and in the future on our way to $4 billion. So we thank you for your time and we look forward talking to everybody again next quarter. Thank you have a nice day.
Thank you.
Oh here you are too.