Q1 2020 Earnings Call
I'd like to future results on offense or otherwise be forward looking in nature, such statements reflect all current views with respect to future events, including those relating to the Companys anticipated financial results for the first well sure I'd are intended to phone was going to see my work visions of to secure where she is no. It's actually just thoughts orphan.
In the future are subject to measure of risk out of these I may differ materially from those currently anticipated or desired reference in any forward looking statements made I never thought of number of factors such factors include the company's determination as its finalizes its financial results for the first call sure. That's it's fine.
Actual results differ from the current preliminary on all Detroit Oh, just hit numbers. That's fourth in the press release issued yesterday other factors that the company may not have currently identified or quantified those are those risks and uncertainties identified from time to tie the Companys reports filed with the securities and exchange can.
Mission.
Additionally, additional discussion off these and other factors affecting the company's business I'm prospects as well as additional information regarding forward looking statements is contained in the fall into slide presentation posted in connection with this call on the company's filings with the Securities and Exchange Commission, we disclaim any intention or obligation to uptake or a fight any forward look.
These statements whether other thoughts off new information future events or otherwise inefficient there are certain non-GAAP.
I'd like to measure is used in this conference call a reconciliation of funny Nongaap financial measures to the most comparable GAAP financial measure can be found in the Companys earnings press release or in the Investor presentation for this call on the company's website at Www Dot BB insurance dotcom by clicking on Investor Relations and then calendar.
With that said I would now turn the call well for Pollo Brown, President and Chief Executive Officer, you may begin.
Thank you Lisa good morning, everyone and thank you for joining us for first quarter 2020 earnings call.
Well, we talk about our first quarter results.
Around them like to say, our thoughts and prayers are with all of those people directly or indirectly affected by cope with my team.
Also wants thank those all of those people want to someone for everything they're doing during these challenging times.
Finally, I'd like to thank all of our 10000 plus teammates.
For everything they're doing for customers and for successfully transitioning to work from home environment.
They will discuss our Q1 results I'll give you our thoughts in the next few quarters.
Here, a couple key points free to keep in mind first we had a very good quarter.
Additionally, we have a strong balance sheet.
Hi, cash conversion among our publicly traded peers and have access to approximately a billion dollars liquidity.
Our conservative operating philosophy has and will continue to be indicative of how we run our business. We're focused on a long term and our cash and already capital like business. That's focused on providing unique solutions to our customers every day.
But first quarter was a tale of two cities January and February we're growing nicely.
And then we hit early March when we started seeing the impact of a walk to work on our customers the Pacific Northwest.
He said before we believe we're a proxy for the economy with an emphasis on the middle and upper middle market.
We began seeing the impact on our customers around the country in mid March one of many difficult thing to assess today is what will that mitigation efforts from the U.S. government due for our customers through government government support systems.
During these very unusual times, we're focused on the safety and security of our teammates and their families. Many of our previous investments in technology have helped us transition 10000, plus teammates to work from home environment in a very short period of time, our customers have been and continue to search for solution.
Yes on everything from the cares Act S.P.A. loans insights on furloughs and lay off to how you can use your personal vehicle to deliver meals from a restaurant or how to get certain supplies. We opened our VNB relief center customers and others have liked to take advantage of discounts on certain supplies.
These actions combined with a weekly updates for customers and prospects have been well received by our intended audience.
In addition, I'm humbled by the determination dedication and commitment of our teammates.
But what they have for our customers now, let's transition to the results for the quarter on slide four.
For the first quarter, we delivered $698.5 billion revenue growing 12.8% in total and 5.6% organically. We're very pleased with the strong organic revenue growth and I'll get into more detail on a few minutes about the performance of each of our segments are EBITDAC margin was 34.6, which is up to.
Hundred 80 basis points versus the first quarter of 19, our net income per share for the first quarters 54 cents, increasing 35% as compared to the same period in the prior year on an adjusted basis, excluding the change in acquisition earn out payables. We delivered 51 cents of net income per share.
Our growing 24.4% over the adjusted net income per share for 2019 Q1.
During the quarter, we acquired another five businesses of annual revenues of approximately 39 million in.
In summary, we're very pleased how agree the topline and bottom line. This quarter. It was a great quarter after delivering a really strong 2019.
Later in the presentation, Andy will discuss our financial results in more detail.
Now on slide five.
The first quarter was an interesting one until early March we saw the U.S. economy continue to grow and most companies continue to hire employees and invest in their businesses ultimately driving expansion of exposure units.
Then in the middle of March everything changed due to many stay at home or shelter in place mandate. We're now seeing companies either terminating employees are putting them on furlough and driving the GDP lower for the first quarter and beyond we've said in a path that one of the primary drivers of our organic growth is.
Exposure units. So we do expect an impact over the coming quarters more on that later when we get the outlook.
From a rate perspective, we continue to see modest rate increase on rate increases on most lines of coverage as carriers continued to tightened underwriting standards. The increases were substantially in line with what we'd expected for the first quarter and were similar to last few quarters ultimately the amount of raw.
Rate increase was primarily driven by the loss experience for given account premium rate for low loss account and he admitted market generally increased 1% to 5%.
Excluding auto which is up five to 10.
From an EPS perspective coastal property rates increased five to 15 versus the prior year General property rates were five to 10 professional liability increased five Dan cyber was up about 10 to 15.
The impact of the pandemic on a rates now and in the future is unknown.
Regarding the M&A landscape. It remained very competitive during the first quarter. We closed another five transactions were 39 million in estimated annual revenue what can we continue to talk with lots of companies, let's sense, a slow down as sellers are trying to get a handle on how the pandemic will affect their businesses.
And therefore impact of valuation they receive.
I'm on slide six now, let's talk about the performance of our four segments.
Our retail segment delivered another strong quarter with organic revenue growing 5.7% in Q1.
Our organic revenue growth for retail would've been approximately 300 basis points higher.
If not for a 10.5 million dollar change in estimate.
Related to future revenues, resulting from the economic disruption associated with Cobot 19.
Andy will describe this in more detail later our growth for the first quarter was driven by improved retention exposure units exposure unit expansion for existing customers.
New business in rate improvement.
We'd like to congratulate all of our teammates in the retail segment for delivering another great quarter.
Runs from a number of our programs, including our lender place are earthquake, our personal in commercial property as well as many of our other programs.
In early January we completed our first acquisition in Canada Special risk insurance managers were really pleased with this acquisition any opportunities. We believe will present to us over the coming quarters in years overall is great corridor for national programs and I wanted to say, thank you to all of our teammates in that division.
[noise] or wholesale brokerage segment delivered another solid quarter with organic revenue growing 8.2% driven by song that strong performance from both our brokerage and binding authority businesses.
This is even while we experience some pullback from carriers riding, California personal lines do losses from wildfires last year.
Thank you to all of our team for delivering another good quarter.
The organic rubbing for our second services segment decreased 13.1% for the quarter. We originally expected organic revenue to decline by 5% for the services segment in the first half of the year being driven by a social security advocacy business and it terminate customer contract and one of our claims processing.
Businesses during the quarter. However, organic revenue growth of services segment was further impacted due to lower weather related and social security advocacy claims as we've seen in the past our services segment can have more volatility and it's revenues based on the volume and timing of claims activity.
Now, let me turn over to Annie discuss our financial performance in more detail. They keep l. Good morning, everyone consistent with previous quarters, where to discuss our gap results certain non get financial highlights and then or adjuster results. Excluding the impact the change in acquisition Earnouts over on slide number seven.
But the first quarter, we deliver total revenue growth is $79.2 million or 12.8% organic revenue growth a 5.6%.
Or even deck increased by 22.8% growing faster than revenues.
Due to leveraging our expense base with higher organic revenue growth.
Higher contingent commissions and the results from one of our acquisitions in the past year that recognizes substantially all its revenue in the first quarter of each year.
Or income before income tax increase by 38.2% growing faster than EBITDAC news, a change in acquisition or not pay bills, which decreased by 12.2 million year over year based on our most recent projections are net income increased by 38.5 million or 33.
0.8% in our diluted net income per share increased by 14 cents for 35% to 54 cents.
Are affected tax rate for the first quarter was 25.7%.
Pair to 23.3% in the first quarter of 2019.
The higher effective tax rate was driven by lower state tax rates in adjustments in the prior year as well as the change in the market valuation of our company owned life insurance related to our deferred compensation plan.
Are weighted average number of shares were substantially flat compared to the prior year and our dividends per share increased to eight and a half since we're 6.3% compared to the first quarter of 2019.
We went over to slide number eight dislike presents are results after removing the chain you didn't estimated acquisition for an hour payables for both years.
We believe this presentation provides a more comparable year on year basis.
During the first quarter, we revise our estimated future financial performance and the corresponding estimated around payables by 11 million for certain acquisitions. We completed in the last three years with 6 million of this adjustment related to the potential impact from Cobin 19.
Leading the change in acquisition Earnouts in both years or income before income taxes group 44.6 million or 29.8% [noise].
Net income on and adjusted basis increased by $29.5 million or 25.7%.
In our adjusted diluted net income per share with 51 sense, increasing 10 cents for 24.4% overall it was a really good quarter [noise].
Over a slide number nine.
So I present for key components of our revenue performance with a quarter or total commissions and fees increase 12.8% or contingent commissions and guaranteed supplemental conditions or G.S.C. increase by 8.9 million has compared to the first quarter of 2019 as a cash receipts during the first call.
Or a 2020 for contingents crude as of December 31st 2019 was higher than anticipated as we qualified for certain contingents that we did not qualify for the past.
Organic revenues, which isolate the net income act net impact of eminent activity increased by 5.6% for the quarter.
Orders slide number 10, our retail segment and deliver total revenue growth, 15% driven by acquisition activity over the past 12 months and organic revenue growth, a 5.7% driven by growth across all lines of business.
In accordance with A.S.C. six or six we lowered our estimates put the revenues, we expect to earn from existing employee benefits and workers compensation policies, resulting in a reduction to revenue of 10 and a half a million dollars.
These estimates were revised after assessing the projected impact of covert 19 on future levels of employment and payrolls at our customers during the remainder of their current policy periods, the adjustment lowered organic growth for retail for the core by almost 300 basis points.
He bedeck margin for the quarter increase by 220 basis points and even deck grew 22.3% due to the phase in a profit from an acquisition, we completed and the third quarter of last year.
Higher contingent commissions and leveraging our expense base with higher organic growth.
The margin expansion was partially offset by higher noncash stuff based compensation cost.
Hi, key costs in the margin flow through on the 10 and a half million our revenue adjustment we've mentioned earlier.
We grew our he'd been deck faster than total revenues, even when excluding the impact of the acquisition record substantially all of its revenue in the first quarter a year.
Our income before income tax margin increased 470 basis points, primarily due to higher even deck margin adjustments to are are not liabilities of 7.1 million year over year, and the lower percentage growth of intercompany interest charges, the adjustments door or not liabilities were primarily driven by that.
Potential impact coven 19 upon the future performance of acquisitions, we completed his last three years.
Would over slide number 11 or national programs segment increase total revenues by 18.8 million or 17.2% and organic revenue by 11.8% due to strong performance from a number of our programs, even <unk> increased 25.2% and are.
Margin increased by 210 basis points due to higher revenues increased contingent commissions and to continue leveraging of our expense base. The margin expansion was partially offset by higher inter company I teach charges.
It was another really good core for our national programs segment growing EBITDAC substantially faster than total revenue.
Income before income taxes increase like $10.3 million for 53.4% expanding 550 basis points due to eat that margin expansion lower intercompany interest expense and decreased estimated or not pay models that were impacted by the potential for lower future perform.
It's a social coven 19.
What were the slide number 12 or wholesale brokerage segment deliver total revenue growth of 10.2% and organic growth of 8.2%.
Total revenues grew faster than organic Dude acquisitions, we completed in the past 12 months, which was partially offset by lower contingent commissions.
EBITDAC grew 8.5% and the margin decreased by 40 basis points due to higher in our company I.T. charges and lower contingent conditions that offset underlined margin expansion.
Income before income taxes group, 13.5% and the margin increased by 70 basis points due to lower amortization and a change in acquisition or not pay animals.
[noise] over to slide number 13.
Total revenues for our services segment declined 10.1% and organic revenue decreased by 13.1%.
Total revenues benefiting from a previous acquisition since organic revenue declined more than anticipated in the first quarter. We anticipate are organic growth for the first half a year could be closer to a negative 10%.
Scooting any potential in back of covert 19.
For the quarter EBITDAC declined by 16.9% in the margin declined by 180 basis points.
Them by lower organic revenues can hire intercompany I teach allergies income before income taxes increase 9.8% and our income before income taxes margined increased by 410 basis points. This increase was driven by lowering our estimated acquisition earn out payables.
[noise] over slide number 14, we want to make some comments regarding capital and liquidity.
Our goal has been and will continue to be disciplined in our approach to allocating our capitol within gold optimizing returns for our shareholders and maintaining a conservative leverage position.
We've mentioned in the past the importance of having low leverage in a balanced debt maturity ladder in order to provide strength during times of economic uncertainty.
We believe having the lowest leverage of the major public or P. back insurance brokers provides us with strong financial security and flexibility.
Having a very strong balance sheet and liquidity position.
Will allow us to manage through the uncertainties of this pandemic, but also allows us to continue to invest.
At the end of March we had over $385 million of cash in cash equivalents and $700 million of available capacity on a revolver, we anticipate borrowing approximately 250 million under a revolving line of credit before may 1st.
A portion of these proceeds are expected to be used in connection with a payment for our previously announced acquisition of low protector insurance services that we anticipate will close in early may the remainder of this borrowing will be used to further strengthen our financial position in order to mitigate the potential effects of the Kobe.
In 19 pandemic that May result from delays and payments from customers or carriers.
Moving over a slide number 15, one of the metrics. We are proud of his our ability to convert revenues into free cash flow.
Consistently convert 22% to 26% of our revenues into available capital due to our strong margins and rigorous management of working capital.
Our industry, leading free cash flow conversion ratio is about 100% higher than the average or the other public brokers.
That means we generate about the same amount of cash as compared to accompany twice or size.
That means we have a lot of capital to invest in our business, depending upon the level of M. and activity, we generate significant capital insect in excess of our committed expenditures that include dividends cap accent get service. We believe we are they really strong position right now.
As a reminder, Q1 normally has a lower free cash flow conversion ratio due to S.C. six or six as we are crew revenue primarily related to employee benefits policies with associated cash collected throughout the year. We also pay the majority our annual performance bonuses, earning the prior year in the <unk>.
First quarter.
Are free cash flow conversion ratio was about 2.5% for the first quarter of 2020 compared with a negative 2.9% for the first quarter 2019.
One thing that may affect free casual conversion would be customers delaying payments either offered by carriers are mandated by states. We believe this scenario wouldn't delay our cash receipts and this is why we anticipate drawing an additional capital on a revolver. Later this month with that let me turn it back over to Pal for closing comments.
Thing Sandy Greg report, let's talk about how we're thinking about the outlook for the coming quarters. We expect the economy unemployed men are going to decline for at least the next two quarters and then potentially increased slightly into the fourth quarter. This assumption is based on.
From any economist within our banking partners that or projecting a 15% to 20% unemployment rate in the second quarter keep in mind that per that cares act self employed and gig workers are now eligible to file for unemployment.
These individuals are generally not covered by sponsored plans.
They will be more than likely not impacting our employee benefits or workers compensation lines of business also keep in mind there are many employees being furloughed.
That are filing for unemployment, but are still benefit eligible.
These are good examples of the complexities when comparing current unemployment figures to prior years <unk> estimating the potential impact on our business.
These same economists are projecting GDP to declined 20% to 30% and the second quarter with growth starting to rebounded a third quarter, but they're not expecting a recovery until mid to late 2021.
Based on these assumptions, we believe the biggest impact on our financial performance will be in the third quarter.
But anticipate or organic growth could be negative in the second quarter.
Due to the fact that higher unemployment will take about 60 days before we see it.
Impact our numbers, we believe the largest impact will be to our employee benefits and workers compensation lines of coverage.
Primarily driven by employment and payrolls.
In addition, we expect our overall P.N.C. business to be impacted when companies reduce their exposure units. Another dynamic of the work from home mandate is that we're expecting our new business to slow but retention to increase.
We do not know fees will offset each other the unknown right now how deep and for how long the impact of code will laugh, we hope to the cares back and he action by the federal starts to take effect in the coming month for two.
Regarding race, we think most rates will increase slightly in a second quarter, but it's unknown well what happened to rates and the second half of the year until more is known about the impact of covert 19.
Taking all these factors into consideration our best estimate.
Is that the full year organic growth could be slightly positive or down low to mid single digits. This range is really unknown as we've made assumptions based on limited actual data.
We'll have better view over the coming quarter adds to the depth and duration.
Here's what we do know we're solutions provider. Therefore will continue to stay focused on providing risk management solutions for our customers and prospects and developing new and creative ways of generating new business remotely.
We continue to talk with acquisition candidate and make clothes, a few deals in a second quarter.
For the next few months at least we expect there will be a slowdown in him in a activity duty uncertainty around the future performance of businesses and what this might mean for sellers valuations.
We can see <unk> I I'm, sorry, I mentioned earlier that we are continuing to innovate and serve our customers. During these uncertain times out of necessity comes great creativity, we always try a brown and brown to deliver as many new solutions as possible for the benefits of our customers are teammates.
Are carrier partners and our shareholders lastly, as I stay as I started with comments about our teammates and their families I want to close with the same focus we're a company dedicated hardworking teammates focused on serving our customers. Therefore, it's our goal to all.
Always ensure they are safe and healthy when we do this it helps them to be great spouses parents and teammates that focus on delivering innovative risk management solutions with that let me turn it back over to Lisa for the Q. and I.
Thank you.
Ask the question please signal by pressing star one on your telephone keypad.
Using a speaker phone P. make sure you amuse function is turned off to allow your signal to reach our equipment.
Again, Please press star one to ask a question.
Pause for a moment to allow everyone.
We've been now take the first question.
Please go ahead, it's some quake P. said, some lame and change your line.
Good morning, so thank you for the guidance regarding the outlook.
We appreciate that and.
Wondering if you could build upon that by commenting on your exposures to industries like the restaurant industry, the energy industry et cetera.
And then secondly.
I know some of your parents made comments about <unk> layoff by jazz and I'm. Just curious if you anticipate possibility might get organic.
<unk>, how you intend to manage that spent states during this crisis.
Okay. So good morning, Greg a couple things first of all as you know we have a pretty diversified book of business that does not mean that we don't have a lot of a lot of things, but it's just a broad spectrum.
Across the the United States. So I would tell you there are industries as you know.
That are dramatically affected things like gaming hospitality restaurants movie theater sporting events.
Yeah, you said oil and gas you know anything in the theme park gyms certain construction.
Transportation and and quite honestly.
It's very difficult right now to determine the impact on each of those industries, we can make assumptions and that would be our best estimate at the present time. So for example, you might ask we do a lot of business in the autumn.
<unk> space and automobile could involve dealerships new boat and R.V., we do F. and I bet that we do a lot of things so depending on where are you are in the country.
That there has been impacted widely so for example, and <unk> and the northeast it is hit much harder than it is in the mountains States as an example, and so.
It's really I think too early to say, Greg, but from an industry standpoint, there is no one industry that we have such enormous exposure to that we need to call. It out like I said I just use the auto industry because of the unique one.
And you read a lot about it but we have lots of governmental entities and we have lots of non profits and we have lots of construction and we have.
So that's the first thing the second thing is relative to.
The 64000 dollar question, which everybody. It I expect it would ask about and let's talk about that for just a moment.
Number one at Brown Brown, we have teammates we don't have employees.
And we are part of one big high performing we call athletic team.
And each team at the local level is run by a leadership group, which evaluates how to invest in that business on a daily monthly or quarterly yearly basis.
So we are defined as an organization.
And the locally.
Our customers are capabilities and our carrier relationships.
So when I say that it is not our intent.
To have to have p. make get off the team during this period of time that.
That would be the last thing that we would be interested in I will tell you. This those assessments if that would happen would occur at a very local level not a broad you know dictate we would not be dictating from above it would be a local level decision.
On on how to best serve our customers. So we are very sensitive around that topic right now as we always are because we got a bunch of great teammates and we believe that as this changes and whatever that.
Means because your gas as good as ours.
Is we will be a stronger organization coming out the other side.
<unk>.
<unk> appreciate it.
Yeah <unk> in the comments Mmm spoke about.
Press release about.
Yes.
<unk> sheets for customers might be delayed.
And you can you speak to.
Seen any.
Evidence of that today, and and then perhaps.
That build upon.
No new comments around the acquisition and how you are busting the business at this point going forward.
Okay. So number one remember it's absolutely happening because there are states that are mandating it Greg.
So there are state says you know where they are mandating Ah 60 day premium holiday or something to that effect. That's number one number two we have on a limited basis certain customers, particularly smaller customers, but not exclusively other request.
Thing rate relief.
Doesn't exposure units.
Going down in some instances and some carriers.
Are allowing us to adjust exposure unit down in mid term in anticipation of the impact on their overall business now.
Ask the question about acquisitions, and how we think about our business, let's talk about the reality of life reality of life is number one we announced alone protector, which we think is a very good business and we were waiting for a D.O.J. approval and we anticipate that closing some time.
And the second quarter and we closed at you know several other transactions in Q1, and so we're an organization.
There's always talking to people.
Okay and at the end of the day businesses are run by talented people.
And so they can have the best revenue stream or earnings stream that you could come up with but if it if there's not a cultural fit then it it doesn't work and we don't want to do that and so the idea of you know.
Consummating a transaction based on a video call, where we'd never met the people that I didn't I just have a very very very hard times seeing that.
But having said that we've been calling lots of people for a long long periods of time. So the reason Andy talked about and I and I talked about this a lot is the recent anti talked about our liquidity is I think that's really darn important.
And for those of you that were on the call 10 years ago before the slow down 10 years ago. Some people use to get a little they used to criticize up for being conservative.
And then we worked our way through that period of time and now we can take should be conservative and I think we're in a good position, where we can invest in our business whenever we want that does not mean, we're trying to go out and buy a bunch of businesses during the downturn. It means that we have the flexibility to invest when we want.
Okay and the final final question would be in the previous courtrooms you know you.
<unk>.
Perspective on what what happened to profit sharing guaranteed suppose supplemental commissions.
Of course, the here and I'm wondering if you could use this opportunity based on you know really short outlook for about C. or how you think that my ripple through.
Those two lines within Europe.
Okay again drag and this is purely a gas.
And so I'm going to take to to wax that that one number one if you look at it you could say Oh, you may have fewer losses, because of automobiles and things like that not on the road for a period of time, So you could say.
Maybe it goes up slightly but in some of these as you know their growth components to them. So you have to have you got to grow the business and have a certain performing that's number one number two I think many of our large carrier partners and and other carriers.
Are looking at.
Ways to.
[noise] help their distribution partners and what I mean by that is is you know again, how we run our business and how it's smaller independent agency runs their business might be slightly different from a cash flow standpoint, and some of that other stuff and so.
I do believe that the carriers will be looking closely at how can they.
Take in.
Take into account these extraordinary circumstances.
And mitigate the potential negative side of that meaning like if there's a growth component.
They decide to waive that for the year I don't know I haven't heard of anybody doing that yet I'm just speculating. So it's very hard to tell Greg, but if if you. If you. If you pressed me I would basically say I think it would be down slightly.
Yeah, Hey, you're more integrated Andy here is because we a crew for these on a go forward faces now with a a c. six so six it puts another level of complexity and.
<unk> in our first quarter, we picked up additional contingents based on you know those that we didn't qualify for last year would it at least we would not anticipate as of right now that going forward hopefully that will occur, but that would probably not be our expectation at this stage.
We're going to need to really watch this closely over the next quarter or two and just see what trends look like a feedback we're getting from carriers.
The last comment is spot on the other side of it but if premium is down form it impacts their profitability, which impacts the contingents. So there's a lot of factors were going to need to come monitor on the way through.
Got it in your A.S.C. six foot six adjustments in your reference stuff fronts, none of that related to the profit sharing guaranteed supplemental commission component.
Or did something about well through there.
And was very very small.
I didn't have.
No no basis you.
Oh.
Thank you even know take the next question from my design ski from quite a Swiss piece go ahead.
Good morning, gentlemen.
First question morning on the revenue recognition just wanted to understand.
Hi, there.
Packed it's quarter impacted margins materially.
Ah well done or would say.
The cheerily on it a Mike is you know what we disclosed as we made the tenant half a million dollar revenue adjustment and it had a a profit impact of about $5.8 million and as you've seen in the past normally the adjustments that we make around A.S.C. six so six and normally.
Move with higher margins than the overall business, so that's pretty consistent.
And and how it works.
Okay. So just to clarify gonna did did <unk>, who helped the margin by it but five to six nine.
Negatively impacted the margin.
If what it does it basically it flowed out at about 58% margin, we don't have a 50% either deck margin.
Okay got it means and yep shall we expect that to persist potentially two q. and three q. given your commentary.
No, let's see if we can do a an example here to try to explain how this worked because what we had to do is we had to look at all.
Current policies that are in effect through or enforce through March 31st and do a look back on all those and of the adjustment of 10, and a half million about seven and a half million or so relates to policies that we found in the first quarter.
And then the residual relates to policies that we'd down the back in 2019, Here's how you want to think about what's what's used worker compensation. So if we were to bind a policy and the estimated payrolls for that policy said that we were going to earn $100 over the next 12 months.
What would happen is now at this stage, if we think that the payrolls are going to decrease and we're now going to earn $80. What we need to do is reverse the $20 that we recognize when we found that policy. So in this example, we did that in January we then turn around and backed up to $20.
March Okay. So that should represent all outstanding policies, what it doesn't account for Mike in the in the peace that we don't know in the commentary we had is.
What exactly happens on renewal business over the coming quarters.
And the impact to the organic that piece, we just don't know right now.
I understood it and helpful. My last question.
Regarding potential business interruption claim seen a lot of chatter out there I'm not speaking to the regulatory from something that unless you happen to be.
Maybe not a lot of control I'm curious kind of what their clients.
From your clients from the carriers.
Terms of.
Or go to be do you think there will be some business interruption claims paid I put your clients are most of them.
That.
Okay markets Powell, a couple things I'd I'd like to first say that as you know.
Business interruption.
Typically excluded for generally excluded due to pandemic.
And then on top of that there is a provision for a physical damage loss.
So you got to keep that in the back your mind. So I would tell you that in a very small number of policies out there there are some sub limits.
But I mean, very small as a percentage less than 1% if I had to guess.
But having said that.
Again, we you would have to look at every single policy for every single customer, but if you're talking about generally speaking in the industry.
Of which are our customers represent a good wide range of what's written in the industry as I said generally speaking.
Business interruption is has a pandemic exclusion and it also necessitates.
The goal damage loss.
That's that's number one.
That's it.
Thank you very much.
Hey, Hey, Mike I want to just come back clarify one thing on your question just make sure that we've covered it with everybody.
Cause you to ask about would there be a go forward impact.
The adjustment that we made on the 10 and a half again, that's that's our best estimate.
Based upon what we think may happen with unemployment and payroll.
For those out same policies if for some reason that turns out to be different than what we anticipate could we have another adjustment in the second or third quarter incremental yes, we could we don't know right now can we we made our best estimate.
Stage.
Understood. Thank you okay. Thank you.
Thank you we will now take the next question from N.D. screens on from last five okay.
Hi.
My question.
On the corner.
What's your question.
Oh Oh.
Hmm.
Right.
Right.
How did that.
[noise] I get morning to lease yeah. There a couple of things we mentioned this during our commentary.
On the incremental the higher I.T. cost down on the divisions that was really a just a shift from corporate down to to the divisions.
Versus how we reported at last year. So it was a portion of it and then also during the first quarter, we didn't make some adjustments to our ship based upon estimated pay out.
For those the the three grants that are outstanding.
So those those were the primary drivers in a in the corporate that made up the other 6 million.
As it relates to to Sip again, we we monitor that on a regular basis as as you know and we'll make adjustments up and down over the coming quarters based upon what we think the the payouts will be both on organic and the earnings per share.
Okay, well and then huh.
<unk>.
<unk>.
Hmm.
Well no Klein thinking.
That's nice <unk> 19 or.
Okay.
Well what happened.
Yeah at least that was so a few different dynamics going on to that was almost primarily all driven by new business.
And you know we solve that they had a great 2000 and and 18.
They had a good in 19, we had lost a couple of customers last year through emanate, but we had picked them up or covered most of that through new business. They're continuing that same trend the dynamic right now in in that space and you see a number of mandates regarding <unk> inability to foreclose on properties.
So we're not seeing a lot of incremental placements right now, but the thing that we like about that space is that it gives us a nice you know <unk> around the the organic growth because as the economy does go down those businesses take off which is really good.
Okay. That's helpful. And then you can't be outlawed.
I understand that there's a lot of uncertainty in terms that yeah. He p. unemployment projection <unk> well how long thing.
But I.
Think about this kind of no no it's like <unk>.
<unk>.
Here, how do you see the difference <unk> <unk> <unk>, but I think one food different scenarios. It seemed like Oh man, you know I kinda, so I'm pretty well nah, no karaoke kind of high level what.
Then you know what could perform better what and what might be more pressure you Don.
<unk>.
So we said Powell and the answer is as you know historically, we've not giving guidance and we're not going to give guidance on the divisions. This time, we've got our best to give you an overall view based upon our best guess demand.
Today.
And if if and when we have better information, we wouldn't be able to give you a better answer but at the present time. We've we've we've said what we're going to say on that.
Yeah. The the only segment that we had as additional color on this quarter or at least was the services segment, just because of what we're seeing on underline claims activity.
Okay.
<unk> about two thirds.
Right.
Uh-huh.
Right.
That kind of ballpark something <unk>.
I think that that's correct ways here, here's the thing that I I think is very important for everybody to consider on this telephone call.
When the and the 2008 through 2011.
Period of time or exposure units, we're going down and rates were going down.
A day you have a different dynamic you have exposure units going down and race going up.
Okay and so there is there a couple things you got to think about there is one that dynamic when people are strapped for cash.
And in the event then you are trying to it. If you were ended up bunker mentality, which is I just want to fight another day I got to get through this then do you buy a and we haven't seen it yet, but I'm, saying do you buy a slightly lower umbrella.
Do you buy a lower limit on your earthquake cover do you buy less of a wind limit what do you do out of necessity.
To enable you to get to that another day.
So, let's let's not forget that that's really important and I I'm not aware of any way for you or anybody else on this call to model that.
Because we don't know.
We're just telling you our sense of it and you know in talking to customers ourselves and talking with people in our organization you know that's a big thing.
For me I want to know how our customers are doing financially and how can we help them.
You know, we want them to be an ongoing concern.
Yeah at least this is yeah, we talked about this in our last couple of calls that you know you.
Can't always make a direct correlation that as an example, if property rates are up 5% that as a result organic growth is about 5% because of how companies are thinking about deductibles and again, 5% might not be the the trigger mark but if for some reason you know you lay 10 15 or 20 on somebody because of.
There are lost experience they might change their deductibles and so those are some of the dynamics that kind of play into the actual revenues and then the weightings.
Okay that same.
Color.
Thankfully.
Thank you.
Take the next question from my Kids from some trust please.
Yeah, I think you'd be more in detail indeed, if organic <unk>.
Taking the mid point, you know flap or down just a little bit.
Due to eat there probably being.
Yeah.
Hi morning, Mark I think that's probably still one of the the unknowns for us right now.
You've seen in the past, there's not always a direct correlation between our organic growth and our margins we've had quarters when the two of them move in tandem we'd headquarters where it moves back and forth. You know, we we as you know we try to.
Managed to business and lead to business on a long term basis, not a quarter over a quarter.
Is there a potential for some interim March impact potentially.
How quickly this came at at everybody through all that but we we.
We should try to really stay on top of all this every day. It's why we have the margins that we have in our business.
But you know wouldn't be surprised if there are some downward pressure on a on the margins on the full year as it relates to the quarters Boy, we don't have a good view at this stage just because we're we're struggling to get her arms around the revenues in all honesty, there's minimal actual data today for us to face any or assumption.
Oh, and that's what our struggle is.
Oh, that'd be a distinction kind of smaller accounts persons middle sized or large accounts, how much would be a different color you seeing in their behavior.
Well markets Powell I would tell you that you know we write a lot of all it and so you know a lot of our small.
Ah customers.
A number of them don't have a financial resources to whether you know six week working from home.
Ah or you know as as I.
Say when I go home and.
See the ingenuity that it's come out in the transition or transformation, particularly some small businesses to an alternative.
<unk> every model of value whatever it is that there whether it's takeout service at a restaurant to something else I think that there are people that are just getting by in some instances more so in a small businesses or if if they.
Received some sort of financial assistance or it's forthcoming you know, they're just trying to get to where we crank back up again.
Many at a medium and larger businesses barring those that are highly leveraged so.
There are a lot of those two but they are.
<unk> better equipped.
A a common response a common response would be when we went into this into the piece of it.
You know week, we can make it for a couple months.
We got to get this thing crank back up you know the first part of the summer middle of the summer.
And because they had managed their their balance sheet and our cast position you know pretty conservatively.
So it's kinda all over the board.
<unk>.
Thank you.
Okay. The next question for me are in can are from Goldman Sachs.
Hi, Good morning, everybody first question.
Margins effect and you know.
And but scenarios, where again go there so.
Yeah.
And you're not really looking.
I'd go here.
The other night.
Yeah.
Well.
Maybe in the broader sense.
<unk> or their remote.
<unk>.
As you know we've got a fair amount of levers inside the organization on on variable cost and those are just there's going to float up and down a accordingly.
From anything that we pay on the Commission's front.
Anything we can look at at the right time on compensation, we will we will do but again, we'll figure out how to step through that at the at the right time and it is we send our commentary that's going to really come down to the leaders in those individual businesses because.
How each of our businesses navigate through this uncertainty is going to be different and we're gonna really rely upon our leaders locally to make the right calls inside of their they do an excellent excellent job of leading their businesses today. They have in the past we've got all the confidence that they will continue to do that in the future.
In order to to balance off the needs with our customers and carrier partners with all of our teammates.
Okay.
And then.
Hold back at the global financial crisis I think.
Indiana growth.
For for a walk a long period of time.
[noise] recovery period took a long.
Great on page bin Laden.
Hmm.
Talk about what has changed.
<unk>.
Maybe you can go.
The average.
<unk>.
Sure.
The.
But the crisis.
Yeah yarn, if Powell number one I'd I'd caution you or anybody else to try to draw parallels between this event and any other subsequent events that occurred any event that occurred historically because that is.
Surely up a gas I just want to make sure that that's that.
Up fraud number two if you think about our business just had a very high level. Just just think about this for just a moment.
We have had.
Arrowhead Beach or Carlson right right. We've had Hayes, we've had all kinds of other really high quality organizations that spanned the entire size spectrum and a lot of that had been upper middle market and even.
And to some large account businesses.
Having said that I think another important distinction is if we're just talking about retail for a moment the reliance upon the state of Florida as a percentage of revenue then as it is today. So if you overall as a company it's about 20% of our overall revenue eliminate.
From Florida, but that's misleading because let's say almost 6% of that revenue isn't Nash in in a program, but outside of Florida for the most part so all of a sudden you you have more diversified you know of Andy by say portfolio up company.
I actually would tell you that.
We're not economists and by the way we are optimists by nature. We are simple sales people that live by the seat and we understand our numbers then we reinvest it for the long term and so what I would say is this is not a fee.
But whether it to you or an l. or whatever that is we don't know.
But what we do know is in light of all of that.
I want everybody to understand that we're really pleased with the first quarter.
And that.
You know our three biggest division had great quarters, and we are riding a lot of new business.
And you know we are going to be there for our customers and so I actually think it's <unk> I would be very cautious of trying to draw a parallel between then and now because there are no similarities in my opinion that was a <unk> that was a lot.
Long.
Downward slide over let's say 16 to 18 months and a very slow crawl out this was an elevator drop down.
Which included financial panic for many people and we so you had eight demand drop.
You know for services and consumable goods and you have the financial institutions and much stronger point of view.
So I wish we could give you a more on that yarn, because you know it would help us to but I'm, just saying I think it's different.
And you know, it's 68% of the G.D.P. as a customer.
Then and that's going to impact demand than how to the customer feel.
If they're unemployed getting an unemployment check or their furloughed or what and we don't know they don't feel good I know that.
The year and you know the other and just make sure keeping my probably or call. This you know the whole citizens effect that we went through during that time period. So you've got that dynamic go you know 2007, exactly so you've got that impacts that's what drove down but if you look at you know commercial lines racing probably again have went back and.
<unk> this but you've got 06789.
Nine and 10.
During that time period, all commercial lines were also down so those are some of the dynamics yeah constructions significant impact. That's why we think this feels like a very very different sent to us maybe in some aspects. It feels like kind of taking that Oh wait through 10 period income packing it down into a lot of three or four weeks.
Yeah.
That's how it feels right now that's kind of some of the unknowns Childress.
I I appreciate the thing and it's exactly try now.
My back in.
I think.
I mean, maybe one final one huh.
Some people probably.
It's it's kinda same I mean, it like I said I I don't want you to get.
To caught up in.
If you're going to go up more so or down I think the carriers, obviously are very sensitive around limits that they put up and a certain lines of coverage, where they think there might be some potential exposure and I'm not talking about A.B.
Hi claim I'm, just talking about other lines of coverage that might have an exposure and how they under right that you know professional liability <unk> et cetera.
Okay. Thank you very much.
<unk>.
<unk>.
No take the next question from Ron <unk>.
<unk>. Please go ahead.
Hi, it'd be like Oh, Thanks, a lot.
We we always so.
Well being so we sure hope that does not have you were on those beach pictures that'd be so couple weeks ago.
We weren't.
Great.
<unk>.
I would question about.
<unk>.
Drum Corps I'm curious I know, it's very very <unk>.
I'm curious, what's your machine useful orange flow of activity sort of traditional sound business.
Quoting activity.
Pushing more business to that channel.
Or not visible.
Mmm change thanks, well, let's talk about just you know q. want again and and the answer is I think it's similar to the prior.
Quarters.
But but I wouldn't tell you that.
There continues to be a lot of activity.
So I think the activities same you know it's like you for taking one but there's just a lot of activity and wholesale.
And so you know remember depending on the.
The ancient that we're doing business with some of those agents.
Have not been able to transition to a work from home environment as easily as let's say, we did or maybe someone else.
Finger pointing despite dining still quite activity.
<unk>.
Yeah, Yeah, that's it.
That's coming back to catch how and why you think about it.
Okay, alright, thanks, Yeah.
Thank you are on.
I can't even now take the next question May or she has some APW piece go ahead.
Oh, great thing going on any.
Beat and a half million dollar yeah.
Maybe what's me.
Denominator of like annual revenues or what sort of employment or payroll decreases contemplated in that you know.
Yeah. Good morning America, So maybe a couple of ways to to think about that is.
We looked at an outstanding policies. So thing it doesn't it's not that it's applying to all policies for an entire year.
And the reason why it's got a more waiting in the first part of the year is any policies that we place last year. They would have upwards to 11 months that they've already had the previous exposure you is kind of underpinned need them.
And inside of there what we tried to do it you know when our commentary that we mentioned as we leveraged a lot off of what all the economist or are saying, either our banking partners or other information that we could get.
And utilize that to potentially in you know at least project <unk> unemployed. It could look like here's the variable is we don't know what Furloughing will do.
So that's that's an unknown.
The data that is out there is.
About three weeks ago.
And so that that's a piece we don't know exactly what Cobra effect is going to do on on the employee benefits business. So that's also kind of a an unknown and then this question about how many of those previous.
And.
Previous individuals that are now able to file for unemployment claims I independent contractors are getting workers get it's it's going to inflate the number that is reported.
But we'll have more than likely almost no impact on our employee benefits are at work comp businesses.
So those are kind of the dynamics that we were juggling around in order to come up with an estimate.
Okay understood that's available done yeah.
That if you <unk> you correct, then historical impact opinion on it.
So.
So let's see here is on.
As it relates to work comp and employee benefits is.
Yes that would be true in your statement, if if everything worked out perfectly which by the way, it's not going to work out perfectly, but yes that would be the case the item that we don't know about right now is for other policies that we place.
If it starts to become evident that there are the likelihood for significant return premiums.
In out periods, yes, we were going to need to take a look at those.
Absolutely, but again, we have go data.
This stage to give us any indication.
That it's there.
So we need to wash out one again wish we could be more specific man. There's so many unknowns in this current environment at this stage.
No I, just said and definitely potato the help one last question if I can.
<unk> no.
So.
You know suck the year that they're did something clean or covered or something you could they could do the Brenda brown sort of all these procedures, maybe you know cover against clean.
Some people that.
How about this one.
Well remember as I said before generally speaking.
There is a pandemic exclusion in business interruption.
And in usually mandate a physical damage loss.
And so we are talking to our customers obviously.
Ah relative to how it is written in their policies and in instances that there needs to be some clarification, we maybe obviously talking with our carrier partners.
On that and in some instances there I've actually been claims filed so it it it depends very much so on the customer and the policy.
Okay.
[noise] can we have to follow up questions in the queue.
Okay.
And these clean speech.
<unk>.
Oh.
[noise] Oh.
Yeah.
[noise] [noise] [noise] okay.
[noise]. After if you are breaking up the least fair. So if I plan to your question exactly you may have to rephrase, but I.
What.
Sensual positive on reduction in T.N.E. expense and the organization and the answer is yes, we do believe there could be a slight benefit in Q2 and Q3 relative to travel obviously, we are encouraging our teammates to talk.
With our clients best would be on video conference just like all the other millions of people that are out there trying to do that or on the telephone and then as and when states reopen and we believe that it would be a safer teammates to go out and see our customers we would.
You know they'll be traveling there I do think it'll be a cautious.
Open from our standpoint, and what I mean by that is I think it's going to be a lot of driving and cars as opposed to jumping on planes right away.
But but yes, we do believe there could be as a slide a positive impacting Q2 and Q3.
<unk>, how much time mm mm.
<unk>.
No at least we haven't disclose that in the past.
Okay.
Thank you again.
<unk>.
<unk> have a good day.
[noise]. Thank you the next calling us from my cues from some trust piece go ahead.
Yeah.
We're selling a lot of <unk>.
On April new business.
Tend to do anybody broke compared to what it might have been.
You know January February sort of run right.
Yeah. So let me remember this is a purely speculative anecdotal statement because now we're not getting for looking information and I would tell you that remember we work you know 60, 8000, and 20 150 days out.
So remember you know we had inventory ended up height. There was April May June you know things that we're working on so.
I would tell you.
Think it's it's an important distinction I think the when you start to see the potential impact on new business.
And the reduction in exposure units for our existing customer base is may.
So I want you to think about that statement for just a moment if somebody has gotten through April and we are working with them and they say we think you know, let's say their annual revenues are $12 million a year a million dollars a month and let's say for three months that their revenues were.
Right next to zero or you know, 10% of the regular and they adjust that down then that would flow through it may and and and June and July and everything and that's why we believe cute three we'll have a potential bigger down draft.
Because you'll have three full month of exposure changes versus potentially two months.
Yeah, marking them at one point <unk>.
Hey, Mark just you know one other p. on that one is.
The other dynamic is carriers are probably being more receptive to mid term exposure unit adjustments right now in potentially what they wouldn't normally that they would say, we'll we'll catch it on on on it. So that's just another dynamic that we'll probably play out during this time period it depends on the carrier.
Hands on how they but you know we would rather make the adjustments.
Best indicate what the exposure units are now.
And so with it must.
Did that point, how can you think you're not how good your information to plainly New information you go on how much of the of the leg better than this.
So.
You mean, we bought a business owners or.
It's another activities that may not have got around to adjusting are thinking about the insurance impacts do you think it's you so natural legere how timely.
Mm.
As I said, it's going to depend on the customer, but I I want to make sure that you know that <unk> pretty much every business owners thought about insurance. So that's number one and number two they've also thought about cash flow. So I call. It a going concern.
Earn theory, which is you know if you think about it if if the carrier takes the position to just keep paying in the normal payments and we'll catch you at the audit.
I would encourage I would say that not that good because the care. The client is thinking I don't know if I'm going to be around in some instances when he on it comes around so I have to manage my cash flow to day and next week and next month in next quarter to get there so I.
I believe there is a slight delay mark <unk> not that much.
So to the extent that are carrier partners will allow us to make those adjustments mid term, we are encouraging Matt and working with our customers to do that to help them get through this period of time.
Very helpful.
Yep.
Alright, Haley sites think we're going to probably go ahead, because we're a about an hour in a in 20 minutes. If there's anybody else has other phone calls they can give us a a a ring who hadn't wrap up the call today Pals got some closing comments.
Thank you Andy as we conclude I just want to remind everybody have a couple key themes.
We had a really good quarter.
And although some people may put that to the side in light of the the recent events I want to make sure that everybody understands that we don't.
And we're really proud of our teammates and how they had delivered for our customers time and time again, and what I would call difficult environments number one.
To and we don't take this lightly we have a strong balance sheet and we're proud of it.
We deliver the highest cash conversion among our publicly traded peers.
And we have access to a billion dollars plus and liquidity.
So we think about things long term.
And so good it'd be a little bit bumping the next quarter to and beyond yeah sure.
Ah, but I'll tell you one thing we we got our hands on the wheel and were navigating through this situation and trying to work to deliver for our customers business solutions. So they can live to carry on their businesses again.
So with that I wish each of you the best of health and we look forward to talking to you again next quarter Good day and good luck.
<unk> today's call. Thank you for your participation you may know disconnect.
[laughter].