Brown & Brown Earnings Call Nuggets: Arrowhead and Organic Growth

Brown & Brown, Inc. (NYSE:BRO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Arrowhead

Gregory Locraft – Morgan Stanley: Nice growth in the quarter, congrats. I just wanted to ask on Arrowhead. You mentioned it’s included after Jan 9th. Could you just refresh us, what has that growth been since you joined and also where is it going to come through on your reported financials or where is it today just which segments?

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J. Powell Brown – President and CEO: Well, Greg, first of all the Arrowhead is primarily in the National Program section with exception of ACM, which is their claims management and ACM has roughly $25 million in total revenues and the rest of it that will be in Services.

Cory Walker – SVP, Treasurer and CFO: That’ll be in services.

Gregory Locraft – Morgan Stanley: That’s in services, okay.

Cory Walker – SVP, Treasurer and CFO: ACM is in services, right. So, if you look at the entire year, Arrowhead’s internal growth was roughly 9% for the whole year, when you exclude the automobile aftermarket. And when you include that the automobile aftermarket added about $2.5 million in the fourth quarter. So, when you include that, it’s about 13.4 for the year, 9% without it.

Gregory Locraft – Morgan Stanley: That auto aftermarket also going to come through in the organic growth beginning June 10, I guess forward?

Cory Walker – SVP, Treasurer and CFO: January 10.

Gregory Locraft – Morgan Stanley: I am sorry, January 10, yes. Second is just, what are you guys going to do with the broker incentive program this year, are you going to continue it or you are going to – was it a one timer, how do you think about that cost?

J. Powell Brown – President and CEO: If you remember, Greg, I said that that was a one-time only incentive program. We obviously thought it was very beneficial to the team and I personally reserve the right to put in force at any time in the future and incentive plan or something else to drive the desired results, which is grow our business organically and profitably. That’s a long way of saying; no, we are not doing the same incentive plan this year.

Cory Walker – SVP, Treasurer and CFO: For the whole year of the year that entire program amounted to right at $7 million.

Gregory Locraft – Morgan Stanley: So, that $7 million that does not recur this year, okay, on the cost side, great. Then last from me, it just you were giving us a lot of details you went through, but you were sort of calling out the flood business, I wrote down as 8 days, they contributed over a $1 million, and it’s going to continue in the first quarter as you said so, we are going to pick up another – I mean that’s another call it mid-teens millions of dollars that’s coming out us from that business in the first quarter?

J. Powell Brown – President and CEO: What I would say is what we believe is that will be $8 million, roughly $8 million or more in the first quarter. That’s what we are anticipating, but obviously we’re not there yet.

Organic Growth

Sarah Dewitt – Barclays Capital: First, on the organic growth, what’s changed in the last three months that drove organic growth from 1% last quarter to 5% this quarter? Should we think about that 5% level as sustainable going forward?

J. Powell Brown – President and CEO: Well, remember, we don’t give, Sarah, as you know, we don’t give internal growth estimates. But the internal growth in retail is highly dependent on three things that we talked about. One, the economy in the middle market and it also depends on what’s happening in Washington and will continue to happen in Washington, and third new business sales. We feel good about our new business sales and we’re continuing to push and push and push some of those things are little bit outside of our control and once again we say that hope and prayer is not a good business strategy, but we’re quick to identify that the economy in the middle market and what goes on in Washington will impact our internal growth.

Sarah Dewitt – Barclays Capital: Maybe you can just give us a sense of within that 5% organic and how much was pricing versus exposure versus new to loss business?

J. Powell Brown – President and CEO: It depends on where you are in the country as I sort of summarize in terms of rates and exposures. I would say as a general rule, as a general rule we’ve said all along that exposures have the biggest impact on our business overall. Having said that, when we are in areas where there is rate pressure, that can help us, but we have said over the past that two-thirds the three quarter of the negative down drop was exposure units and the updraft I would say would be similar, so it depends on the office and the classes of business that they are writing. You know as I said Southeast Florida habitational is one thing versus construction in Phoenix, because of exposure units. But that’s kind of how we see it.

Sarah Dewitt – Barclays Capital: So generally two-thirds of the organic growth this quarter was from exposure of growth, but…

J. Powell Brown – President and CEO: That’s what we typically say. We don’t – once again, I am just kind of trying to help you through the last five years and what we’ve said all alone, one, that that was what we saw in the down draft. I think that in the updraft, I think the exposure unit has helped more to increase and we’re writing a lot of new business than rate increases, although rate increases are helpful. So, if I were hedging, which I’m going to hedge on this, I would say it’s slightly more impact on the exposure units than the rates.

Sarah Dewitt – Barclays Capital: Then just lastly on the margins, I’m surprised that 5% organic growth wasn’t enough to expand margins this quarter even when you exclude the acquisition payable. So, what’s driving that and if you were to continue to see 5% organic growth, should we expect some margin expansion or no?

Cory Walker – SVP, Treasurer and CFO: On the margin growth, you really have to kind of get into the – more into the detail by segment and if you look at and we talked little bit about this in the third quarter where we kind of show the differential on the revenues and then the EBITDA impact and when you get to 10-K, I mean you’ll may be able to see some of this difference. But on the retail side when you squeeze out the EBITDA impact, basically we believe that there was about $1.4 million increase in the EBITDA dollars when you take out the differentials. Where the compression occurred is primarily in the program division and the service division, because overall it was relatively flat, but we’ve always said the margin leverage is going to show itself fairly strongly which I think it is in the retail division.