· Estimated Impact of New Standard on Revenue Recognition:
· As Co. has been disclosing its quarterly filings, effective Jan. 1 of this year, (inaudible) instituted several new rules that will impact recognition of revenue and expenses throughout 2018 and beyond.
· Biggest changes related to recognizing revenue for contingent commissions and commissions on employee benefits and workers compensation.
· Contingent commissions:
· Will now be estimated and recognized (inaudible) during the year.
· Co. will then true-up the accruals in the following year when cash is received.
· Co.’s previous practice was to recognize contingent commissions when cash was received.
· Employees benefits and workers compensation:
· Co. will now recognize a large portion of this revenue upon binding of coverage rather than its previous practice of recognizing revenue when built.
· For full-year, estimates the effect on revenue to be minimal but impacts for qtr. to be material.
· Primary impact is within Retail segment with exception of contingent commissions.
· From an expense standpoint, Co. will now recognize producer compensation when coverage is bound.
· Previous practice was to recognize commission expense throughout the year when premiums are invoiced.
· Co. will also need to defer a portion of its commissions on new business with deferral primarily impacting Retail segment.
· As a result, Co.’s EBITDAC margin will benefit slightly from this cost deferral in 2018 then commission expense will increase over a 15-year period as the annual deferral is amortized.
· Estimates net deferral of expenses for 2018 to be approx. $4-8m.
· Estimated Impact of the Tax Reform Act:
· Primary impacts for 2017 are the estimated revaluation of deferred tax liabilities and deemed repatriation tax.
· These items represent $0.85 benefit for 4Q.
· For 2018, Co.’s federal tax rate will decrease to 21% but will be partially offset by the lower federal benefit of state tax deductions.
· As part of the new tax bill, all compensation over $1m for Co. CEO, CFO and the next three highest paid Section 16 officers will now be non-deductible and certain entertainment expenses will now become non-deductible.
· Co. estimates that these two items will increase full-year rate by approx. 2%.
· Including all of the aforementioned changes, anticipates full-year 2018 effective tax will be 27-28%.
· Lower tax rate will result in tax savings of approx. $45-50m per year and will further increase operating cash to revenue conversion ratio.
· Information Technology Update:
· Co. is well underway with its technology investment program.
· Co. completed certain deliverables and has others underway which are in line with expectations.
· Investment phase started slightly slower than anticipated in 2016 but the momentum increased during 2017.
· Co. expects a level of investment in 2018 to be commensurate with 2017 and then it will start to realize savings from the program in 2019.
· Each year thereafter, Co. will realize additional savings in order to recapture the impact to its margins.
· Anticipates margins to breakeven around 20-21% and have a slightly upside vs. starting base line margin.
· Co. is on track with the estimated cost of the program and expected returns.
· Co. is actively discussing the timing of its quarterly earnings release.
· In an effort to align the timing of Co.’s first three quarters earnings release and to be consistent with timing of year-end release, it will move all earnings release date to the fourth Monday of the month and will seek to file 10-Q’s closer to earnings release date.
· (inaudible), Co. anticipates a further reduction on its estimated contingent commission and GSCs in 2018 due to large losses associated with hurricanes and California fires experienced in 2017.
· For full-year, estimates the contingents and GSCs could be down between $6-8m from what Co. experienced in 2017.
· Expects to see this reduction in all divisions.
· Largest effect will be within Wholesale and Programs division.
· Closing Comments:
· Co. is pleased with performance for 4Q and full-year.
· As Co. anticipated rate increases for (inaudible) properties seem muted now by the existence of fresh capital seeking higher returns.
· Having a property rates flat to up 5% is a nice improvement over past couple of years.
· On the acquisition front, Co. only closed 11 transactions with $17m of annualized revenue in 2017.
· While Co. looked at many potential acquisitions it would like to have closed more.
· Co. is comfortable with its approach to annualizing and assessing potential acquisition candidates for cultural fit and financial returns.
· Co.’s goal is to more than cover its cost of capital in appropriate period of time based on the strategic nature of acquisition.
· Co. attracts business owners that see the benefit of joining a larger organization that will provide them the opportunity to maximize its collective capabilities and enhance their entrepreneurial spirit.
· With 28 or so private equity firms trying to put their capital to work despite it’s crowded, 60 plus percent of all deals done last year were done by private equity and Co. does not expects this trend to change much in 2018.
· Co. believes there are still a number of firms out there that fit culturally and make sense financially for it.
· Technology initiatives are to upgrade and standardize certain platforms across Co. and specifically within Retail segment.
· These programs will give Co. platforms to support its growth and profitability in future and helps to improve the experience for team mates.
· Co. is a decentralized sales and service organization and it is standardizing some support functions with the goal of benefiting team mates, customers and engaging deeper with carrier partners.
· Today Co. is leveraging its data better to win more new business and create new products to the benefit of its customers.
· As it relates to additional money from tax reform that Co. will be able to invest, it is focused upon current and future team mates, innovation in technology and beyond and M.
· Co.’s goal each year is to deploy as much capital as it can and that will generate appropriate returns for shareholders.