Good morning, and welcome to the Brown & Brown, Inc. fourth quarter earnings call. Today's call is being recorded. Please note that the certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answer given in response to your questions, may relate to future results and events. Otherwise, be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the fourth quarter, and are intended to fall within the safe harbor provisions of the securities laws. Actual results for events in the future are subject to a number of risks and uncertainties, and may differ materially from those currently anticipated or desired, or referenced in any forward-looking statements made as a result of a number of factors such as.
Such factors include the company's determination as it finalizes its financial results for the fourth quarter, that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the company may not have currently identified or quantified in those releases issued yesterday. Other factors that the company may not have currently identified or quantified, and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussions of these and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements, is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission.
We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measure to the most comparable GAAP financial measure can be found in the company's earnings press release or in the investor presentation for this call on the company's website at www.bbrown.com by clicking on Investor Relations and then Calendar of Events. With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may now begin.
Thank you, Bryce. Good morning, everyone, and thank you for joining us for our fourth quarter 2018 earnings call. Before we get into the performance of the quarter, we'd like to welcome all of our new teammates that joined us this quarter from recent acquisitions. We definitely had a busy quarter, adding almost 800 new teammates and acquiring five businesses with approximately $227 million of annualized revenue. The largest deal we completed in the quarter and in our history was the Hays Companies, and it closed effective November 15th. We're excited about the additional talent and capabilities these acquisitions bring to our customers and to our team. I'm now on slide four. Now let's get into the results for the fourth quarter. We delivered $508.7 million of revenue, growing 7.3% in total. Excluding the impact of the new revenue standard, our total revenues for the quarter grew 8.6%.
Our organic revenues decreased by 2.1% for the fourth quarter, which was driven by the significant claim processing revenue we recognized in Q4 of 2017 associated with Hurricane Harvey and Hurricane Irma. Isolating this impact, our organic revenue growth would've been over 3%. I'll get into more detail in a few minutes about the organic growth for each segment. Our EBITDA margin was 28.1%, which is down 210 basis points versus 2017, and was primarily impacted by the claims revenue recognized in the fourth quarter of 2017 and the new revenue standard in 2018. Andy will discuss the detailed movements of our margins later. Our net income per share for the fourth quarter was $0.26 versus $0.66 in the fourth quarter of 2017.
Remember that our EPS for the fourth quarter and the full year of 2017 was impacted by the one-time benefit of $0.43 associated with tax reform. On an adjusted basis, which excludes the one-time tax benefit, the change in acquisition earn-outs, and the new revenue standard, our earnings per share was $0.27, which is an increase of 12.5% as compared to 2017. I'm now on slide five. We're pleased with our full-year performance as we surpassed $2 billion in total revenues for the first time. This is a significant milestone for Brown & Brown. It was seven short years ago that we crossed the billion-dollar threshold. A lot of positive changes and improvements in our company since then. This is a result of all the efforts of our outstanding team of almost 10,000.
For the year, we grew total revenues over 7% and experienced organic revenue growth of 2.4%. Please remember, Q4 2018 was negatively impacted by a significant amount of claims revenue recorded in Q4 of 2017. Isolating the year-on-year variance in claims activity, we would've grown organically approximately 4% for the full year. Our EBITDA margin was 30.6%, and our net income per share for the full year of 2018 decreased to $1.22 from $1.40 in 2017, almost entirely driven by one-time tax adjustment I mentioned earlier in the non-recurring claims processing revenue. On an adjusted basis, which excludes the one-time tax benefit, the change in acquisition earn-outs, and the new revenue standard, net income per share increased by 23% to $1.18. For the full year, we closed 23 transactions with approximately $323 million of annualized revenue, by far our largest year ever for acquisition activity.
In regards to acquisitions, 2018 was one of those years that everything seemed to work out for the Brown & Brown team. We're really pleased to have completed at least one acquisition in each of our four segments last year, another first for our company. Lastly, we'd like to extend a huge thank you to all of our teammates that supported our acquisition activity. It was a busy year, and our success would not have been possible without their significant efforts. In 2018, we grew the top and bottom line nicely. We added talented teammates, increased our capability to serve our customers, invested in technology, and continue to invest in our teammates. Our performance is the direct result of the incredible effort and dedication that our team strives to achieve each day for our customers. Later in the presentation, Andy will discuss our financial results in more detail.
On slide six. The economy during the fourth quarter continued to expand, with exposure units increasing across most industries and geographies as our customers continue to invest in their businesses. We're seeing a lot of construction going on around the country, and there's a general shortage of qualified labor for many industries. Rates for most lines remain generally flat. The exceptions continue to be commercial automobile, which is up 3%-7% or more, depending upon the loss experience, and almost all employee benefits accounts continue to experience rate increases. Workers' compensation continues to be down in the 1%-3% range in many states across the country. Coastal property rates for the quarter remain generally flat, with some downward pressure on the best accounts and upward pressure on those with poor loss experience.
We made a lot of progress this past year and are pleased with the investments in our core commercial program, as well as our technology investments related to both core infrastructure and innovation. Now on slide seven. Let's talk about the performance of our four segments. Our Retail segment delivered solid organic growth of 3.5% in Q4, with most lines of business growing through solid new business activity. During the quarter, we completed five acquisitions and realized approximately $44 million of year-on-year revenue growth from acquisitions. For the year, we delivered 3% organic revenue growth, which represents continued incremental improvement over prior years. As we've discussed before, while it's good to look at the quarters, we believe the real measure is the full year results, and 2018 was another year of improvement.
Over the past four years, we are pleased with the continual improvement from 1.4% organic revenue growth in 2015, then increasing to 1.9% in 2016, then 2.9% in 2017, and 3% for 2018. Our National Programs segment decreased 14% organically. This was driven by approximately a $20 million decrease in claims processing revenues as compared to the fourth quarter of 2017. Isolating this change, our National Programs segment would have delivered positive organic revenue growth of just over 1%. A number of our programs performed well, most notably our earthquake and all-risk programs, but we had some experiencing changes in carrier risk appetite that resulted in decreased performance year over year. For the full year, our organic revenue was about 1% negative, which was impacted by lower year-over-year claims processing revenues.
Isolating this change, we would have delivered positive organic growth of over 4%, so it was a good year for the National Programs segment. Our Wholesale Brokerage segment delivered organic revenue growth of 3.4% for the quarter, driven by expansion in all lines of business. This is down versus the prior quarter of last year, which is consistent with the past three years, that we've had lower organic growth in the fourth quarter due to the amount of new and renewal business in the quarter. For the full year, we're very pleased with the organic growth of 5.7% for our Wholesale Brokerage segment. Our Services segment organic revenue decreased by 3.3% for the quarter, driven by claims processing revenues recorded in Q4 of 2017 as a result of Hurricane Harvey and Irma.
Isolating these claims revenues, the Services segment experienced strong organic revenue growth of approximately 7% for the quarter, driven by new business. Isolating the decreases in claims processing revenues, our full year organic revenue growth would be approximately 6%. When we look back on the year, we're pleased with the performance and the acquisition activity of our four segments. Now let me turn it over to Andy, who will discuss our financial performance in more detail.
Thank you, Powell. Good morning, everybody. Consistent with previous quarters, we're going to discuss our GAAP results and then our adjusted results, excluding the impacts of acquisition earn-outs, the impact of the new revenue standard, and the impact of the fourth quarter 2017 revaluation of our deferred tax liabilities that Powell mentioned earlier. As a reminder, we have excluded the impact of the new revenue standard for calculation of organic growth in order to provide a better comparison to 2017. I'm over on slide number eight. This presents our GAAP and certain non-GAAP financial highlights. For the fourth quarter, we delivered total revenue growth of 7.3%, with organic revenues declining 2.1%. The decrease in organic revenue is a result of the claims processing revenues recorded in the fourth quarter of 2017. Isolating these revenues, our organic revenue growth would have exceeded 3%.
Our income before income tax decreased by 5.3%, our EBITDAC declined by 10 basis points, both of which were negatively impacted this quarter by the new revenue standard and the claims processing revenue that we realized in the fourth quarter of 2017. Our net income declined by $114 million, or 60.8%, to $73.5 million, our diluted net income per share decreased by $0.40 or 60.6% to $0.26 versus $0.66 in the fourth quarter of 2017. The one-time deferred tax benefit recorded in the fourth quarter of 2017 was $120 million or $0.43 of earnings per share. During our third-quarter earnings call, we estimated the impact of the new revenue standard for the fourth quarter of 2018 to negatively impact revenues by $3 million-$7 million, the pre-tax income impact to be in the range of $0 to -$5 million.
For the quarter, the actual revenue impact was a -$6 million, the pre-tax impact was a -$4.5 million. Net income and diluted net income per share were impacted by the one-time benefit of tax reform recorded in the fourth quarter of 2017 and the lower claims processing activity. Our weighted average number of shares outstanding decreased approximately 930,000 as compared to the fourth quarter of 2017. This was driven primarily by the share repurchases we initiated in the fourth quarter of 2017, we completed in the first quarter of 2018. During the fourth quarter of 2018, we also initiated a $100 million accelerated share repurchase program. This is expected to offset the dilution associated with the Hays acquisition. As we've discussed before, we still intend to repurchase shares periodically in 2019 to manage the share creep associated with our equity plans.
Our goal is to generally keep our share count flat. Lastly, our dividends per share increased by $0.08 or 6.7% compared to 2017. Moving over to slide number nine. This slide presents our results after removing the change in estimated acquisition earnouts payables for both years, the one-time tax revaluation adjustment recorded in the fourth quarter of 2017, and the impact of the new revenue standard in 2018. This approach provides a more comparable basis. For the quarter, our revenues increased by 8.6%, income before income tax decreased by 1.4%, and EBITDAC increased by 3.1%. The lower EBITDAC growth rate was primarily due to the claims processing revenues in 2017 and increased non-cash stock compensation costs in 2018. In a few slides, we'll talk more about the components of our margin change year-over-year.
The lower growth rate for income before income taxes was driven by incremental interest and amortization associated with the acquisitions we completed during the year. Our net income grew by 14.9%, and diluted net income per share was $0.27, growing by 14.9%. Both of these metrics benefited from our lower federal income tax rate, which was 27% for the fourth quarter, as compared to 37.3% for the fourth quarter of 2017. Moving over to slide 10. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 7.3% as compared to 2017. Our contingent commissions increased $9.1 million as compared to 2017, which was driven almost entirely by the adoption of the new revenue standard.
As a reminder, we now recognize contingent commissions throughout the year upon the effective dates of the underlying policies, rather than when received per our previous treatment. Guaranteed supplemental commissions were down $800,000 year-over-year and were not impacted by the adoption of the new revenue standard. Our core commissions and fees increased by $26 million or 5.6%. When we isolate the impact of the new revenue standard and the net impact of M&A activity, our organic revenue growth declined 2.1%. As noted earlier, this growth rate was materially impacted by lower claims processing revenues of approximately $24.5 million. Isolating this revenue, our organic growth rate would have been approximately 3%. We'll move over to slide 11 to provide some additional insight into the components of our EBITDAC margin. We've included a walkthrough of our quarterly EBITDAC margin from 2017 to 2018 and highlighted the main drivers.
The acquisition of Hays negatively impacted our margin by about 10 basis points for the quarter, and this is in line with our expectations. Keep in mind, this only represents 45 days of operations, with the acquisition effective November 15th. Later in the presentation, we'll provide additional information regarding the quarterly numbers for Hays in 2019. During the quarter, we realized about a 30 basis point impact to our margins as non-cash stock compensation costs have increased due to continued incremental financial performance and higher retention of teammates. The new revenue standard negatively impacted our margin for the quarter by 50 basis points. Other reflects the significant year-over-year decrease in claims processing revenue, which more than accounts for the margin decline year-over-year. We also had some one-time items, the most significant being performance-based bonuses for certain businesses.
On the following slide, we presented the results of our business segments on an as-reported basis, as well as excluding the impact of the new revenue standard. We've included a reconciliation by segment in the appendix. Let's go ahead and start with retail, which is on slide 12. For the fourth quarter, our retail segment delivered total revenue growth of $39 million, or 17%. Excluding the negative impact of the new revenue standard of $12 million, total revenues increased by $51 million, or 22.3%, and we delivered 3.5% organic revenue growth. Total revenues benefited primarily from the acquisitions we completed over the past 12 months that contributed $44 million of incremental revenue. Overall, it was a good quarter for our retail segment.
Excluding the $6 million impact of the new revenue standard, our EBITDAC for the quarter grew by $13 million, and our margin declined by 40 basis points. This decline was driven by increased intercompany allocations for technology, as well as our investment to upgrade our agency management systems, and as we mentioned earlier, increased non-cash stock-based compensation cost as our equity plans are performing higher than expected, resulting in incremental cost. These two items more than offset the underlying margin expansion from leveraging our revenues during the quarter. The growth in income before income taxes was impacted by higher intercompany interest expense and amortization for acquisitions we completed during the year. Moving over to slide number 13. For the quarter, revenues for our national program segment decreased by 12.5%, and organic revenues declined by 14%.
The revenue decline was due to significantly lower year-over-year claims processing activity of approximately $20 million, as well as a $2 million impact from the new revenue standard. These items more than offset other organic growth and revenues from acquisitions. Without this decrease in claims activity, organic revenues would have been slightly over 1%. Income before income taxes declined by 38.8%, primarily due to the lower claims processing revenues, the new revenue standard, and was partially offset by lower intercompany interest expense. EBITDAC, excluding the new revenue standard, decreased $15.7 million, or 27%, primarily due to the lower claims processing revenues, the finalization of year-end bonuses, calculations associated with the performance of certain programs, and incremental non-cash base compensation cost. Over to slide number 14. The impact of the new revenue standard on the wholesale segment was about $1 million for both revenues and EBITDAC.
Excluding the impact of the new revenue standard, the wholesale brokerage segment delivered total revenue growth of 3.7% and organic revenue growth of 3.4%. Our EBITDAC margin, excluding the new revenue standard, decreased 190 basis points for the quarter. The decrease was impacted by lower contingent commissions, higher intercompany technology allocations, and increased non-cash stock-based compensation cost. Our income before income tax margin, excluding the new revenue standard, decreased by 60 basis points, impacted by the same factors contributing to the EBITDAC margin change, but benefiting from lower acquisition earn-out liability expense and intercompany interest expense. The services segment delivered 19% total revenue growth. Excluding a $6 million impact for the new revenue standard, total revenues grew 5.3%, primarily driven by an acquisition we completed in the third quarter of 2018. Our organic revenue declined 3.3%, driven by lower year-over-year weather related claims processing activity.
This decline was about $4.5 million, and if claims volumes were consistent year-over-year, organic revenue growth would have been about 7% as most businesses continued to grow. For the quarter, our EBITDAC, excluding the new revenue standard, increased 6.8%, and margins expanded by 30 basis points due to leveraging our higher revenue growth. The lower growth for income before income taxes was driven by intercompany interest charges for the acquisition in the third quarter. On slide 16, we presented our GAAP results for the full year 2018 and 2017. For 2018, we delivered $2.014 billion of revenues, growing 7%, and earnings per share of $1.22. For the year, we also decreased our total outstanding shares by approximately 2 million. Over to slide 17. Due to all the moving parts and difficulty with comparability, we presented on this slide certain GAAP and non-GAAP financial highlights.
For the full year 2018, we adjusted for the impact of the change in acquisition earn-out payables and the new revenue standard. For the full year 2017, we adjusted for the impact of the change in acquisition earn-out payables, the legal settlement we had in the first quarter, and the one-time impact of the tax reform we realized in the fourth quarter. Since these are non-cash or non-recurring and can increase or decrease by year, we believe it's helpful to evaluate the business excluding them. For the year, our total revenues grew 7.2%, or $134 million, and our organic revenues grew 2.4%. Isolating the year-over-year decrease in claims processing revenues of $24.5 million, our organic revenue growth would have been approximately 4%, or $70 million, which is a really good year for Brown & Brown.
Our EBITDAC grew by 2.1% and was impacted primarily by the 2017 claims processing revenue, our investment in the core commercial program, as well as additional non-cash stock compensation expense. Income before income taxes grew by 2% due to higher interest and amortization related to the acquisitions we completed this year. Our net income grew by 22%, and earnings per share increased by $0.22 or 23% to $1.18 as compared to 2017, benefiting from the lower federal tax rate. Our effective tax rate for 2018 was 25.6%, decreasing from 38% in 2017. Over to slide 18. This slide presents the quarterly and full-year impact of the new revenue standard. In connection with the implementation of the new revenue standard, we now record certain of our revenues in the services segment on a gross basis.
For the full year 2018, the total impact of this change was an increase to core commissions and fees of $10 million and other operating expense of $10 million. As a reminder, in the third quarter, we recorded an $8 million non-recurring adjustment to revenue and income within the national program segment. Isolating the one-time impact, our full-year income before income tax benefit would have been approximately $8 million-$9 million. Please take both these items into consideration in your modeling for 2019. Moving over to slide 19, we'd like to provide some additional information regarding the anticipated annual performance for Hays. We continue to believe that Hays will deliver $210 million-$220 million of annual revenues, $47 million-$53 million of EBITDAC, and diluted net income per share of $0.02-$0.03 for 2019.
The chart shows our current view of the estimated quarterly phasing and incorporates the impact of the new revenue standard. Similar to what we expected for the remainder of Brown & Brown, Hays will have a significant shift of revenues and profit into the first quarter due to the high percentage of employee benefits business. Please take this quarterly phasing into account when you build your models for 2019. We've got some closing comments regarding outlook on a few items. Let's see the first one. Keep in mind our previous comments about our lender-placed business within the national program segment, as we're anticipating material headwinds due to the continued improving economy and bank consolidations that are impacting our customers. We expect continued pressure into 2019 and believe this business could decline anywhere from $2 million to $4 million in 2019.
This is in addition to the $8 million one-time new revenue standard adjustment we called out in the third quarter of 2018. We're expecting revenues to be under pressure within our services segment due to lower claims for our Social Security advocacy business resulting from the completion of advocacy work on a book of business. We realized about $8 million to $9 million of revenue in 2018 that we do not expect to recur in 2019. Due to the fact that the retail segment had the most impact of the new revenue standard, we want to remind everyone that our organic revenues may fluctuate by quarter. We would anticipate the first quarter of 2019 to be lower than the average for the full year, and then higher in the second quarter versus the average for the full year.
As we discussed over the past two quarters, our stock compensation cost has been increasing as a result of higher performance of certain grants. We expect this trend to continue into 2019 and anticipate non-cash stock compensation costs could increase $3 million to $5 million. Interest expense should be in the range of $66 million to $68 million for 2019, and amortization should be in the range of $100 million to $102 million for 2019. Both estimated interest expense and amortization are excluding any additional acquisitions or borrowings that may occur in 2019, you'll need to make your own assumptions regarding these items. We expect our effective tax rate to be in the range of 26%-27% for the full year 2019 as a result of various state tax law changes and the geographic mix of our acquisitions completed throughout the year.
I'll turn it back over to Powell for closing comments.
Thank you, Andy. Great report. I wanted to make a clarification. The dividend increased to $0.08, an increase of 6.7%, and I know you know that. In closing, we have really good momentum across the company and feel great about our business. I want to thank first and foremost our 10,000 teammates for all their contributions in 2018 to help grow our company and serve our customers, and also for everything they'll do in 2019. We remain optimistic about the economy. As I mentioned earlier, I think there's a reasonable possibility the economy may slow down in the second half of 2019 or in early 2020. It's something that we watch very closely, and we'll keep you posted if and when we see that. We talked about premium rates earlier in the call and would say we don't expect any material changes in premium rates in 2019.
There's still a lot of capital out there that will keep pressure on rates, and we just don't see them moving up. We feel really good about our acquisition activity in 2018, as we talked about. Today, as I usually say, our pipeline is good. It's been that way for the past few years, and we're actively talking with a lot of people. We will remain disciplined in our approach. As you've heard me say before, when and why someone sells is different for each party, but we're always out talking to people, and when that time comes, we would like to be considered, particularly if there's a cultural fit. As we've said in the past, one of the most important things we can do is invest in our teammates.
We're proud to announce that we're setting aside $25 million to help fund an education program for our teammates and their dependents. The interest income from this money will be used to fund tuition reimbursements, student loan repayments, and scholarships for dependents of teammates. This new program will commence this year in 2019, and it's something we expect to continue going forward. We believe this program will be a great benefit and motivator for our teammates. Our goal is to continue to grow the top line and the bottom line and do this in a disciplined manner. In 2019, we expect to generate over $500 million in cash again, something we're very proud of. Our capital deployment philosophy is to invest this money into acquisitions, return it to our shareholders, pay down our debt, and invest where appropriate in our businesses.
We will do this prudently with the objective of driving long-term shareholder value. With that, let me turn it back over to Bryce to start the Q&A session.
Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi. Good morning. My first question, going back to some of your outlooky comments. You, Andy, pointed to organic growth in the first quarter due to Rev Rec being lower than the full-year number. My assumption was because Rev Rec went in place in 2018, it wouldn't impact comparison. Just a little confused there. Was that a comment with the first quarter growth being lower than the full year? Was that just specific to retail, or was that a consolidated company comment?
Hi. Good morning, Elyse. Good question. Let me take the last one. I'll come back to the first. The comment was associated with just retail. As we look out to 2019 and just the implementation of Rev Rec, there's probably going to be some noise between the first and second quarter. That's why our comment was, whatever you anticipate the full-year organic to be, the average in the first quarter will be a little bit lower, and it will be higher in the second quarter. It's just kind of a waiting.
Okay. In terms of retail, sticking there for a minute, you guys saw a little bit of a nice uplift in the fourth quarter sequentially from the third quarter. I know last quarter you had said new business was a little bit lighter. Powell, I believe you kind of thought it would just be a one-quarter situation. Can you just comment about new business and retention trends within your retail segment that you saw in the fourth quarter?
Sure. Well, remember, Elyse, as we've talked about, we don't look as much at quarterly results. We look at the yearly results overall as a kind of a barometer to success. We had a good quarter in Q4. We always like to write more new business, we wrote a good amount of new business, we've done a nice job in retaining our clients as well. We're very pleased with the 3.5% organic growth for the quarter. As I said, as I referred back to the prior four years, I just look at the trend 14, 18, 29, 30. That's how I look at it.
Okay. Thank you. One last question on margins. When we bring together some of your comments about some of the headwinds you're expecting in some of your business, it does look like retail should show stronger growth. What I guess I'm wondering about is, can you talk us through the line items that you might call out when we talk to the margin build for 2019? Obviously, Hays will be a drag. As you gave us numbers, can you kind of talk through the other buckets as we think about the consolidated margin we should expect in 2019?
Yeah. Elyse, coming back to some of the comments we made. Yes, you're correct on Hays and the guidance that we've given. Make sure you incorporate that. Keep in mind our comment about the $8 million adjustment that we recorded in the third quarter of 2018. Again, that will not recur, that will be an impact. Think about also the guidance that we've given on services. Also keep in mind the stock comp. Those are the primary ones, okay? No other items.
Okay. One just last quick question. Was there a couple million of flood-related revenue in the fourth quarter of 2018? To kind of, I guess, $22 million in programs last year, $20 million was the delta. Was there about $2 million that came through this year?
Yeah. It was about $1.5 million, $2 million. Not a lot. It was really small.
Okay. Thank you very much.
Thank you.
If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Once again, if you'd like to ask a question, please press star 1. We'll take our next question from Kai Pan. Please go ahead.
Thank you, and good morning. I would like to follow up both questions Elyse has asked. First on the organic growth. You have seen a sequential year-over-year improvements in the retail segments. Your overall organic growth for the company is 4% in 20 18. Will we see better than 4% in 2019? The other factors like in the national programs or service would weigh down that a little bit in 2019?
Good morning, Kai. Thank you for the question. As you know, we don't give organic growth guidance. We have always said in our business, both the overall business and even in retail, that we believe it's a low to mid-single-digit organic growth business in a steady state economy. The answer is, we got some positive things going, and we're going to have some headwinds too, and it's going to all work out in the end. We're not going to say like some others, this is what our organic growth is going to be for the year.
Yeah, Kai, what we would suggest on this one is, definitely do your projections by segment. Don't use just a blanket %, because more than likely, you would end up getting a very different answer, because the performance in each of them will be different in 2019 based upon the guidance that we've given.
Okay. Thank you for that. A follow-up on the margin question, wanted to drill a little bit down into details. You have Hays headwind, I estimate it's probably about a 70 basis points because they add 10% revenue to your overall and their margin is about seven points lower than yours. I just want to make sure my math is correct.
Yeah. The guidance that we gave back on the third quarter, as we said, it'd be around 100 basis points. Somewhere in that range, depending upon if we're on the higher or lower end of the guidance that we've given.
Okay. The comp expense, non-stock comp, it had been a drag actually in 2018 as well. Is it 2019, there will be further drag or the drag will be actually less, so it will be incrementally a positive factor for your margin overall?
Yeah. The guidance that we gave on it is it will be an incremental expense year-over-year of another $3 million-$5 million in 2019.
Okay. The last item on the margin side. I'm assuming the IT investment Arrowhead core programs will be accretive in 2019. Would that be significant that more than offset these negative factor we mentioned earlier?
No, it wouldn't. I think those programs as we mentioned during the commentary, they are progressing along in accordance with plan. If you go back to our previous decks that we've talked about, they are progressing along. No, they would not be enough to offset the other items.
Okay, great. Well, thank you so much.
Thank you.
Thank you.
We'll take our next question from Greg Peters with Raymond James. Please go ahead.
Good morning. I wanted to touch base on a couple of the, I guess, we can call them legacy initiatives, considering it's been over a year now, specifically around the Five for Five and the tech spend. With retail accelerating growth, as you pointed out, Powell, do you feel like the Five for Five has started to have an impact there, or do you expect it to yield better results in 2019 and 2020? I know you don't give organic growth. Same comments around the tech spend. Then with Hays coming on board, will there be incremental dilution from Five for Five or tech spend as it relates to the integration of Hays?
Okay. The first thing that you're asking about, Greg, we call the Producer Incentive Plan.
Yeah.
The Producer Incentive Plan is working in line with exactly what we thought it was going to do. We're pleased with the results. Every year, we look at how it's operated, and we've been very pleased since inception with its results. We think that's a positive going forward. You talked about the tech spend, and I think the tech spend, important point to make is we don't believe that there's going to be an additional monies in the tech spend that we're aware of or that are known. What I mean by that is, as you know, there are certain states that are imposing cybersecurity and/or cyber guidelines, which may in fact actually increase that spend at some time in the future that we're not aware of to be in compliance.
As you know, you've heard us talk and others probably talk about the DFS regulations and compliance in New York if any of your businesses do work in New York State. That's an example. As it relates to Hays, the short answer is relative to the incentive plan and/or the tech spend, we believe that their expenses anticipated are actually reflected in the guidance that we gave last year.
Okay.
That we just reiterated.
Great. Thank you for that color. I know you, in your opening comments or your prepared remarks, talked about the M&A pipeline. Given what's happened in the markets, I suppose, in the last half of 2018, with the tax law change, I'm wondering if you've seen any sort of change in the appetite from private equity on M&A in your space, or if you've seen any impact on multiples as you look across your pipeline.
Yeah. First of all, I think it's as competitive as it's ever been, so that hasn't changed. The last count, it seems like there's always somebody new considering getting in, there's somewhere between 28 and 30 private equity-backed firms. Typically, what we see when we're involved in these transactions, and this is not new, Greg, is usually there are a group of firms that are involved on a pretty constant and consistent basis, you can many times throw a blanket over kind of the group of the offers there. It comes down to cultural fit and how that might work.
Having said that, periodically, in those instances, you have one outlier, and that outlier might be a new private equity firm coming in or them buying in a new part of the country, or they do something that just doesn't seem to make sense to us and/or the rest of the group, seemingly based on the offers that are given. I think the most important thing is cultural fit, and we always talk about that. There's a lot of firms that The thing that I would say that continues to amaze me is, at the end of the day, private equity can give an offer within 30 minutes and just throw it out on the table, and that's not the way we operate. We think a lot about the cultural fit and the talent and the people.
There are a lot of talented firms out there that wouldn't fit culturally with us, and we wouldn't fit with them. We want to know that up front. We spend a lot of time on vetting that process more than anything else. Ultimately, if there's a cultural fit, we usually think that we have a pretty good shot of doing the transaction. It amazes me, when you're just putting things together with baling wire and chewing gum, that they just put offers out there with boom, boom. It's very interesting. It's different from an operator standpoint to a financial consolidator. That's what I would say.
That's entertaining commentary. Thank you. I was just looking at the cover of your press release, on the cover, I know there's different accounting basis, but it does point out that your commission and fees were in excess of $2 billion for 2018. I distinctly remember years ago when you launched and rolled out the $2 billion target. What's your new target, and have you established that yet?
Well, the answer to the question is we have, but it's a secret. We will roll that out probably at the end of the Q1, because we are galvanizing all of our teammates around that theme. What I would say is this, if you remember, Greg, I appreciate the offer. When we were $1 billion in revenue and we said we were going to be $2 billion, everybody said the following: "How long is it going to take you to get there, and what's the margin?" We basically said, if we wanted to be $2 billion or to double overnight, we could have done that in the last month, the last six months or the last year. Culturally, that wouldn't have made sense, and more importantly, it wouldn't have made sense for our teammates, of which our teammates own 30% of the company.
What I would tell you is this. When we double again as a company, it's not the number of years that it takes, it's the quality of the people that we add. Interestingly enough, from a shareholder standpoint, we believe that that applies to all shareholders, not just teammates. That just is an interesting, unique fact that you know that we happen to be large owners of the company, which I believe is something that investors would find interesting. There's alignment.
Great. Thanks for the answers.
Thanks, Greg.
Our next question comes from Yaron Kinar with Goldman Sachs. Please go ahead.
Good morning, everybody. Powell, you ended the scripted comments with a couple of headwinds that you noted for 2019, namely possibly an economic slowdown and, well, maybe not a headwind, but rates not necessarily being a positive trend. At the same time, you were also quite optimistic about opportunities for all four segments in 2019. Can you maybe talk about the opportunity set a little more?
Sure. Remember, we feel the best about our company today that we ever have in terms of the capabilities, our teammates, the way we work collaboratively across the organization to the benefit of our customers. That's just Categoric. I feel really, and we feel really good about that. I think that there's going to continue to be some interesting opportunities that will be presented to us. I'm not foreshadowing something. Everybody, I get a kick out of, Yaron, they say, "Well, when are you going to do your next big deal?" Or, "What are you doing with the money on the balance sheet?" Or, "What are you doing?" The answer is, we're going to invest it wisely, and when the right opportunity comes along, we're going to make that investment. Case in point, with the investments we made last year.
I just think that we're well-positioned to continue to steadily grow our business, to improve the margin profile, and we just need to be mindful of those things. Once again, I am not an economist by profession. I do have an economics degree from the University of Florida. I will tell you that there are a lot of things that I look at that may not directly impact the U.S. economy, but by God, they're going to surely indirectly impact the U.S. economy. There are all kinds of things that sit out there that a lot of people maybe they don't think about and maybe they won't impact ours, but that's part of my job, is to think about things that could potentially impact our business and foreshadow those.
I think it's pretty clear that if you talk to many CEOs in the United States, there's a feeling that sometime in the latter half of the year or early part of next year, we may have a slowdown economically. There also happens to be a lot of questions around transitions with Brexit, Angela Merkel, Italy, China, and the rest. Trade wars and how that impacts our customers and their businesses and things like that. I think it's kind of a balance. I'm an optimist, but I'm a realist, and I think that's reflected in our company. We are optimists, and we are realists. We go in with very positive feelings about 2019, but we're just trying to make sure that you're aware that these are the things we're thinking about.
Just a question on the IT initiatives. I thought the IT investments were supposed to start waning a little bit in the fourth quarter and were supposed to be a lift to margins. I think they were still a little bit of a drag. Is that because you identified additional opportunities, or is that because the initiatives are just taking a bit longer than you initially expected?
Yeah. Good morning, Yaron. No, nothing real unusual, for the fourth quarter. Everything's still right in line with what we were expecting. It's progressing along for us.
Okay.
Yeah.
Finally, with the wholesale business, it sounded like the organic slowdown was more a matter of timing than anything else. Is that a fair way to think about it?
I think it's fair. It's kind of interesting, because I went back and looked real closely at their performance over the last several years. They've had one fourth quarter they'd have a really good fourth quarter, relatively speaking, and then they might have a slight down quarter year-over-year over year if you go back to 2015. You have up, down, up, down, up, down. I don't want you to read something into one quarter performance in wholesale. That's the business that's had the most steady organic growth in our system over the last six years. I look at it and say they just didn't grow as much in Q4, but remember, they grew 7.7% in Q3. They grew 5.3% in Q2, and they grew 6.1% in Q1. There's a 5.7% over the entire year.
I feel real comfortable about Tony Chianese and his team.
Okay, got it. Well, thanks for the answers, and good luck in the year ahead.
Thank you.
Thank you.
Our next question comes from Michael Zaremski with Credit Suisse. Please go ahead.
Hey, good morning. Just one question. Powell, you mentioned a tight labor market in your prepared remarks. Obviously, compensation is your largest expense. Is that having or expecting to have an impact on your margins going forward? I guess I ask because I had thought the comp plan you guys had implemented in previous years was going to be a tailwind in 2019, it sounds like, unless I'm mixing apples and oranges, that's not going to be the case based on the prepared remarks.
Well, Mike, good morning. Let's make sure we're clear. The producer incentive plan impacts a small group, relatively speaking, of people in the overall company. That's in our retail segment, it impacts a group of people that are on commission only. Having said that, in a certain segment of the business, having said that, there's impacts across the entire organization in terms of wage pressure. Here's the way we look at it. At the end of the day, we're trying to attract, retain, reward, and develop the most talented people that fit culturally with our organization. Having said that, we periodically come across people who we feel, and I tell our teammates this, it would be a mistake not to hire them. If they're not in the budget, you just figure it out. I think that it's just like anything else.
It's not purely linear, Mike, that's the reason I say that, because we think of it about one person at a time. If that impacts, all of a sudden, 35 offices, then it may drive our S&R up slightly that quarter or the next two quarters. They start making such a positive impact on the organization in helping us either retain our existing clients or write new clients. I don't want to give you the impression that it's not a tailwind. I think that the producer incentive plan is working very well, and we're very pleased with it. I just want to remind you, it impacts a relatively small number of people of the 10,000 total teammates. We're always mindful of wage pressure, but that means we need to grow the company, both organically and through acquisition.
Got it. All the best in 2019. Thanks.
Thank you.
Our next question comes from Mark Hughes with SunTrust. Please go ahead.
Thank you. Good morning. Just to think about it my own way, I think the original plan was that technology spending and the producer incentive payouts would begin to taper in 2019, and therefore be margin accretive. I think you said you're performing along with the original plan. Is that a fair look at it, that the expenses should taper and therefore would be positive for margins?
Yes. Morning, Mark, it's Andy here. Think about those two in two different ways. It is on the IT side, yes, you are correct from a spend and thinking about it as a percentage of revenue. That is correct. On the retail incentive program, it's actually not about the expense. If you recall back when we talked about the program, the goal there was to drive incremental organic revenue, which therefore compounds over time. The expense remains relatively constant. We're just growing off of a larger base. What that really means, and that's why we said in our previous comments, you would see some margin expansion out in 2019. That's how the plan works and is designed.
Right. The stock comp is only up $3 million to $5 million. Presumably, if you have any sort of organic growth, that likewise would be margin accretive if the expense is relatively fixed or up fractionally, and your revenue grows faster based on what we assume, then that would also be margin accretive.
If total revenues grow faster than the increase in stock comp, you are correct. Yes, that would be a margin. The guidance that we gave on it was $3 million to $5 million. If you look at the cash flow statement, you can see we had about $33 million, $33.5 million of stock comp in 2018.
Finally, with the employee benefits, you say that rates are up. How much do you participate in those higher rates at this point with your mix of business with Hays? How much do higher rates act as a tailwind for your revenue?
The reason is the amount of self-funded business and/or in many states, the smaller market, depending on the state, defined as under 50 lives or under 100 lives. The companies in many states have moved the way you're paid on them from a commission, where, as you know, Mark, if the premiums go up, you would get more income to a per head per month. The only way you get additional commissions would be if you add another head or another belly button. It's what they use, the term. The answer is limited.
Thank you.
We'll take our next question from Joshua Shanker with Deutsche Bank. Please go ahead.
Yeah. Thank you for taking my question. I just wanted to walk through the $22 million versus the $2 million of hurricane servicing revenues. Is the margin on those the same, or is there economies of scale benefit in a quarter like 4Q 2017? What is that margin?
Good morning, Josh. What we said on previous calls is the margin on storm claim-related activity is higher than our average. We have not said exactly what the margin is.
Is there any reason why? That'd be really useful for us for making a year-over-year comparisons given the exceptional circumstances a year ago.
Yeah. I guess similar to, we don't give exact margins on any individual business underlying.
Okay. Can we just understand if there are economies of scale, if you can do $22 million in storm revenues, does it have a higher margin than a quarter where you only do $2 million, or is it the same generally, regardless of the situation?
Yeah, the margins go up a little bit. It does scale underneath. It's the magnitude.
Okay.
You're just not going to see a margin movement on a couple million dollars of flood claim activity.
Okay. If we look at you're getting larger, you had a very strong first half of the year in terms of growth, and now it's more on the back half of the year. As you get larger, is there a seasonal move that more renewals are happening, I guess, due to the employee benefits or whatnot in the first half of the year? Is the first half of 2018 going to be a headwind in the first half of 2019?
Josh, definitely look at how the quarterly numbers have fallen now because the impact of the new revenue standard has absolutely moved revenue and margin around by quarter, without a doubt. If you remember back, the margins on some of the different businesses were different by quarter. Some of that has leveled out, definitely look at it by quarter now.
The first half of the year was up 5.4% on an apples-to-apples basis with post ASC 606 retrofitted for 2017, I guess. Is that a tough comp, I guess, is what I'm asking?
Yeah. Here's probably the way to think about it. Look at the Rev Rec slide that we included inside there.
Okay.
If you go back to slide 18. We moved $27 million of revenue into the first quarter, then $14 on the income before income tax. It about offsets in the second quarter.
I guess, maybe I'll have to go through it. I feel I'm looking at apples to apples. There's no headwind coming from having a strong first half 2018. That's an extra headwind in 2019.
The only piece in there is, again, when you're modeling it, just keep in mind that we were making our core commercial program. We had not made the lap on it in the first half of 2018. Remember that program, we started that up in July of 2017, okay?
Okay. That makes sense.
Yeah.
Okay, thank you very much. Good luck.
Thank you.
We'll take our next question from Meyer Shields with KBW. Please go ahead.
Great, thanks. Two quick questions on Hays, if I can. One, do the revenue numbers on slide 19 anticipate supplemental and contingent commissions that are roughly equivalent to legacy Brown & Brown?
Yes, it does include contingent commissions and GSCs, and yeah, they're in a similar percentage ratio.
Okay, perfect. Is there any reason that the inclusion or integration of Hays would slow legacy Brown & Brown organic growth, or should that not be impacted at all?
We don't think it's going to slow Brown & Brown legacy organic growth.
Okay. Excellent. One final question, just to make sure I understand this. Powell, you talked about the potential for an economic slowdown in the back half of 2019. Would that impact revenues on a real-time basis, or do you expect there to be a lag between when, I don't know, GDP growth slows and when you actually see commission volumes reflect that?
I think it depends on how the clients manage their exposure units. What I mean by that is there are some customers which will adjust their insurance exposure units, particularly on larger accounts, right when they see that change, and sometimes they won't. Inherently, I would say that there would be slight lag, but you could see other people adjusting if, like I said, I don't think this would be the case, but if it was a severe rapid downturn, could people adjust their exposure units, meaning their payrolls or their number of vehicles on the road or whatever the case may be? Could they adjust them mid-year? The answer is they could.
Okay. That's very helpful. Then last question with regard to the revenue headwind guidance in lender-placed insurance and Social Security advocacy. Is there any seasonality to that, or should we just assume that's spread out over the year?
I think you should assume it's spread out over the year.
Okay, fantastic. Thank you so much.
Welcome.
We'll take our next question from Robert Glasspiegel with Janney. Please go ahead.
Good morning, Brown & Brown. I'm going to follow Meyer's questions on Hays with more on the margin side. On the quarter, I think I saw it was a $0.01 negative. Is that inclusive of any restructuring charges and deal closing charges? I was wonder if you could break out what your one-timers were in Q4.
Morning, Bob. No, they were minimal for the fourth quarter for the 45 days.
Okay, there's no deal restructuring, there's no banking fees or anything else that's getting expensed flowing through the numbers as of yet?
No, nothing of materiality. We didn't have a banker on our side.
Is there any seasonality as we think about margins? You gave us $0.03 accretion to Q1, it looks like they have a heavier revenue contribution in Q1 than the rest of the year. I assume it's mainly retail wholesale that the revenues are going to flow into.
It's retail business, remember, they have a very large employee benefits portion of their business, which is why, from a Rev Rec standpoint, that's moved into Q1.
One last Go ahead.
Yeah, just count Bob. Just make sure you look back to slide number 19 on Hays, the phasing by quarter is really important.
Okay. We'll do that. The restructuring charges, are you going to spike those out, or are we just going to have to sort of guess at them? Your, I think it was $0.02-$0.03 of accretion, is that inclusive of restructuring or exclusive?
That is included of integration cost. Again, we don't have restructuring cost. We've got integration. What we said on our previous comments is they're more heavily weighted to the out years. We're really just trying to get all of our teams together and figure out all of the moving parts in it. We're not, and again, similar to our previous discussion, the objective of this transaction was not to drive cost out. Right? The objective was-
You're not-
Hold on a second.
Go ahead, I'm sorry.
Was to drive the top line and grow the business. We will get some cost out, but it is not a cost play.
No, I understand that. You're not going to be integrating the offices day one. They'll operate autonomous.
We'll integrate the applicable offices at the right time when it's right for the business. We're not driving down a plan to crash everybody together, Bob. Again, we're trying to keep all the momentum on the top line moving forward.
Good luck on 2019.
Okay. Thank you.
We'll take our next question from Adam Klauber with William Blair. Please go ahead.
Good morning. Thanks, guys. In the wholesale business, from what I hear, the market's a bit more dynamic. You get a couple of the big players, Lloyd's and Lexington pulling back. How will that impact you? Will that be good for you? Will that be bad for you? Any thoughts on that?
Well, I think it depends on how the rest of the market responds. What I mean by that is if you have a big player in a segment, as you referenced, and they pull out or they double or triple or quadruple their pricing on that same exposure unit, depending on how quickly the market would come in and fill that void, is going to impact if it's going to be that positive for us or not. I would tell you, based on everything that I'm hearing, that there's plenty of capacity in many other instances to fill that right now. Could there be a certain class that I'm not aware of? Absolutely, there could be. As a general statement, I believe there are other markets who are willing and wanting, willing to fill that gap.
Okay, thanks. As far as your retail business, before Hays, what was the growth in your producers in 2018?
You mean, you're talking about the number?
Yeah.
Yeah, we haven't talked about the production growth publicly. We aren't going to do that in terms of how many we've added or how many have left or whatever. We're growing our business nicely. It's reflected in the organic growth. We continue to always look for people that can help bring new customers in.
Okay. On the technology, you've been upgrading your agency management system. Does that give you more analytic capability, and could you give us an idea of what you're doing on the analytics front?
Sure. Well, we have a way now to better look inside of our data and look at similar classes of business, whether it be in a state or in a region or across the country. We are able to share information more easily, which enables our teammates, we believe, to bring better solutions to our customers. As we continue to migrate everybody onto this new one agency management system, we think that that will only continue, that capability will be enhanced. We've put the first things in place, and as we continue to migrate the rest of the offices onto that system, we know that it'll get even better.
Okay. How long will that migration take? Is that mainly 2019? Will that go into 2020 also?
No. Right now, we're looking at another. It would be between 2019 and 2020. If we didn't do another acquisition, which we're going to, so that's a little misleading, but if we didn't do another acquisition, the existing businesses that we have, it would take till the end of 2020 to migrate everybody across.
Thanks. Last question on Hays. Have you disclosed the retention pool for existing producers at Hays? How's that being accounted for in your financials?
No. We haven't described that publicly. Andy.
Yes.
Yeah, for anything that was post-transaction, Adam, that's being expensed through the P&L.
Okay. I take it that's in the pro formas you gave us.
Yes, it is.
Okay, great. Thanks for the answers, guys.
Thank you.
It appears there are no further questions. Mr. Brown, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you, Bryce. We appreciate everybody's time today. We wish you a great day. We look forward to talking to you next quarter. Thank you and good day.
This concludes today's call. Thank you for your participation. You may now disconnect.