Good morning, and welcome to the Brown & Brown, Inc. 2016 fourth quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or 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 2016 fourth quarter, and are intended to fall within the safe harbor provisions of the securities law. Actual results or 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 factors include the company's determination as it finalizes its financial results for the 2016 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, and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion 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.
With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Kathy, and good morning, everyone. Thanks for joining us for our fourth quarter of 2016 earnings call. I'm on slide four. For the fourth quarter, we delivered $434 million of revenue, growing 7.1% in total and 3.5% organically. Once again, all four of our divisions grew organically, excluding the $8.1 million pre-tax credit adjustment related to non-cash stock compensation that was recorded in the fourth quarter of 2015. Our EBITDAC margin for the fourth quarter of 2016 was unchanged from the fourth quarter of 2015 at 30.9%. Our as-reported earnings per share for the quarter remained flat compared to the fourth quarter of 2015 at $0.41 per share.
When excluding the change in estimated acquisition earn-out payables from the Q4 2016 and 2015, along with the $8.1 million of stock compensation credit in 2015, our earnings per share increased 10.5% to $0.42 on an adjusted basis. Our investment in technology remains on target, impacting our EBITDAC margin for Q4 by 40 basis points when compared to the prior year. On to slide five. For the full year, we delivered $1.767 billion of revenue, growing 6.4% and 3% organically. For the year, we experienced a decrease in our EBITDAC margin of approximately 50 basis points as compared to the prior year, which was primarily driven by our investment in technology. As a reported earnings per share of $1.82 was an increase of 7.1% compared to 2015.
Excluding the change in estimated acquisition earn-out payables in each year, our earnings per share increased 8.8% to $1.86 on an adjusted basis. For the year, we acquired over $55 million of annualized revenues, which is in line with our 2015 acquired revenues. Andy will provide some details on our financial performance later in the presentation. Overall, we're really pleased with our results for Q4 and the full year of 2016. These results were delivered through the hard work and dedication of our over 8,600 teammates, and we really appreciate all of their hard work to make this possible. I'm on slide six. During the quarter, we continued to see modest growth in exposure units as a result of further improvement in the economy.
It's still very early days to determine the impact of the new administration, but there is some optimism about potential tax reform and how that might benefit the economy, our customers, and Brown & Brown. There were no real changes in catastrophic property rates for the quarter as they remained down 5%-20%. Now that the 2016 hurricane season is behind us and insured losses were not material, we believe cat property rates will remain under pressure in 2017. Insurers continue to evaluate their hurricane deductibles, flood coverage, and flood excess of the NFIP. We continue to see some non-admitted carriers offering admitted paper options in certain coastal areas. In the admitted market, there are really no changes to rates. Rates are very similar to previous quarters as they're flat to down 5%.
The exception to this is commercial auto, where rates are flat up 5%, all due to the frequency of claims. Professional liability rates are generally flat, with the exception of some lines, which are down slightly or even more than slightly. From a retail perspective, we grew 2.2% organically as we continue to see a positive trend in the last several quarters. We see our customers adding some employees and evaluating their healthcare options. Our customers continue to seek ways to manage their overall healthcare costs through plan or formulary design options. We did not see any material impact in the fourth quarter related to state exchanges. With the potential for changes to ACA in the air, the first quarter of 2017 will give us a better idea of how companies are reacting to the rate increases and there being fewer options on state exchanges.
Last quarter, we talked about the approval by the Florida Department of Insurance in the fourth quarter for a workers' compensation rate increase. The approved increase of 14.5% was effective December 1st, 2016, for all new policies and upon renewal for all existing policies. There's currently a lot of noise around this topic due to questions regarding the disclosure in accordance with the Florida Government-in-the-Sunshine Law. We're not sure what, if any, impact this may have on our Florida workers' compensation business. If the increase stays in place, the benefit would be in the range of $1.5 million-$2 million, which we referenced last quarter. During the quarter, a number of states decreased workers' compensation rates for 2017. We don't expect any material benefit or detriment to retail in 2017.
For 2017 and going forward, we're implementing a new annual incentive program for our middle market producers in the retail division that is designed to pay for incremental performance. This new annual incentive plan is an addition to our standard 40/20 plan. If a commission producer grows a book of business 5% or more organically, they're paid an incremental 5% performance commission on the total book. If they grow less than 5%, the incentive does not apply. We expect this program will drive increased organic growth over the coming years by focusing on customer retention and new business. Later, Andy will talk about the financial impact of this new annual plan. We're pleased with the organic growth of 5.3% for our National Programs division. During the quarter, we had continued growth across many programs, including our lender-placed coverage program and our flood business.
The flood performance was positively impacted by approximately $3 million of incremental year-over-year claims revenue associated with the Louisiana and Mississippi floods and Hurricane Matthew. Over the past few quarters, we've mentioned that we were anticipating a couple of program changes with our carrier partners, which is due to a change in their risk appetite. Several of these changes commenced in the fourth quarter and impacted our growth rates negatively in programs about 1.5%. The plans are solidified with the new carriers, we have a clearer view on the impact for 2017. We've been through carrier changes in the past, it normally disrupts retention and new business during the transition year. We estimate the change of carriers will result in decreased revenues in 2017 of approximately $5 million-$7 million in National Programs versus 2016.
Our wholesale business grew organically by 2.9% for the quarter. This is good performance, given the continued rate declines for coastal properties in the range of 5%-20%. Minimal weather-related insured losses in 2016, we expect continued downward pressure in 2017. We're also pleased with the performance of our Morstan business that we acquired in the second quarter, as it's outperforming our expectations so far. The Services division experienced good organic growth for the quarter at 6.2%. This growth was driven primarily by storm claim activity and addition of new customers. We're very pleased with the performance of our divisions for the fourth quarter and the full year. Let me turn it over to Andy, who will discuss our financial performance in more detail.
Great. Thank you, Powell, and good morning, everyone. I'm over on slide number seven, which presents our GAAP reported results. For the fourth quarter, we delivered total revenue growth of 7.1% and organic growth of 3.5%. Our income before income taxes and EBITDAC margins declined versus the prior year due to certain credits in the prior year and the change in acquisition earn-outs. On the next page, we're going to isolate these changes to give a better indication of underlying performance. For the quarter, our net income was down slightly, and our earnings per share was flat at $0.41 versus the prior year. During the quarter, we purchased approximately 200,000 of our shares on the open market. Over on to slide eight.
This presents our adjusted numbers after removing the impact of the one-time stock compensation pre-tax credit of $8.1 million that we recorded in the fourth quarter of last year, 2015, along with the change in estimated acquisition earn-out payables for both years. On an adjusted basis, our pre-tax income increased by 10.9%, and as a percentage of revenues increased by 80 basis points. We grew our EBITDAC by 7.3%, and our EBITDAC margin was consistent with Q4 2015 at 30.9%. The incremental storm claims revenue recognized by our flood business, which Powell mentioned earlier, positively impacted our margin by about 40 basis points, which offset the 40 basis point impact to our margins from the investment in technology. Later, we're going to get in a little more detail of the margins for each of our segments.
Our adjusted net income increased by 10.3%, and diluted earnings per share of $0.42 increased by 10.5% as compared to the prior year. We experienced a 30 basis point increase in our effective tax rate to 39.3% for the fourth quarter of 2016. The effective tax rate increase was impacted by income apportionment based upon the performance in the fourth quarter. We move over to slide nine. We're going to walk through the key components of our revenue performance for the quarter. Our contingent commissions and GSCs are up about $2 million as compared to the fourth quarter of the prior year. This increase is spread across our retail, programs, and wholesale divisions. We also disposed of books of business in the past 12 months, which represented about $900,000 of revenue being recorded in the fourth quarter of 2015.
We also recognized $14.2 million in revenue during the fourth quarter of 2016 associated with acquisitions that we completed over the last 12 months, with our largest impact coming from the Morstan acquisition in the second quarter of 2016. By isolating these four categories, our organic growth for the quarter was 3.5%. On to the next slide, we're going to look at our performance in each of the divisions in a little more detail. We'll go ahead and start with retail. For the fourth quarter, our retail division delivered 4.2% revenue growth. The organic revenue growth for the quarter was 2.2%, which shows a continued trend of improvement. Retail's year-over-year as-reported EBITDAC margin decreased by 160 basis points. However, on an adjusted basis, the EBITDAC margin increased 30 basis points over 2015, primarily from increased contingents realized during the fourth quarter of 2016.
To arrive at our adjusted margins, 2016 was adjusted to exclude a $1.8 million pre-tax charge associated with a loss on the disposal of a book of business, along with a non-recurring $3.2 million pre-tax credit related to non-cash stock compensation. The fourth quarter 2015 was adjusted to exclude the $5.5 million pre-tax credit adjustment for non-cash stock compensation. Our income before income taxes was down $1.2 million due to higher acquisition earn-out adjustments of $2 million year-over-year, this was partially offset by lower intercompany interest expense. Moving to the next slide. Our National Programs division had a good quarter and delivered 5.3% revenue improvement in total as well as organically. During the quarter, our flood business realized approximately $3 million of incremental claims revenue versus the prior year associated with weather-related events.
For the quarter, income before income taxes as a percentage of revenue increased from 17.5% to 20.3%, due primarily to lower intercompany interest expense charges. Our EBITDAC margin decreased by 50 basis points due to a write-off of a policy administration system related to one of our programs that is switching carriers in 2017. Over on to slide number 12. Our Wholesale division delivered total revenue growth of 20.2%, which was driven by our acquisitions, organic revenue growth was 2.9%. Our EBITDAC margins are 26.5% for the quarter, which is a decline of 410 basis points from the prior year. This decline was driven primarily by higher continued transaction volumes and lower pricing that we've been discussing over the last few quarters, as well as our acquisition in the second quarter of this year.
Income from income taxes decreased for the same reasons noted for EBITDAC, plus the increase in intercompany interest charges. Going to move over to slide number 13. Our Services division had a good quarter and delivered total revenue growth of 12.6% and organic growth of 6.2%. The majority of the organic growth was driven by our claims offices that had strong Q4 renewals, onboarded new customers, and increased activity related to the weather-related events. For the quarter, our EBITDAC margin increased by 260 basis points due to the sale of a claims processing business in 2015 and the acquisition of a higher margin business in 2016. The incremental increase in income before income taxes as a percentage of revenue was driven by lower intercompany interest expenses. On to slide number 15.
We've included our full year results with any callouts for specific items that impact comparability with the prior year. The adjusted numbers should help you with your models for 2017. Our GAAP earnings are presented in our press release, the reconciliations are included later in this deck. From a revenue perspective, we grew by $106 million, or 6.4%, organically, we grew by 3%. From an EBITDAC perspective, our margins decreased by 50 basis points, primarily related to the continued investment in technology. Finally, our earnings per share increased to $1.86, an 8.8% increase, which benefited partially from a lower share count driven by share repurchases in 2015 that flowed into our weighted average share count in 2016. For the full year, we increased our dividends by 11%, marking our 22nd consecutive year of dividend increases.
On the next page, we've included a full year analysis of our revenues to help with comparability to the prior year. All right. A couple quick comments regarding the outlook for 2017. For contingents and GSCs, we don't know of any specific items that would materially increase or decrease our contingents, but expect for them to remain under pressure in wholesale and programs due to lower premium rates and to remain steady within retail, subject to actual claims experience. Due to the implementation of ASU 2016-09, which relates to stock-based compensation awards, we believe we're going to have volatility in our quarterly and annual effective tax rates for 2017. This new ASU requires that upon vesting of stock-based compensation, any tax implications be treated as a discrete credit to the income tax expense in the quarter of vesting.
The prior treatment required that the tax implication be treated as a reduction in additional paid-in capital. Our estimated full-year impact is a credit to income taxes of $3 million-$4 million. However, based on the vesting schedules, the majority of this impact will be in the first quarter of 2017. And we estimate that the impact in the first quarter will be a credit to income tax of about $2 million-$3 million. Due to the accounting policy change, we estimate our first quarter rate with the discrete adjustment will be in the range of 36.5%-37%, and for the full year, will be in the range of 39%-39.3%. Regarding technology, we anticipate margins in 2017 will be further impacted downward an incremental 35-40 basis points as compared to 2016.
In 2017, the costs are going to be incurred about evenly in both our retail and corporate segments, with some incremental spend anticipated in our wholesale segment. Earlier, Powell mentioned our new performance incentive plan for retail. We expect this plan will deliver a slight positive impact in IGR in 2017, and the cost to implement the program will be approximately 50 basis points impact on retail's margins in 2017. Earlier, we also noted that we have a couple of programs going through carrier changes. With these transitions, and taking into consideration that we had about $9 million of incremental storm claim revenue in 2016 that we're not projecting for 2017, we expect the organic growth for National Programs to be negative 1%-2% on an as-reported basis.
With the lower revenue in 2017 and the premium tax credits we recognized during 2016, which will not recur in 2017, our margins in 2017 will be approximately 300-350 basis points lower than 2016. We do view these items as isolated as all of our other programs are performing well. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy. Good report. We say internally the only constant is change. 2016 was one of those years. Changes in carrier appetite impacted our national programs. The cat property market continued downward as more alternative capital was trying to find a home. The acquisition marketplace continues to be fully priced, with some sellers' expectations outpacing reality. With our new president, there seems to be potential changes in corporate tax rates and in the ACA arena. Finally, with some of our carrier partners, there were changes in their senior leadership. This sometimes leads to change in their risk appetite. All this change creates challenges and opportunities. We believe these challenges create great opportunities for Brown & Brown. Even with all of these changes, we are very pleased with the results for 2016, and as we head into 2017, we are realistic and optimistic about the year ahead.
I'll turn it back over to you, Kathy, for questions.
Certainly. Thank you. Ladies and gentlemen, to ask a question, please press star then one on your telephone keypad. Please note that if you're using your speakerphone, to please pick up the handset or depress your mute function to ensure that signal reaches our equipment. Again, that is star one if you'd like to ask a question. We'll go first to Elyse Greenspan from Wells Fargo.
Hi, yes. Good morning. I was hoping to first focus on the new retail compensation program you mentioned. Two questions there is the 50 basis point impact, do you expect that to be even throughout every quarter of 2017? Then when you think about this kind of reinvigorating or leading to stronger growth in the retail segment, do you see that as a 2017 event? Are you thinking this plan gets put into effect and we'll see a greater impact on growth in 2018?
Elyse, it's Powell. For one, I think that the expense would be even across all four quarters. I do believe that it will drive incremental performance in the year of 2017. It has been implemented effective January 1st. We believe it'll have impact this year.
Are you targeting a certain growth level, I guess, compared to the about 2% we saw in 2016 as you think about this program being put into effect?
We are, but that's secret because we don't give growth guidance. I'm sorry. I know that frustrates you, but the answer is yes, but we don't talk about it publicly.
Yeah, Elyse, what we would say is, as we spent a lot of time with this plan and going through all the analysis, which was multi-months to go through and looking, making sure that we've kind of evaluated all factors, is we do anticipate an uptick in organic, driven off the two factors that Powell mentioned. There'll be an investment in the early years. It starts to pay off over the next three to four years. We recover everything back, which is what we're looking for.
Okay. I appreciate all the color on the margins. When I look at the margins in the fourth quarter and the full year, kind of ex tech spend and some of the one-time items, I get about 30-40 basis points of deterioration in both the Q4 when I back out the non-cash comp credit, the full year, and also excluding the tech spend. When we back out the tech spend for 2017, is that kind of the level of overall margin deterioration you're looking at? I know we have now this negative impact on the program margins, any kind of color you can give us on kind of the overall margin outlook that you see, for 2017?
Elyse, yeah, we'd highlight two other things inside of there is one, make sure that you account for the loss on the sale of the book of business, which is about $1.8 million. We had mentioned the write-off on some software during the quarter. That was about $1.2 million. If you put those together, that's why in our commentary, the non-cash stock credit of about $3 million is literally neutralized with those other two items. I think that might've been something that you may have just missed on the way through.
Okay. One other question. In terms of when you think about your acquisition outlook, still kind of pointing to deals being fully priced in the market, and I know that's something you guys have been highlighting throughout 2016. As we think about 2017 with probably a similar type of acquisition environment, do we get to a point where you take that into account compared to where your stock might be trading, and you guys consider return to potentially repurchasing more of your shares?
Elyse, let's talk about how we think about capital allocation. I think of it really in four buckets. Organic growth and margin, acquisitions, share repurchases, and having dry powder. We think about it very long term. As I've said before, we constantly evaluate what we believe is the intrinsic value of our stock and compare that to where we're trading, and we determine, is it something that we think we should buy at that point in time? We have also been asked, what happens if our stock price is fully valued and the acquisition marketplace continues to be fully priced or even goes up? The answer to that, is we stockpile cash on our balance sheet. We constantly evaluate share repurchase as one of the investment options for the cash that we build up.
As you know, we don't have a stated amount that we're going to purchase on a quarterly basis. We're going to look at it opportunistically, just like acquisitions, and we're going to do it when we think it makes sense for the company.
Okay, thanks very much.
Thank you.
Thank you.
We'll move on to our next question from Quentin McMillan of KBW. Quentin, if you could please check your mute function, we're unable to hear you.
Apologies. Thanks very much, guys. Powell, I think that you had mentioned the flood claims revenue, specifically within the quarter. I thought that Hurricane Matthew flood claims would come in a little bit higher than where they did. I'm just wondering if you could just help us out with what the baseline, you said seven and a half million average 10-year flood claims revenue, in the last quarter. What did it end up coming in at for the full year of 2016, and was there any higher activity level from Hurricane Matthew that maybe will spill over into the first quarter?
I'm going to answer Quentin at several things. One, we had $9 million of incremental cat revenue in 2016. Number one. Number two, as it relates to your question, which I think is a very good one, the expectation of more revenue, I think is a very fair one. What you might be surprised to know is there were a lot of people affected that did not have flood insurance. There were areas in South Carolina and North Carolina and areas all around where you would think based on what you saw on the television, that they would have National Flood Insurance and whatever. Many of those people were not in flood plains, and they did not buy flood insurance. That's how kind of we look at it.
Once again, I think your assumption is a fair one. Those affected, or some of those affected the most significantly, were in areas that did not have flood insurance.
Okay, perfect. Another thing that's obviously topical and that you guys put in here with the ACA. I know that you don't necessarily want to make a prognostication of exactly what's going to happen, but can you talk about the early conversations you've been having with clients as it relates to just their uncertainty for how they're going to cover their own employees? Potentially, does this start to benefit you on a fee-based revenue stream, as opposed to just commissions? How should we be thinking about 2017 as this kind of plays out?
Okay. First off, I think the discussions with our clients has not dramatically changed prior to the election versus post-election of our new president. The reason I say that is the conversation typically is focused around managing cost. Obviously, some people talk about bending the cost curve and all these other things. I just make it simple. I just basically say, "How do you manage your cost in a thoughtful manner over the next several years?" It's not a one-year window. In doing that, changes in ACA, everybody is doing lots of speculating right now. Do we think there's going to be changes? Yes. Do we think it's going to be totally repealed? I don't know about that. That's maybe semantics in terms of how you define total repeal.
I think the one thing that we all have to remember is there are certain taxes on Obamacare, which in the event that it was changed, those taxes around healthcare, where are we going to make up that difference? The lawmakers in Washington, I think, are working on that. I wouldn't want you to focus on fee-driven business versus commission business this year, because it's purely speculative on our part. What we're trying to do is we're trying to help our clients, large and small, manage their total cost of health insurance. What this does, Quentin, is it creates more uncertainty, which actually creates an opportunity for us to talk with our clients about options and how they can think about it and attack it going forward, particularly based on whatever is the outcome of the changes.
Okay. That's great. Just very quickly on the last one is, can you just verify, you guys just said you did repurchase 200,000 shares on the open market in the fourth quarter. Thank you for the whole capital allocation strategy and your thoughts around that. That is an indication that you were out in the market and were actively repurchasing some amount of shares in the fourth quarter?
We did, yeah, just a little over 200,000, Quentin.
Okay. Thanks very much, guys.
Thank you.
Now we'll go to a question from Kai Pan of Morgan Stanley.
Thank you, and good morning. Just first a follow-up question on the new incentive plan for the retail segments. I remember a couple of years ago, you have similar plan. Could you remind us, like, how that plan play out in term both the impact driving organic growth and also as timing of the new plan, what make you sort of make the decision now is the right time to accelerate that growth?
Okay. Kai, if you remember, it was the fall, meaning Q4 of 2012, where we saw a major uptick in our organic growth, which was the end of the last sales incentive. That was a one-time-only incentive. We saw the organic growth go up substantially in Q4, but in Q3 and Q1, it didn't seem to be in the normal range. It might have been slightly down for whatever reason. You can speculate on that, but, from a standpoint of, we did have good experience with the program the last time, but it was a one-time-only program. That's number one year only in 2012. Number two, the way we've thought about it is this. Everything that we try to implement at Brown & Brown, as I said earlier, it's got a long-term alignment with our team and our shareholders.
We believe that this fosters, as we said earlier, customer retention and additional new business. We do a pretty darn good job at new business, and I think that we do a good job at retention too, but we can always improve. This is an incentive which aligns that from a producer standpoint with the corporation. We've been thinking about this for maybe the last probably six months seriously, because we've talked with all of our leaders about it, and it was a decision that was made after a lot of weighing and measuring, and we thought it was the best for the organization and for our producer force.
Yeah. Thank you so much for that. On the potential tax reform you mentioned earlier, where you expect all the benefits go to your bottom line or you can see opportunity for reinvestments? Also, will that potential lower tax rate, at least in the near term, impact any sort of expectation for the acquisitions, basically for the target, they might asking for a higher price?
As it relates to the first part, we think that that will be a good opportunity for us to deal with if, in fact, something occurs. The way I look at it, as any additional earnings dollars that we receive as a result of a tax cut would just go into the bucket that we think about how we allocate it for those four things that we talked about earlier. I wouldn't say that we're going to do more of one versus more of another. I think of it as equal consideration, and then we're going to try to invest in the best options for the company. That's number 1. As it relates to the tax rate, I think there's 2 parts to think about. Yes, I do think you have corporate tax rate, and then you have the potential for capital gains changes as well.
As we said earlier, we believe that the marketplace is fully priced. Expectations of some sellers are unrealistic. With a tax cut, either in one or both, I believe that those expectations would probably go up because the bankers will facilitate that. That said, at the end of the day, remember, Kai, we are focused on looking for acquisitions that fit culturally and make sense financially. Therefore, as you heard, we've only done $55 million of acquisition for the last two years. I would tell you that I'm comfortable with that because we didn't find ones that fit culturally and made sense financially. We found a couple that fit culturally last year, but financially would not have made sense, and that's not our plan. That's kind of the way we look at it.
That's great. Just follow up on the acquisition topic, last 1, is that you've seen increasing industry consolidation going on. You saw the large players try to getting down to the middle market. Do you see increased competition? Also, you see some larger potential company like from PE firm potential for sale. Are you considering any sort of transformational deals?
That's great. Okay, let's start with the first part. As it relates to some of the larger firms that are kind of going into the middle market, the firm I think you're referring to is Marsh, and they have put together, I think the number's $1.2 billion in revenue, in middle market revenue, but it's a $12 billion company. They have their own strategy, whatever that is, relative to their middle market play. The way I look at it, Kai, is this: number 1, we don't talk about acquisitions until we announce that we have a signed document, purchase agreement, and particularly something of size. I would make the comment that if you just look at the top 20 insurance brokers in the U.S., top 20, I believe six of them are backed by private equity.
If you just think about it just very simply, in the next 3 to 5 years, all of those will try to be sold. I don't know what their option is. Does that mean they go public? Most of the structures at present are not set up to be a public company, but they would have to change. Would they be acquired either by another PE firm or by a strategic acquirer? I would just say that we try to position ourselves to look at transactions of all sizes and shapes, and we focus on trying to find ones that fit culturally and make sense financially. Whether that's something that's a little bit larger or continues to be a little bit smaller, we're open to looking at all of them, assuming they make sense.
Great. Thank you so much for your time.
Thank you, Kai.
Thank you.
Now we'll go to Charles Sebaski of BMO Capital Markets.
Good morning.
Morning.
Morning.
I guess the first one on the margins, I just want to make sure that I understood you correctly when you were giving some of the detail. Were you saying before that the outlook for 2017 is for consolidated margin pressure of 35-40 basis points?
On the technology-
Just on the technology piece.
Yeah, on the technology, Charles.
Okay. I guess within that, I'd like to talk a bit about the wholesale division and the 400-410 basis points of margin contraction in the quarter. How much of that, or can you give some color on of that is this new kind of business mix of higher volume transactions versus the acquisition? I guess I'm trying to understand, because it's such a significant level here in the fourth quarter, if this is kind of a new run rate on higher transactions, how much of this is going to show up through 2017?
All right, Charles. I would say that kind of a broad statement is it's probably two-thirds of the impact is volume of business, and one-third is acquisition.
Okay. I appreciate that. That's helpful.
Yeah. Charles, just on that one, when you guys are modeling for 2017, keep in mind a couple things, if you would, is that as you look at the quarterly margins on retail, you'd probably not expect to see that level of drop every quarter going forward once we make a lap around. Okay? Just keep that in mind when modeling it through. Then 2, on the Morstan acquisition, that was a strategic acquisition that we did, and we knew that we acquired the business at margins lower than our average, but with the expectation that they'll come up over the coming years. We mentioned it's performing really well. We're very pleased with it. Again, over time, we'll continue to, excuse me, get lift in our margin as Morstan continues to improve.
Okay. I guess on the new compensation program, obviously when you did the one-time deal back in 2012, there was a significant kind of fourth quarter boost as you picked up. I guess I'm still just trying to understand a little bit more clearly, is it just for the margin hit? I guess why the success you saw with the 5%, and maybe it's back weighted, but improved organic growth back in 2012, why the reversal and now coming back around? Is it just market opportunity, or it seems like this has the opportunity to have organic growth 100 or 200 basis points higher for you guys. I don't know if it's just a risk weighting versus margin dilution on how you're thinking about that on the organic growth versus margin pressure within the retail segment on this compensation program.
Okay. Charles, we implemented our current plan of 40/20 in 1982. What we have always tried to do is incent producers to write lots of new business and retain the business that they have. When we started evaluating it and talking to other folks internally, we thought that over time, that this would be a positive to the company over the next several years. That said, there's going to be some more expense in year one that we won't overcome all of that expense, and we understand that. As Andy said earlier, this is something that we've thought a lot about, and I know you know this, but we don't make rash decisions. We think about how we can do this over the long term. Remember, the goal is to be even better at retaining our existing customers and writing more new business.
We believe that this plan captures both.
All right. Just finally, on the share repurchase, the 200,000 shares in the quarter, I know traditionally you guys do your capital management on an ASR basis.
Was this kind of just offsetting some stock comp or something, or is there a change in philosophy versus open market practices versus ASRs kind of going forward?
No, Charles, no change in the philosophy. We have utilized both of the approaches in the past. In early 2014, we had did open market, and then after that time, we did a lot of ASRs. In the fourth quarter of this year, we just saw an opportunity to pick up some shares in the open market and decided to go ahead and do that. I think we'll continue to look at all the different ways that are out there in order to hopefully run the most efficient and effective plan that we can from purchasing back in the shares, as well as doing it in a cost-effective manner.
Excellent. I appreciate the answers. Thanks a lot, guys.
Thank you.
As a reminder, ladies and gentlemen, that is star one for questions. We will now go to Adam Klauber of William Blair.
Thanks. Good morning. Can you hear me okay?
Yes. Good morning.
Great. A couple different questions. Number one, in the retail business, how is exposure growth now compared to six months ago and 12 months ago? Is it equal? Is it getting better?
I think it depends on the part of the country and the line of business. If you talk about Florida and construction, I think that there's a lot of construction and a lot of improvement in construction today, and I think it's even better today than it was six months ago. That's not universal across the board. I think it's hard to say categorically, well, they're up 10% or 5%. I would not say that. I would say it's geographic specific, or geography specific, I should say.
Okay, thanks. Then in the wholesale business, how are submissions running in the fourth quarter compared to a year ago?
They're equal to or up. Yeah. Adam, that's where we talked about volumes in the business. We are seeing a lot of submissions coming in to us.
What's driving that? Is that more internal, your sales effort, or is that a reflect in the market? Both?
I think it's a combination of both. Let's back up, I don't remember the exact numbers, Adam, off the top of my head. If you go back, let's say 20 years ago, you say, what portion of the market was non-admitted? Let's say it was single digits, low single digits. Today, that number, I think, is somewhere just in the low teens. There's been some significant, obviously, growth in the non-admitted marketplace. It's a combination of our brokers and production underwriters out soliciting business because we have product which will help retailers not only write new business, but retain their existing accounts. Number 2, the fact that the E&S market, as we've talked about, continues to try to evolve and not only show their relevance, but grow. That's also impacted by this entrance of additional alternative capital.
It's coming into areas where they think there are high margin opportunities, and in some cases there are, unless there's a storm.
Okay. That's helpful. In the retail business, you mentioned some potential pressures next year, additional tech spend, and then you have the incentive program. On the other hand, if organic growth does pick up, can you get some margin leverage from that to offset some of those pressures?
When the guidance that we gave on the 50 basis points, Adam, that was a blended based upon the incremental organic. A lot depends upon how the program runs out. We've run a lot of different scenarios. We think that's probably reasonable for what we know right now.
Okay. Final question. Florida Homeowners, which I realize isn't huge, but you still have some of that business. Is the competitive nature of that market impacting your growth?
I'm sorry. We couldn't hear the first part.
Sorry about that. The Florida Homeowners market continues to be-
Oh
pretty competitive.
Yeah.
Is that impacting you?
Yeah. Let's talk about that. We have Florida Homeowners, so you could have a negative potential impact in certain areas in retail. You can have a positive impact in wholesale or in programs. It's all about product and what do you have available. There are different segments of that, more Main Street business versus the high net worth or mass affluent marketplace. I think the answers are slightly different for each one of those areas. It continues to be a very unique place to do business, particularly for the Main Street homeowners business around the state.
Okay, thanks a lot.
Great. Thank you.
Now we'll go to Ken Billingsley of Compass Point.
Good morning. I had a question on from a tax standpoint, and I'm connecting a few things that you said across the call and trying to pull it together. If we talk about tax reform in general, and then looking at your customers, and then I also want to bring ACA into it. You said that your customers are hiring, more employee headcount is increasing. From an opportunity to expand their insurance program, if the tax reform comes through and they have more earnings dollars for themselves, are they underinsured still at this level? Is there a need to increase coverage, or would it be an additional coverage is trying to sell new products to the current customer?
Ken, think of it as if they, this is an if they leave the money in the business and invest, i.e., to expand the business, then the exposure units go up, which in turn, our revenue and that relationship would grow. If you think about it, let's say that you had a contractor, and that contractor bought three new trucks. The three new trucks go onto the policy, and let's assume that they were able to get two new projects, so their payroll, which is going to be their exposure units, are going to go up because of those projects, where they're going to use those three trucks. That's good for them and that's good for us.
Absolutely. The current customer base as it sits now, a number of years ago, probably people would've thought maybe they were underinsured, maybe a decade ago. As of we sit today, would you say that most of your customers are well insured or fully insured, or are some still underinsured in certain pockets?
Yeah, I think that's really hard to tell. What I mean by that is we're in the solutions business, and we present solutions and options to our clients and try to help them make the best decisions to cover their assets. Having said that, they can choose not to buy crime coverage, but it might be on an outlying on two or three accounts. I think if you pressed me, I would say that they're adequately insured as a whole. There are always scenarios where you want to talk to your clients about changes in their business and/or appetite, what they're thinking about risk appetite. You may sell additional lines of coverage, or you have a different plan design. You go from a fully insured product to a deductible product of some sort on property and casualty. They're retaining more risk.
I think I would just say that they're adequately insured.
Okay. The last question I have, and this may be making a bit of a reach of a connection, is if there is the change in healthcare, in your conversations you've had so far with corporations, do they feel obliged to make sure that there is a health product that may have been expanded in recent years than maybe what was there five or six years ago? Any savings from a tax reform, some of that they may feel obligated to plow that back into their business for their employees.
I think our clients, those who we've spoken to, feel like it's a competitive advantage to have, it's a broad statement, a competitive advantage to have a competitive health plan. It depends on the industry. It depends on what is normally offered versus not offered. If we were talking about a technology company, their health plan design and expectation is probably much different than a general contractor. It is much different.
Sure.
I think, though, that generally speaking, business owners feel like health insurance is something that they want to provide. They feel they have to provide it. They also think that it's either a competitive advantage or a disadvantage, a substantial disadvantage, if they don't have it.
Great. Thank you.
With that, it does appear we had no further questions. I'd like to turn the conference back to our speakers for any additional or closing comments.
Thank you, Kathy, and thank you all for your time today, and we look forward to talking to you at the end of our Q1. Good day.
Thank you.
With that, ladies and gentlemen, that does conclude today's