Good morning, and welcome to the Brown & Brown, Inc. second 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 our future events, including those relating to the company's anticipated financial results for the second quarter, and are intended to fall within the safe harbor provisions of the securities laws. 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 second 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. In addition, there are certain non-GAAP financial measures used in this conference call.
A reconciliation of any non-GAAP financial measures 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.bbinsurance.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 begin.
Thank you, Matt. Good morning, everyone, and thanks for joining us for our second quarter 2019 earnings call. I'm on slide number 3. For the second quarter, we delivered $575.2 million of revenue, growing 21.6% in total. Our organic revenues increased by 3.9% for the second quarter. I'll get into more details in a few minutes about the organic growth for each segment. Our EBITDAC margin was 29.3%, which is up 20 basis points versus the same quarter in 2018. Our net income per share for the second quarter grew by 26.9% to $0.33 as compared to the second quarter of 2018. During the quarter, we also completed four transactions with annualized revenues of approximately $14 million. Overall, it was a really good quarter. Later in the presentation, Andy will discuss our financial results in more detail. I'm now on slide number 4.
During the quarter, the market continued to expand with customers investing in their businesses, driving increases in exposure units. We would say overall, our customers remain optimistic about the market. While the overall premium rates remain competitive, during the second quarter, we did see some upward movement on rates for many lines, including automobile, employee benefits, general liability, and property, both wind and earthquake. Accounts with minimal loss experience are still getting marketed with rigor. The main line where we see rates consistently down across most regions is workers' compensation. Most other lines of coverage are flat to up slightly, flat to 5%, with commercial auto up typically in the range of 7%-10%. Last quarter, there was a lot of discussion that the risk bearers wanted to increase rates, and it was most pronounced in London.
There was some upward pricing pressure in the second quarter as risk bearers are trying to get rate increases where possible. Specifically in the E&S space, we are seeing some carriers be more selective in either certain lines or geographies or both, which is having a potential or a pronounced impact in certain areas. There's still a lot of capital that needs to get put to work, and therefore, we do not believe there's going to be large swings in pricing in the near future. On the M&A front, we remain active and acquired four businesses in the second quarter, bringing our year-to-date acquisitions to 12 with $50 million of estimated annualized revenues. We continue to be pleased with our investments in technology innovation and our new programs.
During the quarter, we realized additional returns from our investments, which helped improve our margins and the experience for our teammates and customers. Investing in innovation will remain an important part of our strategy going forward. On slide five, let's talk about the performance of our four segments. Our Retail Segment delivered strong organic growth of 5.6% in Q2, with most lines of business growing through new business activity, good retention, and the benefit of exposure unit expansion and rate increases in certain lines of coverage. As we mentioned last quarter, organic growth for Q2 was expected to be higher than Q1 due to the impact of the new revenue standard in the prior year. While we did experience some positive impact of the new revenue standard, organic growth for the quarter was better than expected.
We're pleased with the 4.5% organic revenue growth delivered through the first six months of 2019, as this represents continued incremental improvement over the same period of prior years. Lastly, we continue to be really pleased with the results of Hays, as they had another good quarter and are near the upper end of our expectations for both revenues and profit. Jim Hays, Mike Egan, and their team are doing a great job of focusing on their customers and winning new business. On the National Programs Segment, grew 2% organically with good performance within our earthquake programs, our all-risk program, and better than expected results in our lender place business, just to name a few. Most of our programs performed well this quarter.
We continue to experience challenges in our commercial and personal automobile programs as our carrier partners are evaluating returns and their risk appetite, which continue to impact our retention and new business. Our Wholesale Brokerage Segment delivered another great quarter with organic revenues growing 7%. The growth was primarily driven by new business, good retention, and some rate improvement in certain lines. Our organic growth was positively impacted by the renewal timing of a couple larger accounts, which we discussed in the Q1 earnings call. We're pleased with the over 5% organic growth delivered by the Wholesale Segment through the first six months of 2019. The organic revenue for our Services Segment decreased 4.1% for the quarter.
Consistent with last quarter, organic growth was impacted by lower claims in our Social Security advocacy business that resulted from the completion of advocacy work on a book of business in the prior year. This decline offset good organic growth realized by most other businesses within the Services Segment. Overall, it was a strong quarter across the board, and we're very pleased with our top and bottom line results. Now let me turn it over to Andy to discuss our financial performance in more detail.
Thanks, Powell. Good morning, everyone. Consistent with previous quarters, we're going to discuss our GAAP results and then our adjusted results, excluding the impacts of acquisition earn-outs. I'm over on slide number six. This slide presents our GAAP and certain non-GAAP financial highlights. For the second quarter, we delivered total revenue growth of $102.1 million, or 21.6%, and organic revenue grew up to 3.9%. Our income before income tax and EBITDAC both increased 22.4%, growing faster than revenues due to the continued leveraging of our expense base. Later, we'll walk through the detailed movement of our EBITDAC margin and the impact of Hays. Our net income increased by $18.7 million, or 25.3%, and our diluted net income per share increased by $0.07, or 26.9%, to $0.33. Our effective tax rate for the second quarter of 2019 was 25.1%, compared to 26.8% in the second quarter of 2018.
The lower effective tax rate was driven by our state tax footprint and the corresponding apportionment. Based upon the results for the first six months, we're still projecting our full-year effective tax rate to be in the range of 25%-26%. Our weighted average number of shares were down slightly compared to the prior year. As we mentioned before, our goal is to purchase shares related to our equity incentive plans in order to keep our share count on a full year basis relatively flat. Lastly, our dividends per share increased to $0.08 or 6.7% compared to the second quarter of 2018. Moving over to slide number seven. This slide presents our results after removing the change in estimated acquisition earn-out payables for both years. We believe this presentation provides a more comparable year-on-year basis.
This quarter, we recorded a net reduction in our earn-out liabilities, which is equivalent to close to a $0.01 per share benefit. Our income before income taxes on an adjusted basis grew 19.2%, or slightly slower than total revenues due to the incremental interest and amortization expense associated with acquisitions we completed in the last 12 months. On an adjusted basis, our diluted net income per share increased by $0.06, or 23.1%, versus the second quarter of last year. Moving over to slide number 8. This slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased 21.4%, and our contingent commissions decreased $2 million as compared to 2018, which is consistent with our expectations and the guidance we provided during the Q1 earnings call.
We continue to expect contingents to be down $2 million-$4 million on a full year basis as compared to 2018. For the quarter, our guaranteed supplemental commissions increased by $10.2 million. This increase was driven by a GSC within our National Program segment that will not recur in the future as the associated multi-year contract has ended. Please take this into consideration for the second half of this year and going into 2020. Our core commissions and fees increased by $92.7 million or 20.4%. When we isolate the net impact of our M&A activity, our organic revenues increased by 3.9%, driven by the items that Powell mentioned earlier. Moving over to slide number 9. To provide some additional visibility into the major drivers of our EBITDAC margin, we've included a walkthrough from 2018 to 2019. Hays negatively impacted our margin by approximately 100 basis points for the quarter.
This resulted from phasing of revenues and profit in accordance with the new revenue standard, which primarily impacted employee benefits. This drives higher revenue and profit in the first quarter, and then lower amounts in the second through the fourth quarter. The second quarter was at the top end of our range for revenues and profit, and the Hays team had another strong quarter. Other reflects the underlying margin improvement we experienced across the remainder of our business. This was driven by higher organic growth, the net increase in GSCs, leveraging our expense base, and realizing some benefits from our previous investments. These margin improvements more than offset higher non-cash stock compensation costs, as well as some incremental one-time legal costs we recorded this quarter. Taking all these items into consideration, it was a very good quarter for margin expansion.
On the following slides, we present the results for our business segments. We're going to start with Retail, which is on slide number 10. Our Retail Segment delivered total revenue growth of over 33%, driven by acquisition activity over the past 12 months and organic growth of 5.6% for the second quarter. Our EBITDAC margin for the quarter decreased by 130 basis points due to the quarterly phasing impact of Hays that we mentioned earlier. Excluding the impact of Hays, we're pleased that we delivered another quarter of margin expansion. Our income before income tax margin declined by 480 basis points due to higher intercompany interest expense associated with our acquisition activity and the EBITDAC drivers. Over to slide number 11. Our National Program segment increased total revenues by 11.3%.
This was driven by the previously mentioned one-time GSC, which was approximately $10 million, acquisitions during the past 12 months, and organic growth at 2% driven by many of our programs. Income before income taxes increased by 65.4%, primarily due to higher revenue growth, lower intercompany interest expense, and continued cost management. EBITDAC increased by 32.6%, driven by higher total and organic revenues, continued management of our cost, and scaling of certain programs. Moving over to slide number 12. Our Wholesale Brokerage Segment delivered total revenue growth of 7.4% and organic revenue growth of 7%. The EBITDAC margin increased by 120 basis points as a result of leveraging organic revenues and managing our cost base. Our income before income tax margin increased 110 basis points due to the same factors driving EBITDAC margin, but was offset slightly by higher acquisition earn-out payables. Over to slide number 13.
Our Services Segment delivered total revenue growth of 10.7% due to acquisitions completed in the last 12 months. Our organic revenue decreased 4.1% for the quarter. From a margin perspective, EBITDAC grew faster than total revenues, driven by the mix of business and management expenses. We do not expect this high level of margin expansion in future quarters. Moving over to slide number 14. We wanted to provide an update on the Q2 performance for Hays. Total revenues were $44.1 million and were at the top end of our range. Expenses continue to be slightly better than originally expected. For the quarter, we delivered $7.4 million of EBITDAC, which is in excess of the top end of the range. Some of this favorability is due to timing associated with the new revenue standard, and we expect some reversal in the second half of 2019.
We continue to believe Hays will deliver within the previously communicated full-year range of revenue and profit. Finally, a comment regarding cash flow conversion. In the first quarter, we mentioned how our cash conversion percentage, which we define as GAAP cash flow from operations divided by total GAAP revenues, declined due to the timing of payments to our carrier partners. During the second quarter, this percentage increased. On a year-to-date basis, our cash conversion ratio is slightly below last year. With that, let me turn it back over to Powell for closing comments.
Thanks, Andy, for a great report. In closing, we remain optimistic about the economy as businesses continue to invest and hire more employees. Earlier, we discussed premium rates. Based upon what we're seeing right now, we would expect most rates to continue to increase slightly. Competition will remain strong for accounts with low losses. Consistent with prior quarters, our acquisition pipeline remains full. We're talking with a lot of companies. We have good momentum after closing 12 deals through the second quarter with annualized revenues of $50 million. We've announced two transactions already this quarter. The primary challenge remains private equity firms and how they're approaching the pricing for deals. At times, they're willing to pay materially more than we are with a disciplined approach to capital deployment.
Ultimately, our goal is to find companies that fit culturally, make sense financially, and want to be part of a team for the long term. We'll maintain our disciplined M&A approach as it's proven to be very successful over the long term. I mentioned earlier that technology remains one of our key priorities. We'll continue to invest in our data strategy to improve the experience for our customers, how we engage with our carrier partners, and the experience for our teammates. Overall, we feel it was a great quarter for all of our segments, and we have good momentum for the second half of the year. With that, let me turn it back over to Matt to start the Q&A.
Thank you. If you would 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, that is *1 if you'd like to ask a question. First, we will hear from Elyse Greenspan with Wells Fargo.
Hi, good morning. My first question was just on the retail growth in the quarter, 5.6%, pretty strong number. I know when we go back to the fourth quarter call, you guys had pointed to there being some movement with the Q1 potentially being weaker, Q2 being the strongest quarter of the year. I was hoping to just get a little bit more color on the impact that that kind of movement had on the Q2. Is there a way you can quantify if there was a revenue recognition impact, if you could give us the dollar in millions, just so we can kind of break that out from the impact on the Q2 as we think about the organic growth in retail going forward?
Hi. Good morning, Elyse. It's Andy here. Back, if you remember our comments on the first quarter, we had said that the impact of rev rec was less than anticipated. I think the same thing held true in the second quarter. While, yes, in fact, it was higher than Q1, we did not have as big of a benefit in Q2 from rev rec. Underlying, we had a really good quarter. It just wasn't material for the second quarter.
You would view that 5.6 as being like the underlying growth, I guess, that we should think about. I know you guys don't like to give specific segment guidance going forward, but do you view that as a clean number for us to think when we think about the growth that we could see in retail in the back half of the year?
Maybe we take that and put it into two pieces is, there is a little bit of benefit in the 5.6, but it's nothing material inside of there for. As we talked about on the earlier comments about where we are, we're pleased at 4.5% organic growth for the six months, and we always think it's good to look at some trends because any quarters can kind of be up and down through all of it. Keep in mind that we've had employee benefits. We have more of that revenue in the first half of the year, and that business is growing well for us.
So Elyse, also, as you know, we don't give guidance on organic growth, but we've said it's the low- to mid-single digit organic growth business, is kind of how we view it in a steady state economy. That's the limited guidance we would give you.
Okay. In terms of, so Andy, you just said you saw some strong employee benefits growth in the first half of the year. Would you say the rest of the retail book away from employee benefits was still growing within the vicinity of 4%-4.5% for the first half of the year?
We didn't say that on there, Elyse, but would say that all of our businesses are growing really well. It's just employee benefits growing a little bit faster.
Appreciate that color. My second topic was on the margin side of things. You guys did have a one-off supplemental that you called out this quarter, and I thought that those typically run at, it's pretty kind of just drops to the bottom line. I was just trying to get a sense of the margin improvement. I think you alluded to in the comments that you guys did see margin improvement if we backed out that supplemental. Can you guys give us a sense of just X that supplemental with the National Programs, kind of the level of margin improvement you would've seen in the quarter?
Elyse, let's see if we can maybe put it into two pieces. Let's do it at a total level first. If you look at the GSCs, we did pick up about an incremental $10 million, and they do flow through at higher margins. We had made the comment about incremental one-time legal cost, and that was about $5 million that we recorded in the quarter. If you take those two, they start to net each other down. That's why when we look at the underlying, we said we were up 110 basis points. Even if taking out kind of the net benefit of those two, we still had a really good quarter at total company. As it relates to National Programs, when you go through, if you look at their margins and how much they're up, even pulling out the incremental GSC.
Again, keep in mind that contingents were also down in National Programs. We still expanded margins in National Programs for the quarter.
Okay. That's helpful. I appreciate the color. Thank you.
Sure.
Our next question will come from Mike Phillips with Morgan Stanley.
Thank you. Good morning, everybody. On your market overview slide, market overview, business overview slide on slide four, you mentioned some tightening underwriting criteria for some lines of business from some losses. I wonder if you can elaborate on that, like what lines you're talking about and where you're seeing things there.
Well, think about, we're seeing there's a little bit of pressure on rate. There's also a little bit pressure on terms and conditions. You might see a deductible change from a flat deductible to a percentage in an area that's not coastal, which would be different. There are some carriers more, I typically think more of in the E&S market, but even in retail, who are reevaluating certain classes of business, and if they want to participate, and if in fact they're a big rider of a certain class of business, it could be a property-related business or a liability-related business, and if they decide to change their vantage point, that may have a change on the overall market. That's what we're referring to, Mike.
Okay. Yeah. I was, I guess, looking for certain specific lines, property, non-property, liability, casualty, whatever on it. It sounds like you're saying kind of across the board, more on E&S.
Where I'd start with is just property, for example, where people become more selective, or let's say somebody put up a large line or large limit, $25 million in the past, and now they only are willing to put up $10 million or $15 million. Things like that.
Okay. Yeah, that's helpful. Thank you very much. Second question, you've commented last quarter on your non-cash stock comp being up around $3 million to $4 million from 2018 levels. It was up year-to-date this year. It's up almost under $10 million. Any updated thoughts on how that could run out for the rest of the year?
Yeah. Hi, good morning, Mike. Yeah, we were up about $3.5 million for the second quarter. We would expect that it will probably go ahead and trend up a little bit more for the back end of the year. The run rate actually for the second quarter, is a pretty decent run rate right now.
The three and a half?
No. If you look at the total.
The total. Okay, so you're up from 15 to 24, so like $9 million for the year. Is that right?
No. Well, hold on a second. Let's clarify. If take where our run rate is for the second quarter, if you pick it up in there, then that would be a good estimate for the next two quarters on stock comp.
Got you. Okay. Perfect.
Okay.
Yeah. Thanks, Andy.
You'll be coming in, probably coming in that 45 to 50 range.
Yep. Okay, awesome. Thank you very much, Andy.
Sure.
Next we will hear from Mike Zaremski with Credit Suisse.
Hey, good morning. I was curious, I believe you guys have a sizable earthquake brokerage business and maybe you can help size that up. Wondering if anything's going on there rates or uptake, given what's taken place in California.
Okay, Mike. First of all, fortunately, there was, that I'm aware of, no loss of life, and the amount of damage would be defined as minimal. We do business in both the residential earthquake and commercial earthquake. Prior to the event on July 5th, the 7.1, there was some pressure on rates already on those that were putting up very large limits, $50 million, $75 million, $100 million limits in quake zones. That's a fluid market. Once the quake occurred, there was a moratorium on writing quake coverage within 100 miles of the event, then it went down to 50 miles, and now I believe it's open for all classes. Those did not affect the heavily populated areas of San Diego, Los Angeles, or San Francisco. We could write in those all along.
Yes, there will continue to be pressure on those. I will tell you an interesting statistic. Northridge, I believe, was a 6.7. The difference between a 6.7 and a 7.1 is almost, it's between three and four times more powerful. They were very fortunate that it was out in a very rural area because otherwise there would've been significant damage. We continue to write lots of coverage, and we'll continue to do so, to provide capacity to the marketplace in both residential and commercial going forward.
Okay, great. That was interesting and good commentary. A couple others. Maybe I'll put them together. I believe you said lender-placed was better than expected. I didn't catch if you still think there's going to be year-over-year pressure there going forward. You've been talking about maybe some commercial auto appetites being lower. Did that take place or are appetites being bailed out by what seems to be increasing rate momentum in that line of business?
Hey, good morning, Mike. It's Andy here. On the lender place, here's what we saw during the second quarter is we had a couple of our customers actually had picked up some additional portfolios. We had some growth in those, which is good for the business. We do expect to see some continued fall off in the back end of the year. We mentioned previously that we've got a couple customers that were acquired, that business will be winding down in the back end of the year. It's from everything that we can see right now.
Okay, great. Commercial auto? Yep, sorry.
Yeah. On auto, let me address that. Here's the gist, broadly. Number 1, there continues to be losses in excess of the expected losses. This is not exclusively as a result of this, but distracted drivers are, as you know, a huge issue, and it's not slowing down. With that said, markets are getting rate, but some markets don't feel like they can get enough rate or, they are reevaluating the kinds of business they want to write in commercial auto, maybe they write a class of business now, make this up like dump trucks, and they've determined that they can't make money at any price in dump trucks based on their experience. Whereas another market, they do think they can make money on dump trucks, but it's at a significantly higher price than the first carrier.
What we're saying by that is we have some programs that work in the auto space.
If you change carriers at any time, there's disruption in terms of the way you write new business and some of your retention. That is driven or impacted more by the fact that it's commercial auto, because new carriers typically have differing views on the ability to make money in certain states and jurisdictions, which will dictate the legal climate, and thus your payments. It's not like something's changed dramatically, Mike, since last quarter. That's not the case. What we're trying to say is, we do continue to see people being very selective on their automobile writings, and we don't think that's going to change in the near to intermediate term.
Thank you.
Our next participant is Gregory Peters with Raymond James.
Good morning. A couple follow-up questions. In the wholesale commentary, I think you called out some timing issues that boosted the second quarter organic. Can you go back and give us a little more detail?
Greg. In the first quarter, we said it was about a 1% impact. It was about a 1% also in the second quarter.
Down one in Q1 and up.
Exactly.
Say that again, Powell?
I said down. Remember, the revenue, it moved from Q1 into Q2 because they extended it and renewed it at a different time. The impact in Q1 was down about 1%, and the impact in Q2 was up about 1%.
Got it. There wasn't any pull forward of revenue from three Q or four Q in the second quarter, correct?
No. This was just a couple of accounts in Q1 which extended their policies and renewed in Q2.
Okay. In your commentary, you also spoke about positive momentum in employee benefits growing faster. Is this a function of the accounting 606 rule, or is this new accounts or rates? It seems like maybe it's all three, but maybe you could provide some additional color on that.
I would focus it on our ability to retain our existing customers and write new business. That's a growing business for us, and that does not mean that we're not pleased with commercial lines or personal lines. Quite the contrary, we're pleased with those too, and they're doing well. Andy did mention earlier, and I did too, that employee benefits is doing well. I'm telling you, commercial lines is doing well too. Let's not single one out. We're very pleased with how our retail business performed in Q2.
Right. On the retail side, it seems like most of the channel checks come back with extremely positive commentary. BB&T reported a blowout second quarter organic. Is this just a function of the middle market economy, or do you have any perspective on that?
Well, again, it's hard for us to comment on someone else because we don't really know how they track organic growth and more specifically, their mix of business as it compares to our mix of business. I would purely be speculating on anybody else. That's number one. As it relates to us, I would tell you this, I think that we're just executing better. Meaning, I'm not trying to be overly simplistic, but I just think we are executing better.
In the second quarter, and the results showed that way in the organic growth. I do not want you to think that there's something that's changed in the economy or any of this other stuff. I think it's interesting. Some people criticize us on what they might call the muted view on the rate environment. The answer to the question is, that's what we're seeing in the middle market economy. Many people are talking about rate impacts on large lines of business that might be on fees, which have no impact on their commissions because they're paid on a fee. It could be comparing an apple and an orange. We're not uptight about it. I just wanted to clarify that because I know you were probably thinking that, Greg.
The important thing is, rates have a positive impact, exposures have a positive impact, really, at the end of the day, we're executing well, and I'm very pleased. We're very pleased with how the team's doing.
Yeah. Just final question. Andy, in your comments on free cash flow, I think you said for the year to date, running a little bit behind where you were last year on the conversion rate. Do you anticipate sort of the trend of the first half to continue in the second half being a little bit below the full year last year on the conversion rate, or do you have any other commentary on that?
Yeah. We had mentioned before is we do expect it'll be down a little bit this year. If you remember, fourth quarter of last year, we got a bump in the working capital associated with the acquisition of Hays. We're anticipating that will kind of reverse back out to a normal level this year. Last year, our free cash flow conversion as a percentage of revenue, I think, was right about 26%. We would expect that will come down a little bit this year. As an organization, we continue to run somewhere around 22%-23% as a conversion of free cash flow conversion. Again, that's cash flow from operations less CapEx divided by revenues on there. We run right in that 22%-23% pretty consistent all the time.
Greg, and I'd like to point out, that is not just this year, that's for the past four years, five years, and up to 10 years. That is something that we're very pleased about because for every dollar that we earn, we're converting about $0.23 to reinvest in our business, which you've seen how we've done through acquisitions and organic growth and related. That is a point that I think that it should be duly noted. I know you know that, but I would encourage everybody to think about that because we're very proud of that, and it's something that is industry-leading.
Yeah. Greg, the other thing to keep in mind on the free cash flow, we've talked about it in some of our previous calls, our CapEx will be up this year and next year associated with the building of the Daytona Beach campus. Again, the ranges that we've given on that, as we said, will probably be up somewhere around $30 million-$35 million in CapEx this year, we'll spend about another $30 million-$35 million next year on CapEx, it'll drop back down.
Got it. Thank you for the answers.
Yep. Again, that's CapEx on the building, not total, okay?
Yeah. I got it. Thank you.
Okay, perfect. Thank you, sir.
Our next question will come from Mark Hughes with SunTrust.
Thank you very much. Good morning.
Good morning.
You mentioned that there was upward pressure on quake pricing. Any early read on order volume post the events?
The answer is it's a little too early to say, Mark, but what I would tell you is historically, the absorption rate does go up post-event. Okay? I'll give you a statistic that just kind of amazes me. In the state of California, and we write quake in Oregon and Washington, in the state of California, 12% of the people that live in quake zones buy earthquake coverage. 12. That sounds low to me. When the event happens, a lot of people think about, well, what would happen if that happened to us? Some of those people actually buy insurance. We are not expecting some, it's not going to go from 12% to 50%. It just doesn't do that. It's a very unique dynamic that occurs there.
There's lots of people that are asking about it, and talking about it, and thinking about it, we are quoting more of it. I think that it could have a positive impact, but it's too early to tell.
Very good. One other question on the Social Security advocacy timing, that's been a headwind for a couple of quarters. How much of a headwind would you anticipate in coming quarters? When do you kind of lap that effect? Was it as meaningful in the third or fourth quarter of last year?
Hi, good morning, Mark. It's Andy here. We'll have continued headwinds for the third and fourth quarter, the larger being in the third quarter, then it kind of starts to wind down in the fourth quarter. We had said previously we thought it'd be somewhere around $8 million-$9 million on a full year basis. We're still expecting somewhere around kind of that $4 million-$5 million for the back end of the year.
Thank you very much.
Sure. Thank you.
Yeah.
Next we will hear from Yaron Kinar with Goldman Sachs.
Thank you very much. I guess my first question is around the revenue recognition impact. You didn't see as much of it in the second quarter or first quarter for that matter. Do you expect any of that to still come in in the second half of the year?
The only real item that we're expecting in the third quarter, and this was an item that popped up in Q3 of last year in national programs, the $8 million. That was the one-time adjustment that we made last year. That will reverse in the third quarter of this year, which again, is going to flow through the organic calculation for programs. That's really the only one out there.
Okay
By material.
Got it. Then going back to Elyse question on the margins for supplemental commissions, is there any way to quantify that? I know one of your competitors had talked about roughly 60% margin. Is that roughly what we should be thinking about?
Yeah. I mean, we've never said what the margin are or the margin is for either the GSCs or the contingent commissions , they are higher than average for the business.
Okay. Thank you very much.
Sure. Thank you.
Our next question comes from Meyer Shields with KBW.
Thanks. Two quick questions. One, I just want to clarify because I think I had this wrong. Andy, did you say that the $8 million recognition from last year will reverse itself or just won't be there in the third quarter?
Well, it just doesn't show up in the third quarter of this year.
Okay. There's not an $8 million hit?
Yeah, thanks.
From comparability, you had a benefit last year. That benefit will not be there this year.
Okay, perfect. Second, you talk in the presentation about rising employee benefits rates. Does that have an impact on retail organic growth?
It does if you're on commission. It doesn't if you're on a fee. It does impact. Here's the way I would want you to look at it, Meyer, is this: ultimately, you know that there's a cost trend out there, and let's say that cost trend, medical trend is, let's say, 7%, 8%. Every year, employers, whether it be your employer, Brown & Brown, or anybody else, is faced with that burden in terms of providing that coverage. What price increases, what that does is it drives buyers, employers, to consider, number 1, what they can afford and plan design. Sometimes people change their plans to manage the cost increases. The answer to your question is, it can impact organic growth. If you add employees, which in turn increases the premium, which if you're on commission, you can get a lift.
Different carriers do that differently. Sometimes they pay a per head per month. Sometimes you're on a fee. It's hard to make a broad statement. You can't say that everything that we write is on commission, because it's not. Yes, there is some embedded organic growth there because of that rate lift.
Okay, fantastic. Thank you so much.
Our next question will come from Joshua Shanker with Deutsche Bank.
Yeah, good morning, everybody.
Morning.
Good morning.
I apologize, I joined a little bit late, but I think these questions have been asked. The first one involves the supplemental commissions in the programs business. Is there any negative impact in the forward quarters as you pulled commissions out of the future to come into 2Q?
No, there is not, Josh. That was a one-time that we received in the second quarter. Again, that was the final year of a multi-year calculation.
We weren't pulling something out of Q3 or Q4.
No, exactly.
No, I was only assuming you were. Just trying to understand how it all came in this quarter. Not that we know the answer, but if I think about somewhere between two and four as a normal run rate, is there any reason to think that's different in the future?
Boy, a little bit of a hard one to answer, the reason why we say that is the programs is the one that we at times have the most volatility with, because you've got individual calculations for every one of the programs underneath of there. Some of them are single year, some of them are multi-year in nature, it just depends upon the performance. We've been definitely up and down in that world. Again, wouldn't surprise us that they're down a little bit there. We saw them, they trended down for the second quarter.
Okay. Bless you. The second question, it's my own fault, I underestimated your acquired commissions ex-Hays in 2Q. I'm wondering if you can help frame that 2Q versus the end of the year. You have $14 million more coming in annually from the newly acquired businesses. Can you put just a point on how we should think about non-Hays acquired premiums to the end of the year? Not premiums, commissions.
That assumes on what we end up closing, though.
Yeah, of course.
Right.
What you've already closed. Don't try and predict new deals, of course.
Yeah. Okay, remember, here's the deal, Josh. We went to not announcing the size of the deals upon announcement, and we were announcing them, which is consistent with everybody else, at the quarter calls. We've announced two deals, and we will talk about that revenue at the end of the third quarter. Then if we announce any more, which we think we have an opportunity to do, we'll announce all of those at once. We don't give forward-looking guidance on revenues acquired.
Yeah, I'm actually looking backward, just trying to see. Ex-Hays, I see $35 million-$40 million of acquired revenues. If I go to 4Q and 3Q last year, I see that's about in line. I'm wondering if, given that the Hays skews the thing a little bit, with that elevated level, that we're going to have it come off the plateau a little bit in the back half of the year, assuming nothing about deals going forward.
Yeah. Based upon when we close the deals in 2018, Josh, yes, you are correct. It will slow down, presuming no other deals, in the back end of the year.
Okay. Nothing forward, just trying to understand the past.
Yeah.
Thank you very much.
Yeah.
As a reminder to those on the phone, it is star one if you'd like to ask a question. We will now take a follow-up from Mike Phillips with Morgan Stanley.
Yeah. Hey, guys, just real quickly, any impact you expect early on from, in maybe next quarter's revenue for services or programs from Barry?
Limited. The number of claims has been much lower than we thought, Mike. We will have a modest impact, but it's not going to be an event like we thought it was going to be. With the amount of rain that occurred, we were surprised there weren't more claims. That's where we are right now, based on what we know.
Okay.
Yeah, Mike, just for clarity, don't model anything up. The volume of claims that we're getting are really, really small.
Yeah.
We're not envisioning any real uptick at this stage in Q3 versus last year.
Okay, great. Thanks.
Yeah. Sure. Thank you.
With no further questions on the phone, I'd like to turn the call back over to management for any additional or closing remarks.
All right, Matt, thank you, and thanks for joining us. We look forward to talking to you next quarter at the end of our third quarter. Have a wonderful day. Goodbye.
Again, that does conclude our call for today. Thank you for your participation. You may now disconnect.