Good morning, and welcome to the Brown & Brown, Inc. third quarter earnings call. Today's call is being recorded. Please note that certain information discussed during the 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 third 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 third quarter, that is, 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 filing 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. 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 measures 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. I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Jennifer, good morning, everyone. Thanks for joining us for our third quarter 2017 earnings call. I'm on slide four. For the third quarter, we delivered $475.6 million of revenue, growing 2.9% in total and 3.4% organically. Our EBITDAC was 33.5%, which is down 50 basis points, reflecting the investment discussed in previous quarters. Our earnings per share for the third quarter of 2017 increased to $0.53 from $0.50 in the third quarter of 2016. Andy will provide more color on our revenue and earnings performance later in the presentation. Finally, we completed three acquisitions during the quarter, and we are pleased with our results for the third quarter and the performance specifically of the business year-to-date. I'm on slide five. During the third quarter, we continued to see economic expansion, driving exposure unit growth across many industries and locations.
We've been consistent in our discussion about decreasing premium rates across most lines for the past two to three years. In the first quarter of this year, we mentioned that coastal property rates were down in the range of 2%-10% as compared to the first quarter of 2016. In the second quarter of this year, which is typically a big property renewal period, we saw coastal property rates down 5%-15%. During the third quarter, we saw coastal property rates down 5%-10% prior to the storms. We see most carriers now drawing a line with flat rates on property in coastal areas. As it relates to other lines, commercial and personal auto rates continue to increase 1%-5%, which are being driven primarily by frequency of claims and distracted drivers. For most other lines, rates are generally flat.
In summary, there continues to be a lot of capital across the insurance marketplace. However, the recent storms, fires, and earthquakes may have implications on pricing in 2018. At the present time, we don't have a clear view on the potential impact for next year, but there are a lot of discussion about rate increases for coastal properties. If there are proposed increases, which we think there will be, the question really is, will they stick? Certain markets are testing that philosophy right now. Let's discuss the performance of our four divisions. From a retail perspective, we grew 2.5% organically for the quarter and have grown 2.5% year-to-date. We're pleased with this year-to-date performance as compared to the organic growth of 1.8% for the first nine months of 2016. Excuse me. During the quarter, we delivered good organic revenue growth driven by increased new business and higher retention.
Last year, we had a number of large accounts that were acquired, and we had some lost business, which we're not experiencing at the same level this year. Regarding our performance incentive program through the first nine months of 2017, the program continues to perform in line with expectations. Based on our organic revenue performance for the year, the program is having a very positive impact in helping drive improved results. The performance for our National Programs division exceeded our expectations, primarily as a result of incremental claims processing revenue associated with the significant weather events that happened during the third quarter. Andy will describe the effect of these incremental revenues on the quarter and our outlook later in the presentation. We're pleased to report that our new Arrowhead Core Commercial program performed in line with the expectations we provided last quarter.
As a reminder, we're in the investment phase, and as a result, there will be an impact to our margins through 2019. We continue to experience strong performance from our lender placed business and our all-risk programs. The growth from these and other programs was partially offset by continued downward rate pressure for our coastal property programs prior to the storms, and the impact related to carrier changes on certain programs, as we've discussed before. Remember that these changes will result in decreased revenues for National Programs in 2017 of approximately $5 million-$7 million for the full year. We realized about half of this impact in the third quarter. Our wholesale business had another great quarter, growing 6.1%, driven by strong new business. Again, we realized growth across almost all lines of coverage and the majority of our businesses.
Our brokerage businesses continue to improve as we wrote more new business and rate decreases were less than in the prior year. The services division grew 4.8% this quarter, which is a really good performance. We experienced growth from several of our claims processing businesses, driven by new business and to a lesser extent, some claims from the recent storms. Our advocacy businesses also performed well. In summary, we're pleased with the performance of our four divisions for the quarter. Now, let me turn it over to Andy, who'll discuss our financial performance in more detail.
Great. Thank you, pal. Good morning, everyone. I'm over on slide number six. This presents our GAAP and certain non-GAAP financial highlights. For the third quarter, we delivered total revenue growth of 2.9% and organic growth of 3.4%. The difference between the 2.9% and the 3.4% relates to lower contingent commissions. Our income before income tax margin increased by 90 basis points, and our diluted earnings per share increased by 6% to $0.53 versus $0.50 in the third quarter of last year. The effective tax rate for the third quarter was substantially in line with the prior year at 39%. Our weighted average number of shares increased by half a percent due to shares issued as part of our long-term equity plan and our employee stock purchase program.
These increases were partially offset by the impact of our $50 million ASR that we initiated during the middle of the third quarter. Our goal each year is to minimize the impact of these equity programs through periodic stock repurchases throughout the year. In a few slides, we're going to walk through the primary drivers of the EBITDAC margin changes. Over to slide number seven. This slide presents certain GAAP and non-GAAP financial highlights after removing the impact of the change in acquisition earn-out payables for the third quarter of each year. Since these items are non-cash in nature and can increase or decrease by quarter, we believe it is helpful to evaluate the business excluding these adjustments. For the quarter, our adjusted income before income tax margin decreased by 10 basis points.
The differential as compared to the decrease in our EBITDAC margin was primarily driven by lower interest expense as we've been paying down outstanding debt. Excluding the effect of the change in acquisition earn-out payables, our earnings per share increased by $0.01 or 1.9% versus $0.52 on an as adjusted basis in the prior year. Over to slide number eight, we'll discuss the key components of our revenue performance. For the quarter, we had no material movements in investment income or other income. As we've been discussing on previous calls, our expectation was that our contingent commissions would more than likely decrease due to losses and lower premium rates that are shrinking profitability for risk bearers. For the quarter, our contingent commissions decreased by $4.7 million, and guaranteed supplemental commissions were $600,000 lower as compared to the third quarter of last year.
The largest decrease was realized in the wholesale division, with a reduction of $3.2 million compared to the third quarter of last year. Our total core commissions and fees increased by 4% year-over-year. When we isolate the net impact of our M&A activity, our organic revenue growth was 3.4% for the quarter, and this was driven by growth in all four of our divisions. Over to slide number nine. Similar to previous quarters, we thought it'd be beneficial to include a walk of our quarterly EBITDAC margins from last year to this year and highlight the main drivers. Our EBITDAC margins decreased by 50 basis points year-over-year. As discussed during the second quarter earnings call, the new Arrowhead Core Commercial program will initially be a drag on the margins as we invest in building our platform and also incur transition services.
The investment this quarter impacted our margin by approximately 60 basis points, which is in line with our expectations. Once our platform is in production by the end of 2019, we expect the EBITDAC margins for this program to be similar to the rest of those for the programs division. Our retail performance incentive plan impacted margins by approximately 50 basis points, which is in line with our expectations. As we mentioned previously, we are accruing the cost based upon a full year projection of growth by producer, and as a result, there will not be a direct correlation of the expense to the revenue in each quarter. As a reminder, we anticipate this program will impact our margins the most in 2017, less in 2018, and then we'll break even in 2019.
For the current quarter, the impact of our investment in technology was about 40 basis points, and the programs are progressing as expected. The incremental effect of the year-over-year change and the gain on disposals of certain businesses and books of business contributed about 30 basis points to the margin change for the quarter. We also recognized a benefit during the quarter of approximately 20 basis points associated with foreign exchange within our wholesale division. The remainder of the business was able to contribute 50 basis points of margin expansion, which we are pleased with, as we continue to focus upon leveraging our revenues and managing our expenses. These efforts enabled us to offset the margin impact from the decreased contingents and guaranteed supplemental commissions. Moving over to slide number 10. Looking at the performance of each of our divisions a little more closely, we're going to start with retail.
For the third quarter, our retail division delivered total revenue growth of 2.6% and 2.5% organic revenue growth, driven primarily by new business and higher retention. The 40 basis point increase in the EBITDA margin was driven by gains resulting from the book of business sales that we mentioned earlier and good flow-through on new business and better retention. These items more than offset the incremental investment in technology and our performance incentive plan. Our income before income tax margin increased by 380 basis points and was primarily driven by the change in acquisition earn-outs, lower intercompany interest expense, and the items impacting EBITDA margins. Over to slide number 11. For the quarter, total revenues for our national programs division increased by 3.3% and 2.9% organically.
Organic revenue was higher than we anticipated for the quarter, as we realized approximately $5 million of claims processing revenue associated with Hurricane Harvey and Hurricane Irma. For the quarter, there is not a material difference in revenues compared to the prior year realized from weather-related events. The organic growth for the quarter was primarily driven by our Arrowhead Core Commercial program that was launched in July of this year and our lender-placed business. The growth from these programs is partially offset by the reduction in revenue from changing certain carriers and also our coastal property programs. Our EBITDA margins decreased by 390 basis points, primarily due to the investment in our Core Commercial program and the impact of the carrier changes.
For the quarter, our income before income tax margin decreased by 90 basis points, impacted by the EBITDA drivers that we just mentioned, and then partially offset by lower intercompany interest expense. Over to slide number 12. The wholesale division delivered total revenue growth of 2% and organic revenue growth of 6.1%. As we mentioned earlier, contingent commissions decreased by approximately $3.2 million versus the prior year. This explains the difference between total revenue and organic revenue growth. Our EBITDA margin decreased 50 basis points to 36.3% for the quarter. The decrease is attributable to the lower contingent commissions. However, we were able to substantially offset this decline through leveraging our organic growth and continued control of expenses. In addition, we recognized a foreign exchange benefit, as we mentioned earlier. Over to slide number 13. The services division grew revenues 4.8% versus the prior year.
This growth was driven by increased new business, managed care claims, and to a lesser extent, property claims. For the quarter, our EBITDA margin increased by 230 basis points as a result of revenue growth and continued effective cost control efforts. We do not expect this level of margin increase every quarter, but are very focused on operating highly efficient claims processing businesses. Our income before income tax margin increased by 380 basis points, impacted by the EBITDA drivers and lower intercompany interest charges. Okay, a few comments regarding outlook. We are expecting contingent commissions to continue to decrease in the fourth quarter as compared to what we realized last year, with a rate of decline potentially similar to what we just experienced in the third quarter.
Revenues relating to claims processing for Hurricane Harvey and Hurricane Irma are projected to be in the range of $6 million-$8 million in the fourth quarter, and the margins from these revenues should be above the average margins for national programs. We're expecting our full-year effective tax rate to be in the range of 38.7%-39%, and we're still expecting the full-year impact of our investment in technology to be in the range of 40 to 50 basis points. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy. Great report. In closing, we're really pleased with the performance for the quarter and for the year. As I said earlier, admitted rates in cat areas are flat now, excluding automobile. E&S markets are flat to up slightly, defined as maybe 5%. There are some E&S markets looking for increased rate higher than that, but it's not sticking. We believe this is going to continue to be the case throughout Q4. As reinsurance treaties renew, we'll start to see what impact these events will have on insurance rates, and we'll have better insight into the rate environment on our next Q4 call. We do expect to see incremental increases in claims processing revenue in Q4 of 2017 and Q1 of 2018 as a result of the storms, as Andy alluded to.
As of now, we do not expect to see much impact on claims revenues related to the fires in California or Hurricane Nate. Our technology programs continue to progress as we focus on improvements to our core infrastructure, preparing for the new state of New York cybersecurity regulations that are effective in Q1 of 2018, as well as our agency management system upgrades in retail. We continue to look at a number of transactions that can help us further grow, expand our capabilities, and add more talented teammates. As we've said before, we're always looking for businesses that fit culturally and make sense financially. Lastly, our board of directors recently increased our dividend by 11%. This represents the 24th consecutive year of dividend increases, something that we, as teammates, are very proud of.
Finally, I'm really pleased with the activity going on throughout the company, specifically related to how we're engaged with our customers and carrier partners, and the progress we're making on many of our initiatives to drive the business forward. I want to take a moment and thank all of our teammates for all their efforts, as our financial performance is only possible through all of their hard work and dedication each and every day. With that, let me turn it back over to Jennifer for the Q&A session.
If you'd like to ask a question on today's call, that is star one on your telephone keypad. We'll go first to Arash Soleimani with KBW.
Thanks. I know you mentioned the $6 million-$8 million claims processing impact for the fourth quarter. Is that also a reasonable run rate for the first quarter of 2018?
Yeah, for the best that we can tell right now, that's a good guesstimate. I mean, we're still, we'll call it, somewhat in the early days of going through the adjudication process and all the claims. The numbers could move around a little bit. As we get into the fourth quarter, we'll be able to tighten that up a little bit more for Q1. That's a good placeholder for right now.
Thanks. I know the claims processing revenues you mentioned were from Hurricane Harvey and Hurricane Irma. Are you seeing any kind of indirect benefit from Hurricane Maria, just in terms of the shortage of adjusters and any kind of demand surge that causes?
No. I would just say there's already demand here in the United States, even prior to the effect of Hurricane Maria. Between Hurricane Harvey and Hurricane Irma, there's plenty of shortage. No, I don't think directly as a result of that. Maybe indirectly. That's it.
Okay, great. Thank you for the answers.
Thank you.
We'll go next to Elyse Greenspan with Wells Fargo.
Hi, good morning. My first question, I was just hoping to get a little bit more color on what you're seeing on the organic growth within the retail segment. You pointed to being the compensation program working out in line with your expectations and Powell, you also seem to point to a little bit better pricing environment and also some level of exposure growth. How do you see the organic growth, the trajectory in the retail segment through the rest of this year and just any kind of initial color in terms of 2018?
Well, good morning, Elyse. I have to say, this is the first time I think that you're not our first question. Second today. Having said that, you know, Elyse, and I know this drives you crazy, but we don't give organic growth guidance. I would tell you that we were pleased with the quarter, as you've heard, and we're pleased with the year to date. Right now, I hear what everybody else is hearing out there about the marketplace and what people are speculating on. What people are speculating on and what the market will bear are two different things. Until we start to see rate increases sticking, I'm guardedly optimistic or just guarded in regards to what that would do to our organic growth.
I do think that in certain coastal offices where we write, for example, a lot of Excess and Surplus lines property, particularly habitational in South Florida, that it'll help those individual offices, but they're part of the bigger pie. You still have offices in Denver and Seattle and California that are writing in a normal market. I haven't answered your question exactly. I would say that we've always said that we think we're a low to middle single-digit organic growth business in a stable, steady state economy. I think the economy is pretty good. I think that we're seeing our clients thinking about it in a manner where they're making investments in their businesses. That's a positive. We are seeing more construction. That's a good thing.
If anybody is telling you they're getting ramped up for a hard market, I believe that's a little premature.
Okay, great. I appreciate the color, Powell. Did you guys say how many shares did you repurchase under the ASR in the quarter?
We ended up purchasing back a total of about 968,000 share, I think, was the exact number on it. Again, just remember, we did that mid-quarter, Elyse, so we only got about half of the impact in the weighted share calculation.
Okay. Powell, are you seeing anything different in terms of the acquisition environment, whether pricing, just availability of deals, that obviously deal flow. You guys have found a few deals, but has been still kind of a little bit light for you guys.
Yeah. Elyse, what I would tell you is this, you have 26 firms out there that are short-term in nature. That means they're private equity backed, and they're focused on a flip in three to five to seven years. That creates a lot of people out there calling on businesses. Those individuals that are going to be attracted to that model are typically different. Not necessarily, but typically different than the people that are attracted to us because as you know, we're a forever model. We look for firms that fit culturally and make sense financially. I know that it's hard, and we've been asked this a lot over the years and the quarters previously, what to expect in terms of acquisitions, and acquisitions with us are lumpy, as you know.
We're always out talking to people, and we may talk to somebody today that we do nothing with for five or seven years. At the end of the day, as you and I and others on this call have talked about, there are three things that you can say with absolute certainty about Brown & Brown as it relates to our acquisition, strategy, and execution. Number one, we do what we say and say what we do. That means when we do due diligence, it's not a license to renegotiate the actual contract. Watch out, private equity. Number two, we pay with cash. Hard to argue with greenbacks. Number three, when we make a decision to do something, we giddy up and go.
We can move probably as quickly or quicker than anybody else because we in-house pretty much everything from legal to due diligence to everything. We think that's a good thing and it positions us nicely, but I know it can frustrate you and some of the other folks on this call because it's not a predictable stream, and if we could predict it, we would tell you that. The answer is we can't. I would tell you that I think there's going to be a lot of change in the insurance distribution market space in the next three to seven years. We plan on being able to look at a bunch of that stuff, but I don't know if we'll do any of that stuff. It just depends.
I think that we will as it relates to those that fit culturally and make sense financially, but we don't know when those will come available. That's kind of the story.
Okay, thank you. Thank you very much. I appreciate all the color.
Nice to talk to you, Elyse. Thank you.
We'll go next to Kai Pan with Morgan Stanley.
Thank you, good morning. First question is on the coastal property pricing. Powell, you mentioned this year the negative impact had been anywhere between 2%-15% in terms of year-over-year pricing change. I just wonder how much a drag on your organic growth. Just try to figure out if that rate becoming flat or up, what kind of tailwind could be to your organic growth?
Kai, nice to speak to you this morning. We haven't figured out that exact drag number, but this is what I would tell you. There are certain offices, back kind of what I said in Elyse's question, that write a lot of this business, and it has been a drag in their office. Remember, that's not indicative of the entire organization. I'm cautious to say that it's going to be a material amount, in terms of, let's say, in Q4 or Q1. We would say right now that flat is a positive for Brown & Brown. Just a positive. Doesn't mean that we can tell you exactly how much organic growth that's going to lead to.
At the end of the day, when you've had down 15%, down 20%, down 15% or 20%-25% over three years, you kind of get to a point where you're like, "It can't. It doesn't seem logically that it could go down anymore." Like I said, there's a lot of people that would like to move the market up, and the question is: Will the market bear it? We are not seeing that right now. Admitted markets are pretty much flat, and quite honestly, the losses in a number of those are not nearly as bad in terms of number of claims as we thought. That means a lot of those claims, the losses were underneath the deductible amount.
You could have an individual loss that was a large loss, but in terms of the number of losses that exceed the deductible, it's been less than we thought.
Okay. That's very helpful. What % of your revenues are related to Florida coastal properties?
The answer is we haven't given that information out in the past. What I would tell you is the revenue in Florida, total revenue, last year was $184 million, part of just over $900 million in retail. Like I said, as you know, I think the number is 90% of the total insured values are within one county of the coast in the state of Florida, and the vast majority of our population as well.
Okay. That's great. My next question is on the margin side. I hope you can walk us through these three buckets in term of Arrowhead retail incentive plan as well as IT spending for 2018. What kind of general trends there? Are we still going to see similar level of drag on your margin or some of them could be level off or are there any other dynamics going on for the margins?
Yeah. Good morning, Kai. It's Andy here. What we mentioned on the call and previously, the way to think about retail is, and you can see where the numbers are right now, what they're impacting margins. The commentary was the largest investment will be in 2017, less of an investment in 2018, and it breaks even in 2019. Hopefully that gives you the guidance that you're looking for.
Yeah.
All right. On the technology program, what we've said before is that we would be around full investment in 2017 and 2018, and then we start gaining the benefits of those investment programs, and they start paying back in 2019 and 2020.
Okay. What about the Arrowhead?
On Arrowhead, so what we said is if you look back to the previous slide that we gave last quarter on there, and we gave an idea of what we thought the back end of this year would look like. We said we would have somewhere around $6 million-$8 million in revenue, and we would have an investment of $1 million-$3 million. Next year, we said we should have somewhere around $15 million-$17 million in revenue and about $2 million-$4 million net investment in the P&L. Similar to our comments, that will start to improve in 2018.
In 2019.
In 2018. It start to improve in 2019 also, okay? When our platform goes live in the back end of 2019, and then 2020 is when the margins actually really start to improve. Okay?
Okay, great. Thank you so much for all the details.
Sure. Thank you.
We'll go next to Joshua Shanker with Deutsche Bank.
Yeah, good morning, everybody.
Morning.
Yeah, two quick questions. One is on the contingent commissions. Is the business changing in terms of how you derive your revenue? Is this just one small part here? Do you expect going forward, this is just going to be a different way that you guys make money?
No, I don't think that something is changing per se. I'm going to address it kind of broadly. In retail, as an example, we have businesses that have been impacted by losses, and we have that. The biggest changes this quarter were in wholesale. If you want to think at a macro level in wholesale, what you have is you have rates that are continuing to go down, so the rate online is less. They've had more events, not necessarily a hurricane, but things like hailstorms and tornadoes in places like Texas, Oklahoma, Arkansas, Missouri, and very unusual, odd events. The combination of those two things, Josh, have dealt losses in that are not necessarily as high a profile as what you all would see on CNN and The Weather Channel. That's what's happened.
We do think that that can come back over time. It is not that we think the model is dramatically changed, but it's something that we think a lot about. Obviously, we think there is a great alignment between us and our carrier partners with some type of profit sharing. At this time in the market, with rates way down and all kinds of losses all over the place, including fires in California, including things like that, all of that adds up to more aggregate losses for the industry than we have historically looked at. I'll give you an example. We were just at an industry event that occurs every year in the beginning of October, and in that discussion, the property combined ratio, several of our large carrier partners talked about the industry's at a 105%. I didn't know that, but that was pre-storms.
You start to feather that into a large binding authority book of business, and that's how you see your profit sharing eroded.
Makes sense. In terms of what you said going into the previous sort of prepared remarks is that the higher organic growth is allowing you to improve your margins despite the lack of contingents helping out here. Can you talk a little about the difference between 3% organic growth and 2% organic growth, and how it sort of filters down into the operation and helps you grow? We've used this 3% number for a while, but what does 3% mean versus 2%?
Yeah. Good morning, Josh. Andy here. I know this is a topic that comes up all the time, is what's that magic number that I think everyone is in search of that says, boy, if you hit that, then there's margin expansion. I think as we've talked about on previous calls is we don't believe that there is a magic number inside the business, because what can happen is, depending upon how we're investing on a quarterly basis, the flow-through from revenues can go up or down. I think maybe the way to think about it is we've given what we believe is our medium-term guidance on organic of that low- to mid-single digit, and we said that we should be able to run the business in a 33%-35% EBITDAC range. The combination of those two should be able to keep us right in there.
Again, we can be up and down throughout. I think right now, because we're going through some of the investments in a few of the areas, we'll be a little bit below, but we know what those are. That's why when we made the commentary about we're glad to see the flow-through this quarter of the margins, doesn't mean that we're going to see that every quarter based upon the organic. Again, it can go up and down a little bit.
Okay. Thank you very much for all the questions, and good luck on the remainder of the year.
Thanks, Josh.
We'll go next to Mark Dwelle with RBC Capital.
Yeah, good morning. The first question relates to the guidance related to the flood servicing business. First, I appreciate you giving us the guidance. The question I wanted to ask is, are you drawing revenues equally from both Hurricane Irma and Hurricane Harvey? From a Brown perspective, was this maybe more of an Hurricane Irma-oriented level of earnings?
No, it's actually the opposite.
Yeah.
Think of Hurricane Harvey as a water event flood, Hurricane Irma as a wind event.
Yeah.
That's the best way to describe that. It's more claims in Texas as a result of that.
Mark, if I can clarify, because a couple people have also asked us where do these revenues show up? Again, for clarity, these revenues are going to show up inside of National Programs. We will get a little bit inside of Services, but not much. As a reminder, we sold our previous claims processing business for flood back in 2014, Colonial.
Okay. I guess then as a point of reference, how much revenues did you earn off of Hurricane Sandy back in 2012? You just still had Colonial then, right?
Yeah, we did. Yeah. We had purchased that back in 2011. I wouldn't try to use that as a benchmark. You're comparing an apple and an orange with what we have today in the portfolio.
Okay.
Remember, you got variabilities based on the amount of the loss as well. The loss could be higher or lower in the Northeast versus in a rural Texas community. There's a lot of variables in there. It's really hard to draw a parallel between one other event and this event.
Are your servicing revenues mostly commercial or residential in nature? Okay.
Yeah, that's in services. When you ask the question, services. If you go into national programs and you go into flood, that's personal.
That's how I meant to ask the question, if I wasn't clear.
Sorry.
The flood servicing revenue, is it mostly personal or mostly commercial? That's the way I should have asked it.
Sorry.
No worries. Okay. Thanks for that. The second question. This is the brief clarification. You mentioned the ASR in the quarter. Is that most of the cash movement in the quarter, Andy? Is that the main driver of the quarter?
Yes. That would be probably the largest item. Then we have our normal interest payments, dividends, the principal repayments on debt.
Right. Okay. The last one was just. Kai kind of already covered this to some extent. Within the EBITDAC walk, you had the other item. I took from your comments that that was primarily just cost saves, not just, but cost saves within the various business units. Is that the right way to think about that? That there would be whatever you have for the 3 main items, the 3 main drags that you've been highlighting for several quarters, then you have all your other cost-saving efforts, that would be the counter to that?
Mark, yeah. Cost savings is a component of it. There's also a piece in there, as we talked about, which is just our ability to leverage our revenues
A combination of those two.
Okay. Thanks for the clarification. That's all my questions.
Good. Okay, thank you.
We'll go next to Mark Hughes with SunTrust.
Yeah, thank you. Good morning. How much opportunity is there in the fourth quarter for folks to be enthusiastic about the Five for Five program and have a big finish to the year?
I think that, obviously, there are people that are going to be on the bubble, and they know if they're on the bubble, and we want them to get there. I don't want to give you some impression that there's some outlandish thing that's going to happen in the fourth quarter that we can anticipate. We can see a lot of the people that are currently tracking towards it, and we've accrued appropriately. Like I said, time will tell.
Right. Probably a little extra energy in the fourth quarter?
Oh, I think there's a lot of energy. I don't want to diminish the fact of energy. I thought you were talking about from a financial perspective. Quite the contrary. We got a lot of producers that are jacked up, and that's exactly what we want. We're excited to be able to earn our clients' business and go out and write a lot of new business. It has done exactly what we wanted it to do, Mark. Meaning, if you're talking about in the hearts and the minds of our teammates, it is absolutely working.
Yeah, I know. I'm just trying to gauge whether in the fourth quarter you would really see that come to the fore as people make sure they get over the line.
Yeah. Mark, I guess if you're trying to make a parallel back to 2012.
Yeah
That probably would not be a good parallel. As we talked about on the previous calls, remember when we did that program, there are probably a lot of things that we learned about during that exercise that we tried to incorporate into this one, and one of them was around communication. We've been communicating every month with all of our teammates, where they stand, what their projection looks like. There's a constant push all year in order to get there. We do not expect this big fourth quarter jump that we saw back in the fourth quarter of 2012. We'd be more than happy to take it.
Okay
Don't get us wrong, that would not be what we would be expecting.
Right. Andy, you talked about the technology being full investment in 2017 and 2018. What's the marginal impact, would you say, on 2018? If you're already getting sort of 40 to 50 basis points this year, is the margin impact negligible next year? You still have the 40 to 50 that you're putting into it, but year-over-year, it's more steady?
Yeah, there's still going to be some drag. Mark, we're still working through that right now as we're going through budgets and everything else. We'll be in a better position to give that guidance at the end of the year. We wouldn't want to give out a number yet until we've worked through that one. There will probably be some additional pressure next year.
Mark, the other thing is, as you know, the state of New York and the cyber regulations have put some demands on every organization that does business there that we're continuing to work through. We think we have our hands around it, and I believe we do, there's still a lot to get done. That kind of is going to impact us into 2018 too.
Right. Powell, when we think about the coastal property pricing, you'd mentioned the impact of reinsurance, and maybe we'd know more later this year. Do you think the primary rates will parallel what happens in the reinsurance market, say, at the January 1 renewals? Florida doesn't renew until June. How should we think about that when we see the reinsurance pricing? Is that a good tell for your-
No
property?
I would not want you to get overly focused on reinsurance pricing. Here's the way I would ask you to look at it. I'm not a reinsurance broker, so let me preface this. Here's what I understand, and this is how I think it's going to play out. As you know, retrocessional reinsurance is reinsurance for reinsurance companies. They got pounded in this storm. A lot of that is in London, but it's all over the world. The retro market got pounded. That's going to have to react or try to recoup. You have the reinsurance market. They got pounded. The reinsurance market, as you know, one of the most damaging ones was actually Maria. It was like keep hitting you when you're down in that market.
Let's just say that the rates are, they try to get significant rate in reinsurance. It really depends on the primary carrier and what they're trying to do. If everybody's cat reinsurance program came up at the same time, then I think that there could be a higher potential for rate increases that could stick. Having said that, I know of several carriers, which will remain nameless, who already have their property programs placed prior to this storm. They're going to be operating from a position of strength, not a position of weakness. I think there's a lot of moving parts that go into it, and I know that there are some people out there that are frothing because they think this is going to drive the market up.
Like I said, I would rather create an expectation that we see flattening, and we hear of people talking about rate increases, but we're not seeing any big rate increases sticking, like you might have heard, number one. Number two, really, a lot of this change won't happen until after the year. The question is, on some of these primary carriers, how quickly can the insurance carrier get the message from the head to the foot on what they want to do in executing a pricing strategy or increase? Time will tell, Mark, and I wish I could be more definitive, but I do know that the retro market and the reinsurance market took some severe losses, and it'll be interesting to see how they react, and thus, the primary cedents, how they react as well.
They will not pass through dollar for dollar or percent for percent increases into the primary market. It just won't happen.
Thank you.
You're welcome.
We'll go next to Kai Pan with Morgan Stanley.
All right.
Thanks so much for two follow-up questions. The first one is number question. You have a spike in term on your balance sheet on both reinsurance recoverable as well as loss reserves, about $2 billion. Is that related to the flooding claims?
It is, Kai. Yes. You'll see there's always parity on those. As Wright Flood is an insurance company, we report the potential claims on there and then put a receivable right back up for what is ceded back to FEMA.
Okay, great. Just want to make sure you guys don't have any basis risk in this claim adjustments.
No, we do not.
Okay. My second follow-up is on the upcoming accounting changes, the ASC 606. What's the potential impact on your financial statements as well as maybe quarterly variability in term earnings report?
Yeah, we're still working through that like most everybody in the marketplace. When our Q comes out, we will add some additional disclosures on that. We will probably not be in a position where we will side that up at the end of the third quarter. We'll give an indication at the end of the year as to what it looks like. We're still going through. We don't see any major movements right now. Probably will be more through the quarters, but we've got to just see exactly where we get to. We got a lot of work that we're still buttoning down, like everybody.
Okay, great. Thank you again for your time.
Thank you. Bye.
We'll go next to Mark Hughes with SunTrust.
Yeah. Thank you. The expectation for $6 million-$8 million in the storm-related claims revenue, how much was there in fourth quarter of last year of that type of a storm or claim revenue?
Yeah, we had about $3 million in the fourth quarter of last year.
Is the $6 million-$8 million only from these storms, or do you think $6 million-$8 million will be the total, so the incremental will be kind of $3 million-$5 million?
Yeah, six to eight will probably be a total. That is a good way to think about it.
Okay. The advocacy business. Anything to add there in terms of claims that you are working on or your success in that business? Just any more detail would be interesting.
Not really, Mark. I would just tell you that we continue to execute. Remember, those are Medicare set-aside program and Social Security disability advocacy business, both of which are doing well. No, nothing unusual or different. We just continue to execute for our clients.
Very good. Thank you.
At this time, there are no further questions.
Okay. Jennifer, thank you very much. I wanted to end by making a couple broad comments. Number one, I've lived in Florida for pretty much my entire life, and we have a hurricane here usually every 10 years-12 years. This time, I would tell you, there was real fear in the hearts and minds of people in Florida. The governor called an evacuation and a state of emergency very early on, and I would commend him for his efforts. He got a lot of people out of potentially harm's way. We were also darn lucky that the storm moved at the last moment and went to the west coast of Florida. If it had gone further west and the right northeast quadrant had scraped along the coast of West Florida, it would have been worse.
If it had come right into Miami and scraped right up the eastern coast, it would have been worse. There are a lot of damages, and we have a lot of customers that have incurred significant losses that we're working on their behalf. I say that because what we thought it could be and what it ultimately turned out to be was slightly different. In Houston, on the other hand, the amount of rain was just absolutely mind-boggling. The most important thing that I would tell you when we started with all the storms is this. I can tell you that every single teammate in the affected area and their family members are safe. In my mind, that's a huge win for our team.
We have teammates that have trees through their roof, and they're flooded, and the answer is they have insurance, or we're working with them. You can replace that. We didn't have any teammates or family members of teammates that were injured in all the storms. I would say thank you all very much, and we look forward to talking to you next quarter, and have a wonderful day. Thank you.
This does conclude today's conference. We thank you for your participation.