Good morning, and welcome to the Brown & Brown Incorporated 2016 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 view with respects to future events, including those related to the company's anticipated financial results for the third quarter of 2016, and are intended to fall within the safe harbor provisions of 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 of 2016, that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the companies 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. Discussion of this 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 the company's filings with the Securities and Exchange Commission. We disclaim any intention and 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. Please go ahead.
Thank you, Ron. Good morning, everybody, and thanks for joining us for our third quarter 2016 earnings call. For the quarter, we delivered $462.3 million of revenue, growing 7% in total and 4.3% organically. Once again, we realized organic growth in each of our four divisions, with improvement seen in most of the divisions compared to the first half of the year. We will discuss the drivers of this improvement in detail later in the presentation. For the quarter, we experienced a slight decrease in our EBITDA margin compared to the prior year, which was primarily driven by lower contingents and GSCs, along with our continued investment in technology. Our earnings per share for the quarter increased 6.4% over the third quarter of 2015 to $0.50 a share. Excluding the change in estimated acquisition earn-out payables, earnings per share increased 10.6% to $0.52 on an adjusted basis.
Andy will provide more detail about our financial performance in a few moments. Overall, we're very pleased with the top and bottom line results for the quarter and the incremental improvement that we've seen over the last few quarters. We'd like to thank all of our teammates for their contributions to these positive results. During the quarter, we saw modest growth in exposure units as a result of continued improvement in the economy even though this trend was not seen across all geographies or industries. Catastrophic property rates for the quarter were down 5%-20%. We think coastal property rates will not change in a material way as a result of Hurricane Matthew. Buyers of insurance will look very closely at hurricane deductibles, flood coverage, and excess flood coverage in the future. We're also seeing non-admitted carriers offering admitted paper options in certain coastal areas.
In the admitted market, rates generally remain consistent with previous quarters as they are flat to down 5%. The exception to this is commercial auto, where rates are flat to up 5%. Professional liability rates are flat, with the exception of some lines which are up slightly. While the continued increase in overall exposure units has helped offset some of the rate decreases, we do expect rate pressure to continue for the remainder of the year and into 2017. From a retail perspective, we had another good quarter and delivered 2.8% organic growth. We continue to see a positive trend in the last several quarters. Many of you might be wondering what the impact will be of the recent approval by the Florida Office of Insurance Regulation regarding workers' compensation rates.
The approved increase of 14.5% is effective December 1st of this year for all new policies and upon renewal for all existing policies. The impact will be immaterial this year, and we estimate for 2017 to be in the range of $1.5 million-$2 million. We're pleased with our performance within national programs that delivered organic growth of 7%. During the quarter, we had continued growth and forward momentum across many programs, specifically our lender-placed coverage program and the Wright Flood business. In regard to Wright Flood, as of now, it's too early to quantify what the claims revenue we may recognize from Hurricane Matthew will be in Q4.
While we have a number of programs performing well, we have a number of programs that continue to face material headwinds, such as our property and auto programs that are being impacted by declines in pricing or changes in risk-bearer appetite or a combination of both, as we discussed last quarter. We expect these headwinds to have an impact on our growth rate for national programs in the fourth quarter of this year. Our wholesale business also had a good quarter, delivering organic growth of 6.7%, driven by new business, which was tempered by the continued rate pressure in catastrophic property rates. As we mentioned before, cat property rates are down 5%-20%, and we expect rate pressure to continue for the remainder of the year. For our services division, one of our claims TPA businesses and our Social Security advocacy claims business performed well during the quarter.
In summary, we're pleased with the performance of our businesses and view the third quarter as a good quarter, both financially and operationally. Let me turn it over to Andy, who will discuss our financial performance in more detail.
Great. Thank you, Powell. Good morning, everybody. I'm over on slide six, which presents our GAAP reported results. For the third quarter, we delivered 7% revenue growth and an organic growth rate of 4.3%. Our pre-tax income grew by 3.5%. As a percentage of revenues, our pre-tax income decreased by 80 basis points, primarily due to a change in estimated acquisition earn-outs. I'll talk more about this in a few minutes. From an EBITDAC performance perspective, which we define as income before interest, income taxes, depreciation, amortization, and the change in estimated acquisition earn-outs, our EBITDAC margin decreased 90 basis points to 34% when compared to the prior year. Our EBITDAC margin was impacted by lower contingent commissions and GSCs recognized this quarter versus the prior year, which had about a 40 basis point impact.
During the quarter, we realized about a 30 basis point impact associated with our technology investment programs. As a result, we're projecting the impact from our technology investments for the fourth quarter to be in the range of 30 to 40 basis points. We estimate the impact for 2017 to be in the range of 35 to 50 basis points. Our net income improved by 5.8% as compared to the prior year and is slightly higher than pre-tax growth due to a modest decrease in our effective tax rate to 38.8% this quarter versus 40.2% last year. The decrease to our effective tax rate is primarily being driven by several permanent tax differences and the apportionment of taxable income into the states in which we operate. As of now, we see 39.2 to 39.4 as a good estimate for the full year effective tax rate.
Our earnings per share for the quarter increased over the prior year by 6.4%. This increase is slightly less than the revenue growth of 7%, and the difference was primarily driven by the change in estimated acquisition earn-outs. Moving over to slide seven, this presents the reconciliation of our GAAP reported results to our adjusted results, which exclude the impact of acquisition earn-out payables. For the quarter, we recognized an incremental $3.1 million of expense versus the prior year. On this adjusted basis, our pre-tax income grew 6.2%, net income grew by 8.6%, and our earnings per share grew 10.6% to $0.52 per share, partially driven by our share repurchases during the last year and our slightly lower effective tax rate. Moving over to slide eight, we're going to walk through the key components of our revenue performance for the quarter.
Our contingent commissions and GSCs are down about $3.3 million as compared to the third quarter of the prior year. The decrease in contingents is primarily in our wholesale brokerage segment and is driven by increased loss ratios. We continue to expect contingent commissions to decrease in the fourth quarter as they will be impacted by lower written premium by our coastal property programs. We also disposed of businesses or books of business in the past 12 months, which represented $2.1 million of revenue in the third quarter of last year. Please ensure that you make these reductions in your updated models. For the third quarter, we also recognized $17.3 million in revenue associated with acquisitions completed over the last 12 months. By removing these four categories, our organic revenue growth was 4.3% for the quarter. Going to move over to slide number nine.
We're going to look at our performance of each of the divisions in a bit more detail, and we're going to go ahead and start with retail. For the quarter, our retail division delivered 5.7% revenue growth with organic revenue growth of 2.8%. During the quarter, approximately 80 basis points of the 280 basis points of organic growth was driven by timing items related to revenue from previous quarters. Again, please keep this in mind when updating your models. For the quarter, retail's margins increased by 30 basis points, primarily driven by an increase in contingents and GSCs. Moving over to slide number 10. For the quarter, total revenues for our national programs division increased by 5.6% in total and 7% on an organic basis. During the quarter, Wright Flood realized approximately $4 million of incremental revenue versus the prior year associated with weather-related events.
As a reminder, when we acquired Wright, we said that the 10-year average for claims revenue from weather-related events was approximately $7.5 million. In 2014 and 2015, we recognized significantly less than the average, but it appears in 2016 we'll be closer to that average. For the quarter, income before income taxes as a percentage of revenue increased by 450 basis points, and our EBITDAC margin increased by 140 basis points. Our income before income taxes was driven by lower intercompany interest expense charges. Both income before income taxes and EBITDAC benefited from the increased claims processing revenue from weather-related events, performance of certain of our programs, and was partially offset by lower contingents and GSCs. On to slide 11. The wholesale division had another good quarter, reporting total revenue growth of 14.3%, driven by the Morstan acquisition, and delivered organic revenue growth of 6.7%.
Our EBITDA margins were 36.8%, which is a decline of 470 basis points from the prior year, which was driven primarily by lower contingents and GSCs. The margins related to Morstan and then higher continued transaction volumes that we discussed in the previous quarter. These latter two items will more than likely impact our margins during the next few quarters. The reduction in contingents and GSCs from the prior year was approximately $3.6 million. Over to slide number 12. Our services division delivered total revenue growth of 4.2% and organic revenue growth of 1.6% for the quarter, with the difference driven by the SSAD acquisition that we completed in the first quarter of this year. For the quarter, our EBITDA margin decreased by 120 basis points, primarily related to the revenue mix within the division.
As we've seen and commented in previous quarters, the quarter-over-quarter margin can be a bit choppy based upon the growth in specific businesses. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy, and great report. I'd like to take a couple of minutes to discuss Hurricane Matthew and its effects on Florida, and specifically our area here in Volusia County. First and foremost, none of our teammates at Brown & Brown or their family members were injured. Those are in offices from West Palm Beach, Florida, all the way up into the Carolinas, number 1. 2, there's lots of homeowners' claims, and some of those will not meet their deductibles, i.e., a hurricane deductible might be higher than a flat deductible, and it's usually a percentage of the coverage A. Here in Volusia County, we had 90 mile an hour winds, and the eye of the storm passed 30 miles east of us.
With that little wiggle, or whatever you want to call it, to the right, it made a big difference in potential damages here in the Daytona Beach area. What you would see if you were here, we have lots of dock damage, pool enclosures, roofs, particularly roofs on condominiums, and there's been lots of water damage, particularly north of us. That's Flagler Beach, St. Augustine, Jacksonville, up into Georgia, South Carolina and North Carolina. I drove last night up into Flagler, and there are still two areas of A1A which are closed due to the erosion. The ocean washed under A1A and took out parts of the road, and many of you may have seen that on the television. 1947 was the last time something like this occurred here in Volusia County, and I get that information from a source that was here. That was my father.
He was 10 years old at the time. The bottom line on the storm is it's the worst in the history of Volusia County, but not nearly as bad as it could have been if the eye had come on shore. In addition, in areas north of here, as I referenced, the damage was much worse, and our thoughts and prayers go out to those affected citizens in those affected areas. On a lighter note, and in closing, we're pleased with the quarter, and the outlook for the near to intermediate term is good. We believe Hurricane Matthew will have limited impact on rates, if any. There will be more discussions around flood and wind deductibles. Rates for cat property continue downward, affecting retail, wholesale, and national programs, and that will continue into Q4 and into 2017.
We continue to look for acquisitions. The state of the market is similar to last quarter, what we would call fully priced. With that, Ron, I'll turn it back over to you to open it up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one 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 star one if you'd like to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Kai Pan from Morgan Stanley. Please go ahead.
Good morning. Thank you. Glad to hear everything is okay with you guys. Just follow on the Hurricane Matthew, you said will not impact pricing going forward, but we do see your estimates of pricing impact have been sort of slowing down a bit because a couple of quarters ago was down 15%-25%. Last quarter down 10%-25%. Now it's 5%-20%. I just wonder, after multi-years of significant decline, even without a storm like this, is the pricing reaching a floor? I just wonder how would that impact with less headwinds for you guys going forward?
Kai, good morning. I think that's a good pickup on your part. Number one, I would tell you that that moderate reduction in downward pricing was occurring obviously pre-storm because it was Q3 and the storm was the 7th of October. That's number one. Number two, it's difficult to have four and five years of downward pressure going down 15%-25% every quarter. I would tell you, I don't think that it is something that I would not react overly to that pickup on your part yet. The reason I say that is because there is still a lot of interest in the coastal property marketplace. There's lots of capital out there wanting to get in or being put into play. I still think there's going to be plenty of downward pressure on rates.
Don't have to like it, I'm just saying, I think that it's going to continue. Will it moderate a little bit? Yeah, it may, but it's still going to be downward pressure.
Just on that, can you quantify the 15%-25% pricing, how much that drag on your organic growth in the past?
Well, we haven't said what that relates to in aggregate, meaning this coastal property rate decreases relates to this amount. What we have said, we're consistent by saying it, is rates overall impact our business and organic growth somewhere between one quarter and one-third, the remainder of the impact is exposure unit driven.
Okay, that's great. Switch on the margin side. It looks like the margin is mainly dragged by low contingents and also the technology investment in the quarter. In normal situation, if you have a 4% organic growth, we would expect some margin expansion. I just wonder how those sort of lower contingent or technology investment in the near term would sort of muted that potential margin expansion.
Okay, remember in contingents, in specifically wholesale, we were down $3.6 million. That in and of itself is, like I said, that's profitable to our bottom line. Then I'll let Andy talk about the technology investment. I think that your assessment is correct, all things considered. Once again, contingents are variable based upon the performance of the business, and our business didn't perform as well for the insurance company, therefore we were paid slightly lower.
Right. Yeah, Kai, we didn't get into kind of all of the individual moving parts inside of there. You also probably want to keep in mind while we called out the contingents and technology, we've also got impact of flood. We've got a bunch of moving parts back and forth, but underlying business did really well on margins for the quarter. We're pleased with where we turned out.
Okay. How many more quarters like those could dragging on in term of, you mentioned these new acquisition as well as the recent hiring to deal with the higher volume in wholesale?
Yeah. What we said in our comments is we think it's going to at least be it for the next few quarters, not sure on the transactions. That really depends upon what happens with continued new business flow as well as pricing. That one we'll have to just monitor as we go forward. Then as we commented back at the second quarter after we completed the acquisition of Morstan in Q1, or excuse me, in the second quarter, we said that we would, over time, get that margin up. That will probably take a number of quarters, if not, maybe a few years to get there. That will be a drag. But the business itself is performing really well, top and bottom line. We're pleased with it.
Thank you very much for all the answers.
Absolutely.
We'll move to our next question from Elyse Greenspan with Wells Fargo.
Hi. Yes. First on the tech spend. It seems like this year, most of the quarters, the investment and the hitch margins has been probably lower than how you set out at the start of the year. Any changes on the spending that you're seeing, or it's just the impact that's flowing on, flowing through into your margins? Is the 35 to 50 basis point impact for 2017 unchanged?
Correct. Let me go back just to make sure we reset on everything. When we started the year, we said about 40 to 50 basis points was our estimate. We updated kind of mid-year and said 30 to 40. This quarter, we're about 30 basis points. fourth quarter, we think will be around 30 to 40, probably on the lower end of the range. The underlying programs themselves are in fact picking up momentum. We went live with our new financial management reporting system in the third quarter, and then full live with all the offices in the fourth quarter. Again, that's kind of kicking up the expenses on there. As it relates to 2017, the 35 to 50 would be off of 2016, okay, Elyse?
Okay.
Our original estimate of 35 to 60 versus our starting point in 2015 does not change. We're still holding on that.
Okay, great. In terms of just some of their margin commentary, putting it all together. If we exclude the tech spend from the Q3, your margins would have contracted by about 60 basis points. If you assume in the fourth quarter that the tech spend comes in at that low end, another 30 basis points, let's say, would you expect putting everything together that your margins would contract by most likely the same level that we saw in the third quarter, about 60 basis points x the tech spend?
We don't know the answer to that because of the contingents. Right. That'll be the wild card. We're expecting that contingents will be down in the fourth quarter based upon at least the indications that we're getting from some of the carriers. As I think we've mentioned a couple of times, they're at least signaling that they think they could be down materially. We don't know exactly what material means. That will be ultimately the driver of the margin, in the fourth quarter, depending on how much they move.
Okay. I guess another potential would be how much on business you get in from the NFIP following on Matthew.
Correct.
-Q4.
Correct.
Okay.
Yep.
I know you, Powell, pointed to the market being fully priced in terms of acquisitions. We've seen you guys on share repurchase activity pretty light for the past few quarters. I know you guys have historically used ASRs in terms of share repurchase, but any views in terms of getting back into the market to buy back more of your stock, considering if there's no change in pricing outlook on the deal front and we continue to see light acquisition activity?
The answer is similar, Elyse, to how we've commented in the past. We talk to our board pretty much every board meeting about how we view the stock price and should we consider buying stock or not. We look at it as an investment option. I think the underlying question that you're asking is, if in fact you don't do as many acquisitions in the near term, are you going to go buy stock back as the option? The answer is, not necessarily. My answer to the group is, we don't have a problem. If somebody's going to be critical, they can be critical of me, which is fine, for stockpiling cash on the balance sheet. That is not the intent.
I'm saying if we have to do that, we will do that so we can invest it at the right time on the right businesses to grow our business going forward. I know you want to be able to figure out, yes, we're going to buy back X amount, and we're not going to do that, Elyse. I know that's frustrating for you, but we're not going to do that. We're going to evaluate it, and when we think the stock price makes sense to buy it back, we'll buy some of it back.
Okay. Thank you very much.
Thank you, Elyse.
Our next question comes from Quentin McMillan from KBW.
Good morning, Powell, Andy. Thanks very much. Just touching back on the margins one more time. The 35-50 basis points in 2017 seems obviously like it's a little bit better from the 35-60 that you had had previously. I know that you guys have said that longer term, you're expecting to return to that 33%-35% long-term margin, and you don't want to give a timeframe. My question is just the longer term. In 2018, is the expectation that the IT spend will be done in 2017, and that we should see some sort of a margin inflection just from the IT spending rolling off in 2018, so margins should get better even if they don't get to that 33%-35% level? Is that the expectation now?
Good morning, Quentin. Let me see if I can clarify the first piece on it. You had said 35-50, hey, that's better than your original range. What I said earlier was 35-50 was off of the 2016 margins. We're holding with our original range of 35-60 versus our starting point off of 2015, okay? The range is still right in there. When we said this would be a two- to three-year program, no, it would not be completed in 2017. It will definitely go into 2018.
As we talked about during our year-end results last year, we said when we get to the back end of the program, that we'll be able to recover any diminution in our margins, whatever that is inside of that 35%-60%, then we'll get a slight uptick on the back end.
Okay, great. Thank you for the clarification there. Secondly, on Wright Flood. We talked about Matthew, but could you talk about any impact that you might have seen in claims handling activity or just otherwise from the Louisiana floods in the third quarter? Secondly, with Wright Flood, I think there's a little bit of confusion still within the market. Obviously, you guys sold Colonial Claims, but how much benefit that you guys get in particular from claims handling from Wright Flood as opposed to the uptake from the National Flood Insurance Program, and how that business flows through would be really helpful.
Okay. In our comments, I mentioned that we picked up about $4 million of claims processing revenue year-over-year within Wright Flood. The majority of that was associated with the storms down in Louisiana. Not exclusively, but the majority was from there. What I can tell you is it was less than 6,000 claims that we got in Louisiana. For a reference point, when we went through Hurricane Sandy back in 2012, that was over 20,000. Again, we're just trying to give you guys an idea of the volume of what's out there. A lot of this is covered in the press, but that doesn't always mean, one, that how it's being covered represents who has policies. And I think that was indicative when we had the storms last year up in the Carolinas.
We'll always try to manage our way through on the messaging, and that's what really Powell was saying earlier as it relates to the fourth quarter. It really depends upon who has coverage and exactly what claims are going to be.
Quentin, I want to add one thing. Remember, we haven't seen or given any guidance, and we won't, relative to potential uptake, if you want to call that. Remember, the thing that's a challenge, and I believe this is the case in some areas in the Carolinas, there is damage in areas that are not flood zones.
Right.
Those people may or may not own flood coverage. The vast majority probably don't. When you hear losses or projected losses on a national news station, those may be losses, but they may not be insured losses.
Okay, great. Sorry, just to follow up quickly on that. The 6,000 claims from Louisiana floods, Hurricane Sandy, 20,000 claims. Just to put some perspective on it for the organic growth. In national programs, you did a seven this quarter. What would that have been without that increase in claims or activity, or how much of that was attributable to the $4 million in Louisiana claims?
Well, you can do the quick estimate on the top end, the $4 million, you can do that calculation. It would represent probably about 40% of the growth. The actual underlying business still did well.
Perfect. Thank you, guys.
As a reminder, if you'd like to ask a question, you may do so by pressing star one. We'll take our next question from Joshua Shanker from Deutsche Bank.
Yeah. Good morning, everyone.
Morning.
I just want to follow up a little bit on Elyse's question about buybacks versus we're not afraid to hold cash on the balance sheet. Can you give us sort of an idea of what is the value of holding cash on the balance sheet, and how uncomfortable are you trusting the markets that if you really found a great deal out there and you didn't have the cash, the market would not let the financing be available for you to do it?
Okay. Well, let me take the second part first. We, number 1, have worked, as you know, really hard to build a balance sheet that we're very proud of, and we believe that that balance sheet allows us optimal flexibility and optionality in making investments in businesses. In our opinion, we think we could do whatever acquisition it is that we want to do with the balance sheet that we currently have. That's the first thing. The second thing is, I don't want you to think, Josh, that that is our desire to have cash build up on the balance sheet. What I'm saying is we look at all of our investment options as we've talked about. That's hiring new teammates, that's acquiring businesses or returning it to shareholders, of which we do through share repurchases periodically or dividend increases.
We have just increased our dividend for the 23rd year in a row, Andy.
When I say that, I'm not trying to make you nervous per se, but I do want everybody to understand that we don't have a feeling that the money that is on our balance sheet is burning a hole in our pocket, and we need to go out and do something that on the short-term basis, that would not be best long term. That's the way we look at it.
I'd probably add to that, Josh, is when we put together our new Series A and the credit or the accordion underneath of there, that gave us access to $800 million. Our goal when we put that together was to give capital to our organization that we can access when and if we need it at the right time. Combination of the cash that we generate each year, what's on our balance sheet, and that revolver that's out there, we've got a lot of flexibility at this stage when it ever comes to us as an opportunity. Everything that we see in the market right now and all trends don't give any indications that there's going to be any lockdown on availability of capital to a company with our balance sheet capabilities, but you never know. We think we've got plenty of flexibility.
I think that's right. I know it's my job to determine whether your stock is cheap or not, but when you say that we don't think our stock is attractive for returning to capitalist shareholders right now, attractive versus the alternative of maintaining flexibility, I'm trying to figure out what the other side of the balance is, how deeply you're weighing that.
The way we look at it is we evaluate what we think the intrinsic value of the stock is. We then talk to the board, and we figure out if we think it's the right investment at the time. I'm not trying to oversimplify it, but that's how we do it. You're going to make your own determinations based on the statements you just made about us buying stock or not buying stock or wanting to buy it or not buy it in the future. We're not going to comment on that. What we're basically saying is that's how we analyze that as an option, and we talk to our board on a quarterly basis about it.
Understood. On wholesale, obviously you said there's a little drag, maybe two quarters going out on less contingents, less GSCs, it's going to hurt margins on wholesale. Has something structural changed in your wholesale business that the commissions you're earning on that business are less capable of being supplemented by contingent GSCs?
No. Here's the way I think it's important to I'm going to give you a visual, which is a non-insurance visual. If you worked at a burger joint and you're cooking burgers on a grill and you're flipping burgers, envision in order to get back to flat, meaning the same revenue that you had last night, tonight, you got to put an extra 15 burgers on the grill and cook them. You're flipping more burgers for the same amount of revenue when the rates are going down like they have in coastal property, and that's seen both in brokerage and binding authority. Fundamentally, you could look at it several ways. You could say losses, number 1, are random, but in a large subset of numbers, there's some predictability in numbers.
The flip side of that is you could say as rates continue to go down, then the traditional losses that occur in a large book will actually be a higher loss ratio because your premium volume comes down, and it could be a combination thereof. Just think about it as you got to flip more burgers. When Andy talks about having more transactions, that's the burger concept.
We're doing more transactions to stay flat, then to grow forward, you got to do even more. That's not new. I don't want to give you the impression that this is an epiphany, and we're just coming to this. It happens in every market cycle like this. We understand that, we just want you to know we're flipping a lot of burgers.
So-
Josh, which we view as a really good thing. That tells we've got a lot of business coming into the organization. We can't control pricing, we can control, hopefully, the amount of business that we get in and that we retain.
Would I think that contingents will be depressed until rates improve? Is that a takeaway?
I don't think I would necessarily say that. You could come to that conclusion, but I would not actually encourage you to think that way. I think that there's a component. You got to remember, when a building burns, a building burns. Then you have a storm, which is unpredictable, and let's say you have lots of roof damage, million-dollar roof claims like we see in some of the places here and up the coast. That's unpredictable, but you're going to have a certain amount of property damage in a year where inevitably there's going to be a fire in somebody's apartment complex. There's going to be a couple things. I don't know if I'd go that far, but I think you could.
Yeah. With our comments we've been making, Josh, about continued downward pressure on contingents, we would expect that to happen. We don't know definitively because if you step back and say if rates have been down for a number of renewal cycles, then the overall returns for the risk bearer have absolutely contracted. The contingents are driven off of profitability, as well as obviously loss experience inside of there. That's why we are seeing them shrink down. It's a cycle that we go through.
That makes sense. I realize we've asked a bunch of questions, but we still have 20 minutes left. There might not be too many questioners. Can you just talk about deal pipeline versus prices in the markets, and whether or not, A, there's a lot of deals with B, they're not attracted by these prices and what's the relationship between the two?
I think that when you talk about it, I think that there's a normal amount of deals that are occurring out there and in terms of in a pipeline, because we're talking to people all the time. I do think that even the business brokers themselves, the people trying to sell these agencies, recognize that this pricing level is not in perpetuity. They acknowledge that it's at a high and is not sustainable over a long period of time. Like I said, we're looking for businesses that fit culturally, that make sense financially. We've done $52 million of annualized acquisition revenue this year. Last year, as you know, we did about $56 million. Then the three years prior to that, it was north of $100 million. Each of those three years, we had one larger transaction in each of those years.
We continue to look and talk with lots of people. I have no doubt that there will continue to be opportunities that come along. As Andy said earlier, we have worked hard to put our balance sheet in a position where we want to be able to have the option to look at those that come along because we think that there will be a lot in the next several years, and we're looking forward to it.
Thank you for giving me so much time on the phone and good luck.
Absolutely, Josh. Thank you.
Our next question comes from Ken Billingsley from Compass Point. Please go ahead, colleague.
Yes. Thanks for taking my question. Want to follow in on a couple questions that have already been asked. One, on the earn-out expectations and the impact this quarter, and last quarter, which were fairly similar. Can you How that relates to your commentary regarding exposure unit improvements, the pricing in the market outside of coastal being flattened and the contingent pressures. How do those things relate to what you're seeing with changes regarding earnout payables?
I think the way I would look at it is, think of it, these are all different types of businesses. Those businesses in their general market area are performing really well. That means they're renewing a lot of their existing clients, high retention factors, and they're writing a lot of new business. Although you could have one of those things that you just described, i.e., rate pressure, if they wrote coastal property or you could have lower contingents, the core business, meaning the client-first comment that we talk about, continues to expand. They are writing more clients and retaining their existing clients, and as a result of that, they're doing better on their earnouts. It's funny when you have a change in acquisition earnout payable, and we look at it as a positive because-
Right
it goes up, that means the underlying business is doing better, and as you know, from a GAAP standpoint, you cannot book, and we wouldn't, but you can't book the maximum-
Right
You don't know if they're going to hit the maximum. We have to book to what we think is the best estimate at the time, and then if they do better, we adjust it up. We view that as a positive.
I agree. That gets to my next question. When you talk about M&A and being competitive, seeing that at least, I know this two quarters doesn't make a trend, but does this allow for you guys a little bit more flexibility when you're looking at some M&A and trying to compete with others that are willing to open up the pocketbook a little bit more for these transactions because you are able to help them drive better margins, better revenues, better retentions?
Well, I think the answer to the question is, simply put, I know we say it has to fit culturally and make sense financially, and the comments that you've made would fit into the second bucket. There are things that sometimes when people join us that we can do to help them, enable them to get on their way to achieving whatever their earnout is. Hopefully, they get to their maximum. We want that and they want that. I don't want to give you the impression that there's something that so-called is changing in the last quarter or the last two quarters that would make us think differently about our acquisitions. We think the same way today as we did six and nine months ago. The most important thing is we're looking for good leaders that run good businesses.
When you get the head and the heart of the leader, they deliver their team. That's what we've always talked about. If you get one or the other, if you get the head and not the heart or the heart and not the head, it still is not going to necessarily be a bad acquisition. If you get neither, it's not going to be a good acquisition.
Great. I want to move on to a different question on coastal property. I know this is only one piece of everything you're doing, but in the past, competition has tended to generate higher broker commissions and incentives as they attempt to get market share. Is there anything different this time around? I'm just looking at your commentary through your PowerPoint that discussed coastal property, specifically your commentary about contingents being down. Are people trying to be more competitive to grab market share with commissions, or is that unchanged?
Yeah. I would say that the commission environment is pretty much unchanged. I mean, not unlike the last couple of years, but what is unlike cycles in the past is, remember, you had a more traditional finite marketplace. Let's just call that the non-admitted carriers for a moment. Now you have sidecars and more alternative capital that's either coming into the marketplace or actually waiting on the sidelines, which is another alternative. You have additional alternatives in the marketplace, which continues to put rate pressure down on those properties. I think that the commissions are generally the same. I wouldn't say that's changed.
Okay. Last question I have is just on the technology, and I believe you've mentioned this before, I just wanted to clarify. The spend on technology in the fourth quarter, is that expected to ramp up to get to your margin expectations for the year, or is the pathway natural for it to hit the targets?
No, just a natural pathway on it, Ken. We, again, 30 basis points or so in the third quarter. We think we'll be somewhere in that 30 to 40 in the fourth quarter. That will continue to just build as we go forward into 2017, but nothing unusual on a trend.
Okay. Maybe I'm just recalling incorrectly, but I thought the first part of this year, the margins were much lower. I just want to clarify, it's 30 or 40 for the quarter, not 30 or 40 for the year.
I said we'd probably be on the lower end of that for a full year. Again, our commentary is we didn't have.
impact in Q1. We had about a 25 basis points impact in Q2, kind of at 30 in Q3. It is building.
Okay, great. Thank you very much.
Thank you.
Thank you.
As a final reminder, it is star one if you'd like to ask a question. We'll take our next question from Adam Klauber from William Blair.
Thanks. Good morning.
Good morning.
Did I hear in the remarks on retail organic, did you say that the quarter organic was helped by business that was pulled from the quarter before?
We didn't say it was pulled from the quarter before, is that we had a number of items that we didn't recognize in previous quarters, either deals that weren't finalized or incentives that we hadn't received back at that stage. We just, we were able to catch all those up in the third quarter.
Okay. That's what I thought. Then, could you talk about the benefits business? How is that doing compared to the overall retail business? In general, how is commission pressure on that small, I know you don't have a huge book, but in the 100 live and under book?
Okay. I would tell you, Adam, that we're very pleased with our benefits book of business and how it's growing. I would tell you, and we've said this before, we've experienced more organic growth in the over 100 than in the under 100, but they're both growing, which is good. I would tell you that, we have seen in our book, in under 100, there was a lot of change over the last couple of years, where you had carriers going from a commission level to a per head per month or how they're looking at exchanges/other alternatives and all these other things. What we're seeing now is sort of a leveling of commission dollars as it relates to those accounts. That does not mean that it's not under pressure on one-off accounts. That's not what I'm saying.
I'm saying, generally speaking, I think that it's kind of leveling out and the under 100, as I said, both of them are growing, and we're very pleased with our benefits business.
Okay, thanks. Staying with the retail, I think you mentioned that exposures are doing okay. Would you say compared to, say six, nine months ago, are they doing moderately better? In particular, is the West Coast doing better than it has been?
Are you talking about the West Coast geographically?
Yes.
Brown? What I would tell you is I was in 23 offices last quarter, and a number of them were on the West Coast. I would tell you that, from an economic standpoint, they seem to be doing better. I can't say six or nine months ago, because I wasn't in those offices six or nine months ago. I would tell you that moderately better overall in certain areas. You go into places like Miami and Orlando and cities like that, there's a lot of construction. You go into Vegas, you go into Orange County, you go into Seattle, even Portland, things are doing better. Once again, I would tell you that I usually ask our teammates, I want to know about construction, new construction and/or renovation work.
We ask them about just general exposure units in terms of sales and payrolls on their insureds, other insureds, not just contractors. Things like that kind of give you a general sense of what the economy's doing in that local market.
Okay, thanks. Then as far as Florida Workers' Comp, you mentioned it, that will probably add a little to the revenue line next year. There's been a number of headlines. Is it more a headline activity or on the ground, are you seeing a lot of lawsuits with those issues in Florida Workers' Comp?
No. What I would say is, as a go forward from our standpoint, is a potential from a go-forward standpoint. Remember, the way the plaintiffs bar was involved before was mitigated by the current statute as it's currently written, now it's changing back to where they can be more active going forward. Remember, this is a prospective thing, Adam, as opposed to a current thing. That's how I want you to think about that.
Okay
In terms of losses, yes.
Okay. That's helpful. Then in general, across your book of business, you've seen a bit more property losses this year compared to late last year. How about in really non-property losses? Are you seeing any pressure, even if it's subtle pressure, compared to the last two years? Because losses have just been very benign. Are you seeing any more pickup across your book ex property?
Well, I would kind of say two things. One, automobile, I'm not specifically just talking only about our book of business, but commercial auto continues to be a challenge for our carrier partners. Even on a broader level, I know you already know that. The second thing that I would tell you is, I think that casualty pricing in general, is problematic for some of our carrier partners because what I mean by that is they feel like it's gotten to a level in some instances where they can't make money.
There are certain carriers that are saying, "Look, I don't want to write anymore if it goes that much lower." That's not a lot of carriers, but I'm saying there are people out there that are really digging deep into their books, casualty is always a challenge for carriers, in my opinion. I would think about those two areas. I don't think that our book has had something abnormal relative to other than property losses in the last two years. I think it's kind of normal.
Okay. Thank you. Then bottom line, wholesale, obviously a good quarter, we've been hearing the wholesale business has been holding up. Would you say you're growing better than the market? In general, why are wholesale flows remaining strong despite a fair amount of pressure on the market?
Well, the answer to the question is, I don't know about all the other wholesale businesses out there. I would tend to say that we are performing probably in the top half or top third with that, I believe. I don't really know. The reason that we do well, in my opinion, is we have really good leaders and really good brokers and teammates. What Andy referred to earlier is there's a lot of activity. It is a current and consistent action. We're trying to get more swings at the plate, more opportunities. I think that in sort of markets where there's disruption or potential disruption, that creates more opportunities.
As an example, if you have a storm coming, there are going to be some markets that close and some markets that don't close for maybe another day, so that might present an opportunity to a wholesale broker to try to get something done. Having said that, any time wholesale business makes money, in my opinion, on the downside and the upside, the thing that is not good for wholesale is a flat market.
Okay. Thank you. Thank you very much.
Thank you.
We're going to take one last question, okay, Ron?
Andy, it appears we have no further questions at this time.
Perfect. That actually works out well then.
Perfect. Thank you all very much and have a wonderful day, and we look forward to talking to you next quarter.
Thank you very much.
Thank you.
That'll conclude today's conference. We appreciate your participation. You may now disconnect.