Good morning, everyone, and welcome to the Brown & Brown, Inc. 2016 second quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current view with respect to future events, including those relating to the company's anticipated financial results for the second quarter of 2016, and are intended to fall within the safe harbor provisions of the securities laws. Actual results and events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated and desired or referenced in any forward-looking statement made as a result of a number of factors.
Such factors including the company's determination as it finalizes its financial results for the second 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 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 the call and in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
With this said, I'll now like to turn the conference over to Mr. Powell Brown, President and Chief Executive Officer. Please go ahead.
Thank you, Shirlon. Good morning, everyone, and thank you for joining us for our second quarter 2016 earnings call. I'm starting on slide four. For the second quarter, we delivered $446.5 million of revenue, growing 6.5% in total and 2.6% organically. We also realized organic growth in each of our four divisions, with incremental improvement seen in all divisions compared to Q1. For the quarter, our EBITDA margins remained steady compared to the prior year. Our earnings per share for the quarter increased 9.3% over the second quarter of 2015 to $0.47 per share. Andy will provide more detail about our financial performance in a few moments. During the quarter, we acquired two companies with annual revenues of approximately $34.5 million. I can tell you that we continue to talk with a number of prospects about joining Brown & Brown.
We continue to see the marketplace as very active, with valuations remaining high, even increasing a bit, and seeing some more creative terms and conditions. We remain vigilant in our commitment to find organizations that fit culturally and transactions that make sense financially. Overall, we're pleased with the top and bottom line results for the quarter, and it's a good improvement from the first quarter. Our teammates delivered these results through a lot of hard work. On slide five, we would characterize the second quarter as another quarter that is moderating upward, but inconsistency in the middle market does remain. These inconsistencies can be seen in certain geographies or industries, or a combination of both. During the quarter, our customers continued with modest hiring, and exposure units are increasing.
As a general comment, we continue to see a tremendous amount of capital in the market, and risk bearers want to put it to work, with some being more aggressive than others, either with their pricing or terms and conditions, or both. Rates for the admitted market remain under pressure and are generally flat to down 5%. The exceptions to this are commercial auto, where rates are generally flat to up 5%, and then coastal properties and commercial DIC that continue to see rate declines of 10%-25%, which we've experienced for a number of renewal cycles. We expect this to continue for the remainder of this year, and the rates in 2017 will depend on the occurrence of a major weather related event or events this hurricane season.
We are starting to see some standard carriers begin to draw the line with their underwriting guidelines in coastal property. The continued increase in overall exposure units has helped offset some of this decline, but these rate decreases are putting pressure on all of our property business in retail, wholesale, and national programs. Professional liability rates are generally flat, except in certain lines. From a retail perspective, it was a good quarter and nice improvement over the first quarter. We continue to see improved new business during the quarter across most geographies and industries versus the prior year, and with some offset by the impact of declining property rates and some aggressive pricing in certain areas around the country.
Similar to previous quarters, management of healthcare costs remains front and center for our customers, as small employers are generally experiencing rate increases of 8%-12%, while larger employers are seeing rates that are generally flat to up slightly. While these rate increases in small employer groups do not have a direct impact on our revenues, as many of those carriers have moved to a per employee per month compensation model, it does drive plan design. Companies are focused on how to best manage health and pharmacy costs and have their employees proactively share in managing these costs. Many of you also might have seen that we've had the departure of two senior leaders during the quarter. Both chose to leave the company in order to pursue other opportunities. We parted ways as friends and wish them both well in their new endeavors.
As with all these changes, it creates new opportunities, and during the quarter, we promoted four new senior leaders that are taking on broader leadership roles that will help us further grow our business. We continue to have a lot of interest from our risk bearers in the programs businesses to create new programs, but we're also experiencing certain programs being impacted by changes in carrier risk appetite. During the quarter, we had continued growth and forward momentum across many programs, specifically led by our Lender-Placed Coverage program and Wright Flood, to name a few. 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 either declines in pricing or changes in risk-bearer appetite, or a combination of both.
As you know, carriers continuously evaluate the risk appetite for programs. This will probably have some impact on our growth rate for the national programs in the second half of the year. Our goal is to have a diverse offering of national programs that will deliver balanced growth, as some programs will perform better than others at certain times. In our wholesale business, rates are flat to down several points, except for cat property brokerage. This line remains under the most consistent pressure, and we continue to experience 10%-25% declines in renewal rates, which we've experienced for the last 3+ years. As I mentioned before, we expect this to continue for the remainder of the year and put downward pressure on organic growth.
The big story, though, in wholesale this quarter was the acquisition in June of Morstan General Agency, located in Manhasset, N.Y., and other locations in N.Y., New Jersey, and Florida. Morstan is primarily a binding authority agency that's been in operation since 1964 and places a wide range of commercial lines, personal lines, employee benefit, and life insurance products. It has annual revenues of approximately $34 million. This acquisition positions Brown & Brown as one of the leading wholesale brokers in the tri-state area. We welcome all of our new teammates and are excited about the potential for growth. For our services division, the main story is about the claims revenue we realized in the second quarter.
Our Social Security advocacy claims businesses performed well during the quarter, and the integration of Social Security advocacy for the disabled business, which we refer to as SSAD, that we acquired in the first quarter of this year, continues to go well. We're watching some of our claims processing businesses closely as certain carriers are starting to take claims back in-house due to low volumes, and the federal government continues to have some delays in reviewing and approving claims. This is not unusual during times like this, but may cause some short-term volatility in the services division revenues. As of now, we do not see any long-term impacts to the growth opportunities. In summary, we're pleased to see the continued growth in all of our divisions. As we've discussed before, rates impact our organic growth by one-quarter to one-third, with exposure units making up two-thirds to three-quarters of the impact.
We view the second quarter as a good quarter, both financially and operationally. Let me turn it over to Andy to discuss our financial performance in more detail.
Thank you, Powell. Good morning, everybody. Let's look at our financial results and some of the key metrics for the quarter. I'm on slide six, which presents our GAAP reported results. For the second quarter, we delivered 6.5% revenue growth and an organic growth rate of 2.6%. Our income before income taxes grew by 8% and increased by 30 basis points as a percentage of revenues. Our income before income tax growth was impacted by a charge for the 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 increased 60 basis points to 33.5% when compared to the prior year.
Our EBITDAC margin improvement was primarily impacted by a premium tax credit of approximately $2.8 million in our national programs division. During the quarter, we realized about a 25 basis point impact associated with our technology investment programs, which are continuing to gain momentum. We're managing the financial impact of these programs through some strategic purchasing opportunities that are delivering some savings to help fund the program. As a result, for the full year, we're expecting the impact to be about 30 to 40 basis points rather than the 40 to 50 basis point impact we mentioned during our previous calls. Our net income improved by 8.5% 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 39.3% this quarter versus 39.5% last year.
As of now, we see 39.4% to 39.6% as a good estimate for the full-year effective tax rate. Our earnings per share for the quarter increased over the prior year by 9.3%. This increase outpaced revenue growth of 6.5% and was driven by the improvement in EBITDAC margin, our lower outstanding share count versus the prior year of 1.6% due to our share repurchases, and then the lower effective tax rate. I'm going to move over to slide seven. I want to point out some of our adjusted income and earnings per share. This adjusted view excludes the impact of the change in estimated earn-out payables. These payables represent additional consideration to be paid to acquisitions based upon their performance. Since the adjustments can be lumpy on a quarterly basis, we exclude them from this view to provide another look at our operating performance for the business.
For the quarter, we recognized an incremental $3.6 million of expense versus the prior year. On an adjusted basis, our pre-tax income grew 11.5%, net income grew by 12.3%, and our earnings per share grew by 14% to $0.49. I'm going to move to slide number eight. I'll walk through the key components of our revenue performance for the quarter. Our contingent commissions and guaranteed supplemental commissions are up about $4.4 million as compared to the second quarter of last year. The increase in contingents is primarily in national programs related to a program that became eligible for a contingent commission this quarter. We continue to expect contingent commissions to decrease in the second half of the year, as they will be impacted by lower written premium by our coastal property programs. As we've noted before, other revenues do fluctuate on a quarterly basis.
In the second quarter of 2015, we received $2.2 million for a legal settlement. In the second quarter of this year, there were no material other income items. We also disposed of businesses or books of business in the past 12 months, which represented $2.5 million of revenue in the second quarter of last year. For the second quarter of this year, we recognized $15.9 million of revenue associated with acquisitions we completed over the last 12 months. We isolate these four categories in order to determine our organic revenue growth, which was 2.6% for the quarter. Move over to slide number nine. We'll look at each of our divisions in a little more detail. We're going to start with retail. For the first quarter, our retail division delivered 5.3% revenue growth with organic revenue growth of 1.8%.
Retail's year-over-year income before income taxes as a percentage of revenues declined by 80 basis points, which was driven by the incremental cost associated with the changes in acquisition earn-out that I mentioned earlier. The EBITDAC margin for the quarter was substantially flat with the prior year. Moving to slide number 10. For the quarter, total revenues for our national programs division increased by 5.5% in total, driven by our acquisitions in the last 12 months, and grew organically by 2.2%. For the quarter, income before income taxes as a percentage of revenue increased by 700 basis points, and our EBITDAC margin increased by 380 basis points. Our income before income taxes was driven by lower intercompany interest expense charges. Both income before income taxes and EBITDA were impacted by higher contingents, the premium tax credit I mentioned earlier, along with continued expense management across all programs.
I'm going to move on to slide number 11. The wholesale division had another good quarter, reporting total revenue growth of 10.6%, driven by the Morstan acquisition, and delivered organic revenue growth of 3.9%. Our EBITDAC margins were 32.8%, which is a decline of 280 basis points from the prior year. This was driven by the previously noted rate decreases, primarily in brokerage, and a higher number of transactions across the business. While rates are down, we are seeing an increased number of transactions that results in our need to add incremental resources to handle the volumes. During the quarter, as Powell mentioned, we acquired Morstan, which has margins lower than our average. Over the coming years, we're seeking increased productivity and expanded carrier relationships that will enable margin improvement. We expect our margins to be down for at least the next few quarters based upon the above.
We'll provide more information once we have additional insight on the trajectory of these areas. Moving over to slide number 12, the services division. We delivered a good quarter with total revenue growth of 8.9% and organic growth of 6.3% for the quarter, with the difference being driven by the SSAD acquisition that we completed in the first quarter of this year. The organic growth was driven primarily by increased claims revenue. For the quarter, income before income taxes as a percentage of revenue increased by 220 basis points, with about half of the improvement driven by lower intercompany interest charges and the remainder by operating leverage. Our EBITDAC margin increased by 100 basis points for the quarter, primarily related to claims activity. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy. Great report. We continue to remain optimistic about the remainder of the year and the outlook for our company. We're focused upon attracting and renewing customers, hiring and rewarding great teammates, investing in our business for the long term. Our technology initiatives are moving forward nicely, we look forward to these gaining more momentum in the future. As I mentioned earlier, we do expect rates for 2016 to remain under pressure. The significant decline in cat property rates will continue to impact segments of retail, wholesale, and national programs growth in the second half of the year. From an M&A perspective, the activity and valuations are continuing to heat up. We remain focused on finding companies that fit culturally and make sense financially. As we've said before, we're patient and disciplined operators.
We're focused on the long term and how to best invest our capital that will help us drive long-term shareholder value. With that, I'd like to turn it back over to you, Shirlon, we can open it up to questions.
If you'd like to pose a question, please press the star key followed by the digit 1 on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, ladies and gentlemen, it's star one. We'll have our first question from Elyse Greenspan, Wells Fargo.
Hi, good morning. First question, in terms of the retail organic growth, I'm just wondering if you can kind of talk to your outlook for the balance of the year, just if you expect growth to kind of pick up sequentially, just any kind of view on new business trends from here. Also just in terms of some of the recent employee departures, have you guys thought about putting any kind of retention plan in place just to prevent any potential further departures within that retail segment?
Okay, Elyse, good morning. First, as you know, we don't give organic growth guidance. As you know, our goal is to continue to improve. We were pleased with the performance this quarter, and we've told you a little bit about some of the headwinds that you face relative to rates, specifically in cat property being down, although that's not an enormous part of our business, it still does impact many of our coastal offices in Florida and up the East Coast and into Texas. That said, relative to the recent departures, we're very focused on keeping all of our teammates, and we are looking at all kinds of things in order to maintain the right people on our team. However, as it relates to some retention strategy that would be different than what we've been doing, we are not looking at something outside of the normal.
We always review how people are rewarded, and we believe that we reward people fairly. For those that take on more responsibility, they will have the opportunity to earn more. That's kind of how we've looked at it. I don't want to diminish the fact that we have had two senior leaders leave. I'm not diminishing that at all. I'm just saying that at the end of the day, sometimes people choose to do other things, and we're going to continue to move on, focused on our business.
Okay, thank you. In terms of the tech spend and the impact on the margin, you mentioned some purchasing, some savings that went into effect in the quarter. Can you just elaborate on that? With the majority of the tech spend, did that impact the retail segment in the quarter?
Good morning, Elyse, it's Andy. On the comment that we made about the strategic purchasing, one of the things that we've been trying to focus upon is how to utilize a number of the purchasing capabilities that we have across the organization through enterprise agreements in order to obtain more favorable pricing in certain areas. We're using some of those savings to help fund the program. We'll continue to seek out those opportunities as they arise going forward. The cost for the program itself, most of it is sitting up in Corporate. We're trying to isolate it right there, unless there's something specific to a division.
Okay, that makes sense. In terms of, just on capital, you guys, it seems like there was no share repurchase in the quarter. I know you guys have historically looked to repurchase stock under an accelerated program, which one isn't currently in effect. Can you just comment on just kind of views on capital and share repurchase, in your mind, how you look that to come into play for the balance of the year?
Sure. Elyse, as you've heard us say before, we continue to evaluate share repurchase as a potential way in which we would invest our capital. That does not mean we're going to say we're going to purchase X amount of shares or X amount of value on a quarterly basis. We'll continue to evaluate it, and when we think that that's a good investment for us, we'll do it. It is conceivable that through the remainder of the year, we might not buy any shares back. Like I said, we look at it as investment, an option. It is not something that we are saying we are going to categorically do each and every quarter for a set amount.
We're going to look at the valuation of the stock, see if it makes sense, and we'll consider that with the other investment opportunities that are in front of us.
Okay. Thank you very much.
We'll go next to Charles Sebaski, BMO Capital Markets.
Good morning.
Morning.
First question is on the retail segment and the earn-out adjustment and the pressure that that had on margin. I guess just conceptually, I guess I think about earn-outs increasing because the operations of acquired businesses have been improving, and Why that would be a contra to margins, I guess, if you could conceptually help me understand that, I'd appreciate it.
Morning, Charles. The way to think about the earn-outs and the adjustments that we make, when we acquire a business, we'll project out over the applicable earn-out period what we believe the performance to be. Based upon how that business is performing, either higher or lower than original expectations, we'll make true-ups to that charge out or to that reserve for payout purposes. The reason why what happens is dependent upon the outlook for the back end, you can end up with taking either a charge or a credit in one period, but it doesn't mean that there's a direct correlation to the amount of expense with the amount of revenue recorded. You're truing up for the remaining period. Within the EBITDAC, as we described, is we exclude the changes in there to show underlying margin.
Yeah. Okay. That makes sense. On the national programs and the $2.8 million tax credit, did that just hit the bottom line? Did that flow through top line as well? I guess I'm trying to understand where that's flowing through the numbers for the national programs.
Just bottom line, it was a credit within expenses.
That had no effect on the overall tax rate for the business?
No, it's not. It's a premium tax. It shows up in other income. It's not an income tax. It's like a sales tax equivalent.
Okay. I guess, overall in wholesale, I guess, I don't know if this is from the recent acquisition that you mentioned has got lower margins. I guess when I think of the wholesale business and organic growth nearly 4%, that would be generally, I would think, margin accretive, as opposed to margin contracting at that level of organic. You've got this acquisition, which I believe is all going to roll through wholesale going forward, that you said is lower margin. Going forward, what is the expectation of wholesale brokerage margins on a run rate? I mean, maybe not next quarter, but for 2017, is this new acquisition at pretty sizable to the wholesale operation going to have a material contraction on EBITDAC margins next year?
Charles, let's start by saying the impact is really the compression in rates, and the number of transactions. You have some additional people that are involved. That's the bigger impact on the margins as opposed to the impact of the new acquisition. You've heard us say that historically, what we try to do is have acquisitions be 20%-25% minimum type margins when we make that acquisition, and over time, we try to increase those over time. Specifically, if you look at, you've heard us talk about this, in the property brokerage area, we've had rates go down for 3 plus years in a row, 10%-25%. That's number one. Number two, in the binding authority business, we're seeing more and more transactions, yet the price on those transactions are down slightly. It means that we have additional cost incurred.
What we said in the commentary was that as we get into it a little bit more, when I say that going forward, we'll be able to give you that. Today, we're not going to give any speculation or guidance on margins for next year.
Okay. There are two components. I guess I just don't have the timing of the acquisition in my head and the effect that that had.
The timing of the acquisition was June 1, it was very minimal impact.
Okay
in this quarter. What I'm trying to say is it will be part of the go forward. What I think we want you to think about is this, when you have business, particularly where you have it under a lot of pressure in terms of rates, that, like I said, they're running faster to keep up if they can or fill in the hole. That's the unique distinction there.
Okay. Nothing in the market environment, I guess from what I heard from you guys, leads me to think that that's going to abate, right? That the pressure seen in the wholesale brokerage because of how binding authority is doing, more transactions, compressed rate, is not something that's changing for the positive, at least as the signs say right now. Is that fair?
I think that that's a fair statement. I would just say, the investment community, my impression is you don't have as much clarity into the wholesale space in terms of all of them that are owned by private firms. I would tell you that we're, number one, very, very pleased with the organic growth that we have had in our business, number one. Number two, we're very pleased with the margins that our wholesale division delivers, and Anthony Strianese and his team have done an exceptional job. I know that sounds kind of interesting, but it is a statement because we believe that we are one of the best-run wholesale operations out there. It's a relative statement, but I believe what you just said is fair.
Okay. Finally, just last on the contingents, you mentioned that the uptick this quarter was due to a new national programs business that took effect this quarter, but that the second half contingents are likely to be down. Does that mean that the second quarter is kind of a, this program is going to have a potential contingent every second quarter? I guess, the extent of the bump was material, and yet we're still talking about the back half being down. I'm just trying to understand on how that works.
Yeah, let me see if I can explain on that, Charles. It wasn't a new program, it was an existing program, but based upon the performance of the program, they became eligible for a contingent this quarter.
Okay.
Would we be able to say if they will get that in the future? Wouldn't know, because again, all based upon how the program performs. Our comments about the back end of the year, that was really focused around coastal property programs, and that is primarily going to be driven by the fact there's just lower written premiums. We have every expectation that those programs, which they normally earn in the second half of the year, will more than likely be down.
Thank you very much for the answers, guys. Have a great morning.
Sure. Yeah, thank you.
We'll go next to Sarah DeWitt, J.P. Morgan.
Hi, good morning.
Morning.
Morning.
I think I heard you mention that program wholesale and services organic growth will be lower the next few quarters. Can you just elaborate on what's driving that and quantify it if you can?
Sure. The answer is, specifically what we were referring to was property rates, and specifically coastal property rates and commercial DIC rates across the board. When you hear that, there's an impact in retail, there's a significant impact in wholesale, which you're already seeing, which you've seen, and there's an impact in our programs division, specifically with our property-related programs. We also alluded to some, in a couple of our automobile-related programs that are under a little bit of pressure as well. Once again, we don't give organic guidance, as you know, Sarah, I know you'll appreciate that. What we've said is we're just trying to give you an indication that we continue to face a headwind that I would say that three years, particularly in coastal property, some of the pricing that we're seeing surprises us now.
That's the way it is. We just continue to work through it.
How is that different versus this quarter? Is it just that you have more coastal premium renewing in the second half?
No, it's not different. It's just the fact that it's, let's just say, three years in a row, a 25% decrease on pricing. What I'm saying is there's got to be a point usually where you hit the bottom. What I'm saying is, if you compare it to the quarter last year in 2015, we might have thought that the rate decreases on certain properties would be not as great. What I'm trying to say is we're just continuing to see more of the same, and we're trying to give you a clear path or a clear understanding of what we're seeing and how that impacts our business.
Okay, great. Thank you. Just on the contingent commissions, can you quantify how much they'll be down in the second half? I think in the past you've given guidance on that line item.
Hi, Sarah, it's Andy. No, we wouldn't be able to give that exactly because there's calculations that need to be done by the carriers. All indications that they will be down, but we do not know approximately how much.
Okay, great. Thank you.
We'll go next to Quentin McMillan, KBW.
Hi, good morning. Thanks very much, guys. Could you just help us, there was an increase in the claims activity in the services segment. How much did that benefit organic growth by in the quarter in the services segment? In the first quarter, you had sort of highlighted that this was going to be up from the Texas claims activity. Is there anything that you're seeing so far in the back half of the second quarter or early in the third quarter that might indicate that services would be sort of up or above or below normal?
The benefit for the second quarter was primarily related to claims. One of the things that we've talked about on previous calls is that we do look at our claims businesses over a longer-term horizon, only for the fact that the claims can kind of come back and forth. I think as we had talked about previously, what we were seeing during the end of the first quarter and into the second quarter is that the volumes were not unusual, though. What the volumes really represented was more kind of in line with our 10-year average. It's not like we had this significant pop all of a sudden. There was a lot of noise in the press and a lot of coverage, the volumes were fairly consistent with the volumes that we saw last year.
Then as it relates to outlook, no, nothing that we see right now we'd be able to give any guidance on.
Okay. Just to close that thought, the 1-2 that you had in the fourth quarter and the first quarter on the organic was really more the outlier on the low side, and the 7 is more of a normal course of business in terms of claims activity. Is that what you're kind of saying?
Yeah, the Q1 was definitely down. There was very little claim activity because of almost no storms in the back end of the fourth quarter during the first quarter. Then second quarter, maybe more on an average. Don't know that I would call it a standard level.
In the first quarter as well, you guys had mentioned just an overall sort of retention-like issue where you were losing some contracts and some business that was a little bit maybe concerning to you at the time. Can you just talk about whether that trend has continued at all, whether that's reversed, or what has happened there?
We're always, Quentin, focused on retaining our existing clients. As I said in the first quarter, I don't remember exactly how I said it, but I was pleased with the new business that we had written, but I thought we had had a little more lost business than we would've liked. That was in the first quarter. This quarter, we've done better, and I think that is reflected in our organic growth, which we're pleased with, and we're making progress. It's a very competitive marketplace out there. As you know, many times the reason you lose business, there's a lot of reasons why you lose business, but most of the time it's loss of relationship with the buyer, both the economic buyer and/or the user buyer.
Having said that, in a market like this, where you can see carriers do some really squirrely things in terms of pricing, sometimes you just see crazy things. They do pricing that just doesn't make sense, where they blow something out of the water, and we don't know how long that's going to last or if it's real, or whatever the case may be. Sometimes you lose a little bit of business like that. We're continuing to work through it, and I would tell you that I didn't see some trend in Q2 that would be similar to Q1. I think it was just periodically things like that happen.
Okay. More positive and it sort of has reversed itself. Great. The last question, just in terms of the IT spending, thanks for giving us the update in terms of the impact, the 30-40 basis points you spoke about versus 40-50 basis points of drag previously in 2016. You also mentioned in there was about a 25 basis point impact, I believe, from the technology investments in the second quarter. Can you just talk about what the overall impact has been in the first quarter? Then obviously related to how much impact there might be in the back half, because it feels like we've done a little bit better in the first quarter, maybe there'll be a little bit higher impact in the back half.
Yeah. Our comments during the Q1 earnings release is that there was not a material impact during Q1. The 25 basis points was about the impact that we had in the second quarter, again, that was benefited a little bit by our strategic purchasing. Then utilized the 30-40 for a full year on it, Quentin. Again, if it continues to grow the way that it is and momentum is picking up, that probably a pretty good range for us right now. Which will mean, arithmetically, more expense in the back end of the year.
Great. Thanks very much, guys.
Yeah. Thank you. Have a great day.
We'll go next to Josh Shanker, Deutsche Bank.
Yeah. Thank you. Just a quick numbers question first. How much did you guys spend on acquisitions for the quarter?
Let's see, a little over $78 million, Josh.
Thank you. That's for my notes. I know you're not going to give guidance on the quarter, but I'm trying to understand all the moving pieces. With the IT spend, where does it show up? In which segments do you really feel that in the margin?
Right now, it's primarily in our Corporate segment, but depending upon the individual components of the program over time, Josh, some of it will show up in the individual segments. The one primarily that it may show up in will be Retail. If there's a material impact in any of those, we'll talk to you guys about it.
I guess overall, you're pleased, and I'm surprised and happy about it that margins have been better than you thought. Can you talk about, skipping Wholesale for a second, what's been improving the margin trend, I guess, in Retail and National Programs?
Well, I just think that we had a good quarter, and you heard us say that we wrote a lot of new business. I believe our retention was appropriate. It can always be better. In National Programs, we continue to work through challenges, and some of our programs, as we've said, are doing really well, and some of them are under pressure, i.e., property, both CAT and/or commercial DIC. I just think it was a good quarter overall. We just executed well.
You wouldn't say you've reached a new plateau of efficiency or anything like that. Some quarters will be better than others, I guess, is where we're at right now.
That's correct.
Yeah. Josh, make sure you take into consideration our comments about the drivers of margin in National Programs, because those did benefit the margins for the quarter.
Does that make sense? Can you give a little color on this revenues per transaction sort of relationship in wholesale? I'm trying to understand how that works exactly and the extent to which, is that a permanent feature going forward of the way the wholesale business will operate, and therefore margin erosion over the long term?
Okay. This is a hypothetical example. In binding authority business, the average premium size is around $3,000. Let's say that generates $300 of commission. In a market like this, there's lots of marketing of individual accounts. If the underwriter normally has, I'm going to pull a number out of the air, 100 submissions in a week, hypothetically, and in light of the changes in the rates and/or terms and conditions, that 100 goes to 150 for the week. They have to process 150, the question is, do they have to have another person, not only help that production underwriter, but let's say two or three other production underwriters? That's example number 1.
Example number 2 would be if you have accounts that generate X amount of commission, whatever that is, and this is in brokerage now, and all of a sudden, your rates are down 25%. Your commissions are down 25%, and you're actively trying to fill that hole in. Are you, the broker, out more on the road, and you have to have somebody help back at the office, depending on how you have it structured in the past or not? Like I said, the Wholesale business, as you know, usually has higher extremes on both ends. When the market hardens, typically it goes up quicker, higher, faster. When the market slows, it typically, in the slowest parts, it goes down the quickest, and it has the most drag. Having said that, it's been our best performing organic growth business over the last several years.
It's hard other than to speculate on how that is going to play out, because as we continue to see the market change, it impacts the number of submissions that we get, either in binding authority or brokerage or both.
One final question, given about this issue of you needing new heads. We talked, I think, last year about a significant desire on your part to hire from college campuses and create new young teammates. Where are we in that training program, and when would you expect these new teammates to be revenue accretive?
Okay. Josh, I know that you and the other people on the call would like to have a linear map which talks about investments in people, and it doesn't really work like that. What I mean by that is you could hire a young person or a new person. I wouldn't even say young. It could be somebody that's been in the industry somewhere else or in a different industry and come in, and depending on the job that they come into, they may be able to impact revenues sooner than in other segments of the business. We may have hired somebody in a production role, and as they get in, there's another opportunity presented to them, and we need them in a marketing or a service or a placement type role.
What I would say is, I think it's going to be very difficult for us to give you a clear linear path on, okay, if we hired this person right out of college, how many years does it take at their salary in order to be accretive? Then at what point does that really start kicking in? It's different with different people. That's why it's been difficult to describe on the earnings calls in the past, because at the end of the day, our greatest asset, as you know, we are a people business. Our people go home every night and then come back to the office every day to take care of our clients and solicit new ones. We're going to continue to be opportunistic in terms of our hires. We have done that.
We have hired people you've heard us talk about in Beecher and around the system, not just Beecher, but that are seasoned people that we expect to come in and have a revenue impact more quickly. Then we hire people right out of college where we not only have to teach them insurance, but we teach them about life, as you can appreciate. That's kind of the way we view it, and it's going to be hard for us to say, okay, we're not going to say we hired 100 people and this is where they are. The answer is, we understand about recruiting and developing talent. It's not a science, it's an art, and some people develop quicker or not as quickly as others.
Okay. I'll take that. Good luck in the next quarter. Thank you.
Thank you. All right.
We'll go next to Greg Peters, Raymond James.
Good morning, and thank you for hosting the call. I just wanted to circle back on the technology investment. I'm looking for an update on what this means to Brown & Brown. I guess when I think about it, I was struck by your hypothetical example in wholesale, where you've gone from 100 submissions to 150 submissions, so there's an increased expense. It seems like there's something to be said for technology playing a role to help improve efficiencies there. Just looking for some additional color on how this rollout of the technology is improving the operations of your company.
Greg, good morning. When we talked about the areas in which we're going to invest in technology, we had talked about this next phase, which is around optimization. The number of areas that we were looking at were around our financial reporting and analysis systems. We were looking at core infrastructure, and then we were looking at updates to our retail agency management systems.
Okay.
Specifically on wholesale is that business has a lot of automation already today. I think what Powell was really just trying to explain, he wasn't saying that they actually went from 100 to 150. He was just trying to give some perspective that more and more submissions come in, even while there is a lot of automation inside of there, either interaction between ourselves and the retailer or back to the risk bearer. There is a point where just you need a number of hands on the pump just to be able to get all the volume through, because you still have to look at it.
Right.
We're always looking wherever we can to continue to drive automation through the business.
Andy, how are you measuring the return on investment for these projects, in the context of all the money that's being spent?
Our previous commentary on this one is we said that we would spend around $30 million-$40 million, and the payback would be somewhere in the range of five to six years. We know exactly where the savings are going to come from, Greg.
Okay. Perfect.
We're quite comfortable with that.
Okay. Powell, it seems every quarter during your remarks, you talk about upward pressure on M&A multiples. In this quarter you mentioned it again, then you talked about or you highlighted there's some different type of structures that are popping up on top of that. Where does this end? What do you mean by different types of structures? How high are the multiples? In the context of what you're continually telling us about market conditions, should we expect less M&A going forward?
Okay. Greg, as you know, it's interesting what people or who says how much they paid or how much they got in terms of a multiple. I always say a multiple of what? If we're talking about a multiple of 2018 pro forma earnings, that's much different than a trailing 12 or a true vetted pro forma over the last 12 months or the forward-looking 12 months. What I would say is, as you know, there continues to be a lot of activity in the PE space, there continues to be more money it seems to either flood into it or they want to put more money to work. Like I said, remember, we just sell and service insurance at Brown & Brown.
Those guys are doing their financial modeling relative to shorter term things that include a flip with a terminal value. What we look at is, does it make sense financially? The answer is, a number of the ones that we've seen don't make sense financially. When I refer to terms and conditions, that could mean that guaranteed amounts down or up or kickers or unusual things that are just creative. I think you should just take it as saying the minimums continue to be pushed up, meaning the amount earned, all these different things. Having said that, we continue to evaluate all of our investment options. As you know, we talked about 1, hiring new teammates or additional teammates. 2, it could be acquisitions, which we did 2 last quarter, of which 1 was of size. Morstan, excuse me.
3, the potential of returning it to shareholders in some form or fashion. We have said that we continue to evaluate that. We obviously are paying our dividend again as of August. I believe it's the 17th. Is that right, Andy?
On the payment?
Yeah.
Yeah.
Yeah, sorry. We will continue to evaluate on share repurchases. I'll tell you, Greg, what I would say is this. I think that evaluations are going to continue to remain high for the near term, the near to intermediate term is Let's just make it easy. Let's say the next 18 months. I don't know if I can speculate out further than that relative to how those multiples will continue after that. I would say that I don't believe that it can continue like this forever. We're continuing to operate in an environment that maybe we don't do as many acquisitions. That does not mean we don't want to. That means that they got to make sense financially and fit culturally. Cultural fit is the most important thing. You've heard me say that over and over and over again.
I'm really pleased that the acquisitions that have joined our team this year, not only this quarter, this year, over the last several years, because I think we continue to have lots of high-quality people and additional capabilities join the team. We're not going to do something stupid. I get a kick out of the fact that I made a comment several quarters ago that lit up Andy's phone, which I said, that in order to get the $2 billion of revenue, we're going to have to, I think I said, hire or acquire 2,500 people, and everybody on the call got nervous that we were going to go out and just hire all these people. Well, we're at 8,474 people as of 6/30. We're pleased with our quarter.
If we wanted to be our intermediate goal of $2 billion of revenue, we could have been there two years ago, it wouldn't have made sense. We're not going to do that. We're not in it for growth's sake. We're in it for growth and profitability. Like I said, it is really important we walk away from deals that don't make sense. We are not deal jockeys. That's an important distinction because we're going to do this forever.
Got it. Thanks for the color. Congratulations on the quarter.
Thanks, Greg. Nice to talk to you.
We'll go next to Ken Billingsley, Compass Point.
Good morning. Just want to follow up with some clarification on some comments you made. One, on the organic growth. I know you've talked about the different segments and some volumes, but I just wanted to get maybe a little clarity. Majority of the organic growth, was it just new customers? Were you expanding any of the products, expanding the business that you're writing with your existing customers? I'm sure it's a mix of everything, but what really drove the organic growth primarily?
Well, Ken, you're not going to like this question, but it is all of the above. That means we, number one, start with, do we retain our existing clients? In retaining our existing clients, our clients can actually shrink, if their business has gone down or they can go up. That's going to start the baseline. The question is, what about our retention? We talked a little bit about that, and retaining those existing customers. New business could be defined as new, where we didn't have the customer before, or a new line of business on an existing client where, let's say, we wrote the employee benefits and then we wrote the property and casualty or vice versa, or whatever the case may be. It's a combination of everyone executing well in the quarter.
There's not some magic thing that we just started doing this quarter versus another quarter. It's just we executed well in Q2.
With rates being down in general, are your customers buying more coverage than they have, and are they continuing to buy more coverage than maybe they did two or three years ago because the prices are attractive? Or are they looking to increase coverage in other areas that they maybe didn't have?
I think it could be either with a customer, but let me back up and clarify something. The way we look at it is we are in the solutions business. A solution might be transferring it to a risk bearer. It might be self-insuring it or identifying a exposure that you don't know, that you may not have realized you had before when we weren't working with you. We acknowledge something like a contingent business interruption exposure or a hired non-owned auto exposure or something out there that maybe someone has never talked to you about, or maybe you just never thought of it. That's our job. Having said that, we try to bring solutions that involve transfer of risk, but that doesn't mean all of our clients think that that would be the best decision to do so. We have those conversations with them.
Every client is different. I don't want to make a broad general statement that says, okay, every contractor is buying more umbrella coverage, or everybody in the wholesale food business is buying employment practices liability coverage now, or cyber liability. I would tell you that we quote a lot of cyber liability, but the uptake is not nearly as high as I would think it should be. Having said that, it's not dissimilar to what it was in employment practices liability coverage 10 years ago. We quoted a lot of it, and there wasn't a lot of uptake. There started to be more claims, and it started to register, and then more and more people have started to buy it. I think that cyber is the same exact scenario.
As you have these high-profile instances where businesses are violated, if you want to call it that, all of a sudden other people say, "Well, maybe that can happen to us.
Okay. On the earn-out. The earn-out was just a little bit higher this quarter, and I would obviously expect that you believe the business is doing better than you had initially expected, and there's going to be a payout. What conditions changed though, maybe from last quarter to this quarter, where you identified that the conditions had changed and you were going to have a higher payout on those prior acquisitions?
Okay. As you know, the acquisition earn-out estimation or from a GAAP standpoint, we have to give our best estimate on a quarterly basis. What can happen is a business can write a bunch of new business that would come in to the pipe. That doesn't mean necessarily all of it is booked in that quarter, but we have more clarity with certainty that we believe that that's going to come, either in this quarter or quarters in the future. This is one of those things that Andy and I talk about in the sense that it has a tendency to cloud, I wouldn't say cloud, that's maybe strong. It has an impact on how people view the earnings, and it's a non-cash charge, right?
Sure.
Having said that, it's interesting because the fact that our businesses are doing better is a good thing. We don't want to have these adjustments, but we'd much rather have that adjustment than the opposite. Even though the opposite would actually, non-cash charge again, benefit earnings, it's still the business isn't performing as well in some instances as we had anticipated, and sometimes we have that. That's the thing that's kind of unusual because GAAP, the SEC is actually asking us to estimate the ultimate value of a business when we don't know how much new business they're going to write and how their retention will fully flush out over the earn-out period.
I agree. I view this as a positive long term. It sounds like they're writing more business than you expected, or is it on what you purchased or is it an increase in them adding on ancillary products?
Ken, this is what I call a high-quality problem. Okay? That means that they're doing a great job at growing their business. It's a combination of existing clients may be growing, they may be purchasing more lines of coverage, and we're writing a bunch of new business. Remember, in some of those businesses, in this particular instance, this quarter, those businesses have long sales cycles and many of them are larger accounts. You have better transparency in that at a set time, "Hey, we wrote these four accounts. These are going to come in over the next 12 months." That's going to impact our acquisition, which is good. We want the people who have joined our team to hit the maximum. They just have to perform, and that's a good thing for all of us.
Hey, Ken, we spend a lot of time up front trying to do a lot of work to determine kind of where we think the business is going to turn out. You're not allowed by GAAP to book the maximum, nor can you book the minimum. They say you got to book your best estimate. What we do over the earn-out period is, we're monitoring how they're performing on a quarterly basis. Once we see a trend that says, "You know what? I think our assumptions need to be adjusted up and down," then we'll do it. We don't go in every quarter and make adjustments. Otherwise, we have kind of a whipsaw effect at times. We monitor these pretty closely.
Sure. Again, it seems it's more of a volume as opposed to maybe a margin of. It's not like the margin efficiency changed dramatically from when you purchased them. It's more about volume of business.
Well, it could.
Could be, yeah.
I think I don't want to give you the impression that's the reason. It could be either or both.
Right.
Okay.
Most times it is both.
Right.
All right. Well, thanks for taking my question.
Yeah. Thanks.
Thank you.
We'll go next to Ryan . Janney.
Great. Thanks for taking my questions, guys. Obviously, you guys noted that you're surprised by the pricing environment for coastal property right now. Where are these rates currently as compared to where you guys have seen them in the past? Are we in the mid to late 90s, pre-Hurricane Andrew days? I just wanted to get an idea of where your book rates currently are.
Okay. What I would tell you is, we are starting to see rates in the pre-Hurricane Andrew levels. That would be 1992 for those that may not remember the exact year. Remember, you've had enormous, and I don't want to say, Ryan, that we're surprised, like all of a sudden we're just surprised. We've continued to sort of scratch our head at the continued rate decrease or pressure. It's not like second quarter, we woke up one day and said, "Whoa, we're surprised." It wasn't that kind of deal.
If you look at it for the last three years, and I'm just using Southeast Florida because I live here in Florida and know that area well, and you look at these very nice high-rise condominiums in Dade, Broward, and Palm Beach County, and all of a sudden, the rates have come down, let's just say 20%-25%. Those are big cuts. Now, that's great for our customers. It's hard to fill in the hole from an organic standpoint when you have that much pressure in an office, like for an office specific. I'm not talking about the entire business, I'm talking about in the office or in a region or in a division, depending on how much is connected to that coastal property.
Great. Can you just remind us how those rates responded after Hurricane Andrew? Again, I realize that we're in a completely different environment with liquidity these days, I just want to get a precedent for what happened to rates after Hurricane Andrew for your, I guess, coastal property books, just to
Okay. Let me back up. I actually joined Brown & Brown in July of 1995. I worked for an insurance company then. I saw rates go up in admitted markets as much as were permissible by rate filings. However, here's what I would say. Remember, in Hurricane Andrew, it was much different because the modeling for insurance companies was not nearly as sophisticated. It was more like a map. There would be people in Kansas City riding hotels in Miami Beach, and the people in Florida with the same insurance company didn't even know that they were riding the hotel in Miami Beach.
There was these aggregation of exposure units that was substantial, which most insurance standard carriers realized that had it been a direct hit in Hurricane Andrew on Miami Beach, that we might have had some very significantly impaired insurance companies because they didn't realize how much they had. I think a better example would be to go to 2001 and 2002 and 2003. You had a constricting in the property market. You had post 9/11 events, you had lots of other things, rates started going up and up and up and up. I don't think you can say, "This is how much they're going to go up in the event of a loss," because the size of the loss is going to be a significant impact.
The number and the losses by individual carrier will impact it depends on how opportunistic certain carriers will feel on the way in. If the marketplace is bearing, I'm making this up, a 25% increase, all of a sudden you have a capital provider, which has not taken a bunch of losses and maybe didn't participate in that segment and says, "At this level, we might do that," they might come in and write it at 15%. There's not going to be a linear relationship. I can just tell you, when you have a big event that goes into Florida, which is not a question of if, it's a question of when we have another storm hit Florida, there will be upward pressure on rates. The size and the magnitude of the loss will dictate the rate pressure.
If you had a $40 billion loss, maybe the pressure's not nearly as much if it's $100 billion.
Great.
It's pure speculation on mine, Ryan.
Yep.
I wish I could give you a little more color, but look, here's what I want you to know. I've been in Florida for 48 years, and I can tell you that hurricanes happen usually every 10-14 years. We're 11 years in since it struck land the last time. I could be wrong, but since I came to the Earth, on this Earth, I can remember the first storm that was in the late '70s. I can remember each one distinctly. It'll be, and we don't wish that to happen, but it's going to happen somewhere, sometime.
Okay. No, great. I really appreciate all that color. If I could just ask one more just kind of numbers-based question. Obviously, you kind of lowered the tech spending impact on margins for 2016, but is there any change to 2017, or is that range, I think of 35-60 basis points, still there?
Good morning, Ryan. That's still a good range for right now. If information changes or the outlook changes, we'll let everybody know. That's good for right now.
Okay, great. Thanks.
We'll go next to Kai Pan, Morgan Stanley.
Good morning, and thank you for fitting me in. First, just follow up on the recent departure. How long is their sort of non-compete or non-solicitation period?
As you know, we have traditional covenants with people that are on our team, which are typically two years. As it relates to certain covenants, there were improved or enhanced covenants, which will last for a year as well.
Okay, thanks. On the sort of the coastal property rates, I remember last few quarters, you're talking about down 15%-25%. Now you say 10%-25%. Are we seeing any sign of probably early sign of stabilization, or am I reading too much into it?
You're reading too much into it.
Okay, thanks. Lastly, on margin. If you take out the $2.8 million of premium tax refund, the EBITDAC margin roughly stable year-over-year. You have a sort of benefit of probably $4.4 million of a contingent commission. That's roughly about 100 basis points of margin. I just wonder, is that the right way to think about it? Secondly, you talk about 30-40 basis points impact from the IT investment. I just wonder, is that the overall margin impact? Or is it just IT, not including anything like you're hiring additional brokers or the other impacts?
I'm going to let Andy touch on that in a moment, but I do want to make one comment because this is my favorite. I'm being facetious. 141R, you didn't mention that, Kai. That's the change in acquisition earn-out payable.
Yes.
Remember, there's some offsets to some of the things that you raised. That's number one. Number two, as it relates to, and we haven't, and we're not going to, by the way, we haven't broken out the cost of our strategic hires or opportunistic hires or whatever the case may be. The answer is we just make those investments because when we have the right leaders in the right places and they feel like they have the right opportunity, we're going to back them. The answer is, I know you want something that you can put into your spreadsheet, and unfortunately, it's not that simple. If we find four people that we feel like we've got to have them and they're not so-called in the budget, we just make it work.
At the end of the day, long term, those capabilities and those people, if we feel that strongly about them, will make us a better organization. Andy, you want to respond to his comment on the other stuff?
Kai, good morning. Let me touch on a couple of the points there. Keep in mind, I made mention about the other income last year. While we didn't call that out for the quarter, just always when you're kind of going through, look at those line items because those movements do have impacts, okay?
Okay.
That's part of back and forth. On the technology, when we said 30 to 40 basis points, that is what we would estimate right now on a full year impact to our EBITDAC margins. It may move around a little bit, it may be impacted by how well we do on some of our strategic purchasing initiatives, et cetera.
That's just related to the net IT investment impact.
Yes. Only IT, not any investments.
Okay.
That's what we talked about back when we did the year-end results. Those are the ranges that we had given before.
Okay, great. Well, thank you so much for all the answers.
Thank you, Kai.
We'll go next to Mark Hughes, SunTrust.
Yeah, thank you. Good morning. The strategic purchasing, it's always been my impression you have a little bit more of a decentralized model. Is this something that you can repeat in future quarters? Is this something there's going to be more of? Or conversely, was this kind of a one quarter benefit? Would we see the similar benefit in coming quarters?
Yeah. Well, good morning, Mark. Let me clarify. When we're doing our definition of strategic purchasing does not mean that we're doing centralized purchasing. We're not going away from our decentralized model. That is core to how we operate. What we're trying to be able to do is leverage our purchasing power as an organization for the benefit of all of our individual offices. They still determine what they buy and when they want to buy it, but we try to get the full power of Brown & Brown. Hopefully, those will all continue as we keep going forward. We've been working on them for a while, and we'll seek more opportunities in the future.
Okay. Then in the claims area, I think you had suggested you're getting some good new clients, but maybe some of the volume from existing clients was slowing and they're bringing some more of that in-house. Could you kind of clarify what's happening there? Is it just a lower underlying level of claims because of a better economy, perhaps?
Yeah, that's the right way to think about it, Mark. Yes. The answer is, think about a standard insurance company who has a large infrastructure that's already built in their claims management system. In some instances, we are outsourcing on their behalf, and if their claims activity in-house is down, then they may want to bring some of that back in-house, until and at which time the claims activity kind of bumps back up to more of your normal level for them.
Right. New business is sort of offsetting that other underlying impact. Is that the right way to think about it?
I think that's the right way to think about it.
Thank you.
Thank you, Mark.
We'll have a follow-up from Quentin McMillan, KBW.
Hello, Quentin.
Sorry about that. Sorry to have the follow-up. Can you guys just tell us what the CapEx number was in the quarter?
I apologize. I don't have that right here in front of me, Quentin.
All right.
We'll circle back, and then I can tell you what the number was. Sorry, I just don't have it right here in front of me.
Okay, no problem. I'll shoot you a quick email. I just wanted to follow up on that. Thanks very much.
Yeah. Again, let me just clarify. For full year purposes, though, we've been saying somewhere around about $25 million. That kind of is our average over time, $20 million-$25 million. That's a good full year estimate.
Perfect. Thanks, guys.
Mr. Powell and Mr. Watts, we have no further question in the queue at this time. I'll turn the conference back over to you for closing remarks.
Thank you very much, Shalon, and thank you all very much. We look forward to talking to you next quarter, and have a wonderful day. Goodbye.
That does conclude today's conference. Thank you for your participation. You may now disconnect.