Good day, welcome to the Brown & Brown, Inc. 2016 first quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call, and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature. Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the first quarter of 2016, and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors.
Such factors include the company's determination, as it finalizes its financial results for the first 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 company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements, is contained in the slide presentation posted in connection with this call in the company's filings with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
With that said, I would now like to turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Taylor. Good morning, everybody, thanks for joining us for our first quarter earnings call. Let's jump right into it. I'm on slide four. We delivered $424.2 million of revenue for the quarter, growing 4.9% in total and 1.3% organically. Once again, each of our four divisions delivered organic growth, for the quarter, our EBITDA margins remained steady. Contingents were $34.1 million. We delivered $0.44 per share for the quarter, which is an increase of 12.8% over the prior year. During the first quarter, we continued to talk with a number of acquisition prospects, we acquired three companies with annualized revenues of approximately $14.5 million. While valuations remain high and the acquisition marketplace continues to be very active, we're constantly evaluating organizations that fit culturally and make sense financially.
On slide five, we'd summarize the quarter as a continuation of what we experienced during much of 2015. Our customers continued with modest hiring. Construction appears to be picking up in a number of communities throughout the country. Sales are up slightly, and insurable values are increasing. As we've said before, this is not consistent in all industries or geography. This continued improvement in exposure units will be a driver of our organic growth going forward. It continues to be a very competitive market, as our carrier partners are very focused on retaining all of their renewals. Rates remain under pressure, with property being the most impacted. Coastal properties continue to see rate declines of 15%-25% down, which we've seen now for three renewal cycles in a row, and we expect this to continue for the remainder of this year.
The increase in exposure units has helped to offset some of this decline. These rate decreases are putting pressure on all of our property businesses in retail, wholesale, and national programs. From a retail perspective, we continue to see improvement in new business during the quarter across many geographies and industries. This is partially offset by the impact of declining rates in cat properties and some lost business. Management of healthcare costs remains front and center for our customers. Everyone's focused on how to best manage and share healthcare costs with their employees. ACA reporting and compliance remains at the forefront for many of our customers, and a concern for many of them was the completion of the first major ACA reporting requirement, which occurred at the end of the first quarter. We continue to have a lot of interest from our risk bearers in our programs businesses.
Our all-risk program is a good example of collaboration and design of a new program with our carrier partners. During the quarter, we had growth and positive momentum across many programs, led by our lender-placed coverage program and our non-standard auto program. On the opposite end of the spectrum, we have programs continuing to face material headwinds, such as our coastal property programs, due to pricing declines or changes in risk-bearer appetite or both. The benefit of a broad and diverse nature of our programs across industries and geographies is that when there are a few programs going down, others are hopefully and typically going up. In our wholesale business, binding authority and professional liability businesses continue to perform well as we're writing more and more new business there. We are experiencing some rate pressure on binding authority as compared to prior years, primarily in the property line.
We're seeing some rate increases in certain lines of professional liability. As I said earlier, catastrophic property brokerage is under the most consistent rate pressure over the past two years, and we expect continued year-over-year downward rate pressure through the end of 2016. I'd like to take a moment and look at a historical perspective of property rates in Florida over maybe the last 22-24 years. I will make a comment that in Southeast Florida today, rates for the similar properties in the last 22 years are at their lowest level since 1994. If we go back in time, let's talk about what occurred in that 22- or 24-year period. In 1992, as you know, Hurricane Andrew hit Southeast Florida, which made a dramatic change in the property marketplace, restricting capacity significantly.
We went from 1992 to 2004 and 2005, when we had multiple storms hit the state of Florida. As you've heard us talk about, the Citizens Property Insurance Corporation, which was the market of last resort in 2007, became the most competitive market. In 2007, it became the most competitive property market. Our market of last resort was writing new business out of the private market. In the last three years, there have been several things that have occurred. Number one, there are a number of homeowners depopulation companies. They are taking policies out of the Citizens Property Insurance Corporation, and they're writing homeowners are now expanding their risk appetite into habitational, defined as apartments and condominiums, many of which are in coastal areas right on the water, number one.
Number two, there has been, as we've talked about, additional capital that has come into the marketplace. Finally, our traditional carriers, some of those traditional carriers, have had changes of appetite from a historical perspective so they can participate in this marketplace. The reason I bring it all up is I think you just need to be aware of it, because it's continuing, and as you know, it's been 11 years since we have had the last hurricane hit landfall in the state of Florida. I'm 48 years old, and I can tell you, I remember every hurricane that has hit the state of Florida in my lifetime, and it usually is every 10-14 years.
That is not saying that we think there's going to be a hurricane this year, at a point in the future, there will be a wind event in Florida, and that will, in turn, modify or change the marketplace. With that, I'd like to go back to our services division. During the first quarter, we acquired another Social Security advocacy claim business, and our original business, existing business, The Advocator, continues to grow nicely by adding new clients. This division in services revenue were impacted by a decline in the first quarter of one of our TPA businesses that processes claims for weather-related events. This business experienced very low claim activity as there were minimal storms and events during the quarter.
We did experience an increase in reported claims late in the quarter from the March storms in Texas, we're expecting some revenue uptick in the second quarter as we complete the processing of claims. We also experienced some decline in our Medicare set-aside businesses as there were lower claims volume in Q1. In summary, we view the first quarter positively. We continue to see improving activity in all of our divisions. Our customers are feeling a bit more comfortable, and we continue to deepen our relationships with our carrier partners. While not all of our efforts play out perfectly in our numbers every 90 days, we remain optimistic and focused on growing our business. Now let me turn it over to Andy, who will discuss our financial performance in more detail.
Thank you, Powell. Good morning, everyone. Let's look at our financial results a little bit closer. I'm going to talk about our key metrics for the quarter. We're on slide number six, which presents our GAAP reported results. For the first quarter, we delivered 4.9% revenue growth and an organic growth rate of 1.3%. Our income before income taxes grew by 9.5% and increased by 100 basis points as a percentage of revenues. From an EBITDAC performance perspective, which we define as net income before interest, income taxes, depreciation, amortization, and the change in estimated acquisition earn-outs, our EBITDAC margin remained substantially flat to the prior year at 32.7%. Our EBITDAC margin was impacted by a credit for our stock incentive plan of approximately $3 million and a premium tax credit of also $3 million.
Our net income improved by 9.1% as compared to the prior year and is slightly lower than pre-tax growth due to the modest increase in our effective tax rate to 39.5% this year. As of now, we see 39.5% as a good estimate for the full year 2016. As a reminder, we initiated a $75 million Accelerated Share Repurchase program during the fourth quarter of 2015. We completed it in January of this year. The final settlement was about 363,000 shares. As a result of our share buyback programs over the past year, we've reduced our weighted average shares outstanding in the first quarter by 3.2% versus the prior year. This is driving our diluted earnings per share to grow faster than our net income, increasing by 12.8% over the prior year.
With the completion of the $75 million program I just mentioned, we have a remaining authorization for share repurchases of $375 million. We did not repurchase any other shares during the quarter. As we've said before, we do not buy a certain dollar or percentage amount each quarter. Our goal is to balance our capital allocation across all options in order to drive the best long-term shareholder value. We also announced yesterday our quarterly dividend of $0.1225 per share that was approved by our board of directors and represents an 11.4% increase over the prior year. We're going to move over to slide number seven. We'd like to walk through the key components of our revenue performance for the quarter. Our contingent commissions and guaranteed supplemental commissions are up about $900,000 as compared to the first quarter of last year.
The increase in contingents is primarily in our retail division. They were down in our national programs division. Other revenues are up by about $1.3 million. These do fluctuate on a quarterly basis. In the first quarter of the prior year, we had $1.4 million of revenue related to businesses that we have since sold. For the first quarter, we recognized $14.3 million in revenue associated with acquisitions we completed over the last 12 months. We isolate the four items above in order to determine our organic revenue growth, which was 1.3% for the quarter. We're going to move over to slide eight. Let's look at each of our divisions a little bit more closely. We're going to start with retail. Over the last three months, our retail division has delivered 6.4% revenue growth with organic revenue growth of 70 basis points.
Retail's year-over-year EBITDAC margin declined by 90 basis points. From a margin standpoint, we have two main drivers. First was the lower revenue for the quarter and the related flow-through, which was partially offset by a gain on a sale of a book of business. The second driver was our continued investment in new teammates that we strive to do each quarter. As we mentioned previously, there may be times we have a temporary drag on margins. We may see these fluctuations during the remainder of the year based upon timing of new revenues and additional investments. We're going to move over to slide number nine. For the quarter, total revenues for our National Programs Division increased by 1.6% organically. During the quarter, our EBITDAC margin increased by 160 basis points. This was driven by approximately $3 million of credits related to premium taxes.
Excluding this benefit, there was a decline in our margin that was driven by a few factors. First is the investment in our new all-risk program that we announced in the fourth quarter of last year. We started accepting submissions in February of this year, and we're in the early days of building revenues. We do expect there to be a margin impact for a number of quarters until this program scales. The second driver is the downward impact of rate reductions in catastrophic property programs. We're going to move over to slide number 10. Our Wholesale Division had another good quarter, reporting organic revenue growth of 3.4%. Our EBITDAC margins were 33.3%, which is a decline of 200 basis points from the prior year. This was driven by the previously noted rate decreases and investments in new teammates.
We expect continued downward pressure on rates over the near to intermediate term, which will put pressure on margins while new brokers build their books. We're going to move to slide number 11. Services Division. We delivered total revenue growth of 5.2% and organic growth of 1.2% for the quarter. For the first quarter, our adjusted EBITDAC margin declined by 80 basis points. This was driven primarily by the lower volume of weather-related property claims that were noted previously. Due to the flow of claim activity, organic growth and margins for our Services Division can fluctuate on a quarterly basis. Therefore, we focus upon trends of the underlying businesses rather than just one quarter. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy. In closing, we remain optimistic about 2016 and the outlook for our company. The activity we're seeing in our businesses and how we're investing for the long term will position us and put us in a good position for the future. Our technology initiatives are moving forward, and we look forward for these to gain more momentum this year. As I mentioned earlier, we do expect rates for 2016 to remain under pressure, most notably catastrophic property. From an M&A perspective, the activity in the industry is not slowing. While valuations remain high, we continue to look for companies that fit culturally and make sense financially. We are, as you know, patient and disciplined, so performance will more than likely not happen overnight, so our culture and our capital deployment strategy will help us drive long-term shareholder value. Now let's turn it over to Q&A.
Taylor, I'll let you open it up.
Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Kai Pan with Morgan Stanley.
Good morning. Thank you. First question on the organic growth. It looks like the property has been a drag for the overall organic growth. Could you quantify how much is a property business, a % of your commissions, either overall or by segments? Also, how much drag has the property business on the quarter's organic growth?
Okay. We don't have it broken out exactly in retail in that segment, I would tell you, we've spoken about this before, we think it's probably 20%, both on individual property or in packages. That's roughly. If you look in certain offices in Southeast Florida, they could have very high concentrations in condominium and apartment books, number one. Number two, in our E&S, our wholesale segment, the vast majority of, I would say the number's about 65%-70% of that is related to property. When I say property, that's brokerage property and binding authority property. Binding authority property is under pressure. Brokerage property is under what we would call extreme pressure, down 15%-25%, you heard me talk about the historical perspective in Florida.
In terms of our program business, we have several large programs, FIU being one, Sigma being another, the catastrophic or the DIC, difference in condition programs, both commercial and personal or residential in California are big programs that have been affected as well. Those which would be competing directly in the face of that E&S marketplace. It has had an impact overall, but that's not the only reason. That's part of it.
What's the other reasons?
I said, alluded to earlier, that in Q1, we had some offices, we wrote a lot of new business, and not all of that new business comes in in the quarter. It comes in maybe ratably or in some instances, different times over the year. We experienced some more lost business than historical norms in certain offices. That could be as a result of companies being acquired. It could be a loss in relationship where there's been a change in the buyer at the insured's office or something of that nature. We've had a number of offices which historically have very high retention ratios, where they may have been affected by one or two large accounts that were lost. There's not something that I can point to in particular, meaning saying this is a trend because of that.
It is more a combination of acquired, we call it lost relationship, in terms of in a property market, Kai, I mean, in a market like this, and as you probably saw in Business Insurance, more recently, the property and casualty insurance companies, many of them are just struggling to keep their premium volumes flat. Some are down. In that kind of market, sometimes they do squirrely things. Squirrely things could be defined as make writing policies that are longer than 12 months, i.e., 15 or 18 months, shorter than that, i.e., eight months to get them out of wind season or do something that over a long period of time they wouldn't support, from a pricing standpoint, but on a short term basis, one year, two years, they would do.
You would categorize those are sort of one-off rather than a sort of general trend?
That's correct. Like I said, I'm making a comment that I believe that we've had more lost business in some of our strong offices in the first quarter than we have historically. I can say that categorically, those are the reasons why.
Okay, great. That's great. My second question is on margin front. I want to sort of highlight two things. One is your investment in the teams. Just wonder how much investing is that and what to expect on the margin impact. The second item is on the IT expense. Last quarter, you highlight that you're going to spend $30 million-$40 million over time, to sort of improve the IT system. Just wonder how much that budget had been spent in this quarter. Thank you.
Okay. Relative to the margin impact and the investment in people, Kai, as you know, we have, over time, allocated a portion of our revenues to subsidize or sponsor, not subsidize, sponsor hires in offices to incent offices to hire new people. When you hire somebody that has no insurance background to get them launched, it's usually a two, three, or four-year period in production at a minimum. We're making investments not just in retail, which is that period where the ramp-up period might be a little quicker in wholesale, but we made investments in our program space, as Andy and I alluded to in our all-risk program, as a newbie. This is what I want to make sure you know about margin compression. I'll let Andy talk about IT.
There are really three components, if I look at the aggregate impact on our margin in Q1. Number one, in our services division, as you heard me say, we have a third party administrator, which their claims volume was down dramatically due to the lack of weather-related events in the first quarter. That's number one. Number two, we've talked about growth in some of our programs, but impact or competitive pressures on some of our larger, very established, very good programs in our coastal property. CAT programs are down, and the margins in some of those are higher than those at which that have grown on the top line in CAT property.
The final thing is new teammates, which we talked about first, as evidenced by not only all-risk as a new de novo startup, but continuing to invest in offices, in new hires, in retail, wholesale, and programs. With that, Andy, I'll turn it over to you.
Good morning, Kai. From an IT perspective, if you remember back when we talked about this at the end of the last year, we said that we would spend the $30 million-$40 million, and we gave a range for this year. We said it should have a margin impact of anywhere from 40-50 basis points based upon how fast we're able to ramp the programs. As it relates to the first quarter, there were some modest investments. We're just kind of getting these off and getting them going. That'll probably continue to build during the year, but no sizable or major numbers in the first quarter. The ranges are still good for you.
Great. Just follow on that, do you expect you can sort of maintain the margin? You're pretty good margin right now, given these two investment in new hiring and potential IT investments.
Let me cover the IT first piece. What we said at the end of the year on it, Kai, is that our long term rate that we would expect to operate inside of was around 33-35. When we gave the guidance, we said while we're going through the IT investment, we would expect for margins to drop down by, in this example, let's say 50 basis points. Then when we're on the back end of the program, we get those back. Okay? I just want to make sure we're clear on that piece.
As it relates to the margin maintenance, what we've said historically, and we would maintain the position, is in an environment where rates are going down somewhat reasonably we think that we can grow organically and maintain, or in some instances grow the margin, depending on the quarter. If you got into a situation where there was a continued precipitous fall kind of across the board in rates which we don't see right now, but that would put pressure on the margins.
Great. Well, thank you so much for all the answers.
Yep. Thank you.
We'll take our next question from Elyse Greenspan with Wells Fargo.
Hi, good morning. I wanted to also touch on the organic revenue growth, especially within the retail segment, just given the slowdown we saw in the quarter. I know last quarter on the call, you guys had spoken to starting to see a positive benefit of some of the realignment in that segment. How are those initiatives going, and what was the impact in the Q1? Also, is there any way to break out the organic revenue growth within the retail segment that you saw within the employee benefits business as opposed to the rest of the book?
First thing, Elyse, is we are pleased, and I'm pleased with the initiatives that we're working on. Like I said, it doesn't happen overnight, number one. In terms of retail, as I said to Kai earlier I would attribute the performance in retail to some more lost business than historical in certain offices. Those are in offices that have historically very high retention ratios. Those could be attributable to acquisitions, meaning businesses and our insureds being acquired. It could be a loss of relationship, as I said, or a carrier doing something very unusual, which may not be sustainable in terms of market product. It could be for a 12 month period or something less than or greater than that. As it relates to our employee benefits business, we do not break out our organic growth for employee benefits versus P&C.
However, we have historically talked about the fact that our employee benefits business is about a $260 million business in aggregate. We have talked about that in the past. I don't know if that answered your question exactly, but gave you kind of a benchmark.
Has anything changed? I know we're sitting here on April 19th, but being a little bit into the second quarter, has anything changed in terms of what you're seeing in terms of new to lost business in some of these offices?
You're just talking about overall business?
Yeah, overall or retail specific as well.
Yeah. Like I said, I don't think you can say that lost business in very established, long standing offices in several of those offices in one quarter makes a trend. It is Q2 now, and it is a little early to see, and I wouldn't want to project a trend one way or the other. I fully anticipate that in the offices that I'm talking about, that their retention will be higher and towards more historic levels in the future.
Okay. In terms of margins, I know you guys, you pointed out a few items, including the credit for the stock incentive plan, a premium tax credit, as well as you had a disposal of business in the Q1. We back out those three items, the margins did contract on close to maybe those three items benefited by about 200 basis points, maybe a little bit less. Is there anything as we think forward in terms of the out quarters of this year where you might expect different margin trends? I guess some of the weather-related businesses will run at higher margins. Anything else in terms of modeling how we should think about the margins coming in different towards the later part of this year?
Yeah. No, in aggregate, Elyse, I don't think so. I do think that the TPA weather-related events creates a little bit of lumpiness. I know that that's not easy for you, collectively, all of you, to model. I would just say that be mindful that's not just in this one segment. We have some of that in Wright. We have it in other segments. That's number one. Number two, I think that the cat property pressure is real. Remember, it obviously has been, but it is. What you're seeing is you're seeing some established larger programs that maybe have a little bit different margin profile than some of those that are growing. Some of those that are growing have good margins too, don't get me wrong. That has impacted our margins. We're going to continue to invest in teammates.
When I say that, we always look for good people that fit culturally at Brown & Brown, we hire people sometimes when we so-called don't need them in an office in anticipation of growing the business down the road. As I said, the timeframe to get someone launched might be two, three, four years. There is a long incubation period, if you want to call it that, or ramp-up period.
Okay. One last question. Do you have an outlook for the contingent?
Hi, Elyse. No, we don't. That's the one that we just don't have any visibility into the contingents on those. I think in the current environment, I guess the only thing we would say is we wouldn't expect for them to be going up versus the prior year.
Okay. Thank you very much.
Sure. Thanks, Elyse.
We'll take our next question from Charles Sebaski with BMO Capital Markets.
Good morning. Thank you.
Good morning.
I'd like to dig in a little more on the investments in teammates across the divisions and what kind of overall margin impact. I appreciate that training people, getting them up to speed, being productive members takes time. There really seems to be some kind of a change over, call it the last year, where we're now identifying hiring new people as a seemingly unusual expense. How should we think about that? I guess if I think of a growing business, adding people, training them, getting them up to speed is the normal course of action and wouldn't be thought of as unusual in the sense that we're identifying it as a margin drag. Why wouldn't we think that this is just a perpetual piece of a growing franchise?
I guess, if we could talk about the number of people you're talking about or what the discrete margin impact is of those people this quarter and how it should roll through if it is a three or four-year timeframe. I guess maybe I'm missing something. I'd appreciate any help on that.
Charles, you are correct in saying in a normal course of business, that you continue to hire and train and recruit people. That is correct. When you're in a business like ours, where it's all human capital, 98%, let's call it. When you acquire businesses or in acquired businesses, you have sometimes people that are going to retire or want to do something else. In existing businesses, we have this evolution of our workforce. Having said that, yes, we talk about a traditional investment in producers or service teammates or marketing teammates. What I'm saying is not the traditional, the excess investment where we can export talent to offices that need it, that don't have it, or we're trying to invest in that area. I think you're exactly correct. You're not incorrect in your first observation.
The second thing that I would say is this. We and some of the investment community have given us a little grief in terms of acquisitions, and/or the lower number of acquisitions this year or last year. What we've said historically is, Number one, we're going to do three things with the money that we make. Number one, we're going to invest it in new teammates. In doing that is one of our strategies in terms of growing our business organically. Number two, we're going to acquire businesses that fit culturally and make sense financially. Number three, we can return it to shareholders, which we've done through, as you know, our dividend increases and our share repurchases. I think the point that we're tapping on, Charles, is this, we are continuing to invest for the future.
I'm not talking about the normal office hiring one person or two persons that they might hire each year. I'm talking about hiring more people as we continue to grow and as we become bigger for not only operations that we have today, but operations that will be forthcoming.
Can we get some idea of scale of that? I guess, if you said, "Hey, in the third quarter of last year, we hired 250 new people that would be considered excess, and those 250 people have a three-year run rate," we could at least understand what there is. It just seems to be that there's this talking that you guys are identifying this investment excess of the normal business. I guess, is it ongoing, or was this something that happened one point a few quarters ago, and now we have this three-year buildup? Or is this excess investment something that is happening this quarter, last quarter, it will happen next quarter until we get to some. What's the level you need to get at? What's the level of excess investment from a normal operating perspective that we're talking about? I guess that's what I'm trying to understand better.
Sorry. Yeah. Hey, Charles, maybe see if we can give a little bit of framing to this. The reason why we haven't broken out the exact amount, and this is why we've given a range on the margins of the 33%-35% that we can operate inside of. Some of the areas that the reason why we're calling them out, and Powell mentioned earlier about the investment in our all-risk program as an example of where we're investing. We've hired a team inside of there. It's up and going. We haven't generated any revenues or very small revenues today. That will build over time. If you remember, in the second quarter of last year, we talked about building out our service centers. That's another type of example.
Again, all of these maybe are smaller amounts to like one individual doesn't come in and say, "Wow, that's a big component to it." If you add up a number of them, they do add up underneath it there. That's why we say it can moderate back and forth. The goal on all of this is we want to make sure that we can continue to drive organic growth and make sure it's good profitable growth for us as an organization.
Okay. I mean, those are all things that happened in the past. Are you still making investments in talent that would be considered excess today?
Yes, we will continue to in the future.
Yeah.
Excellent.
We've made specific investments in our wholesale business in the first quarter, and those brokers will come online. We did this, again, just for reference, this is why in our commentary, Charles, we said that our margins can float up and down. If you go back to the first half of 2014, it's exactly what happened there, right? The margins came down in wholesale, and then they rebounded back in later quarters, so they can move around over time.
Okay. I appreciate the answers. Thanks, guys.
Sure. Thank you.
We'll take our next question from Quentin McMillan with KBW.
Hello?
Your line is open. Please check your mute function.
Sorry about that. I was on mute. Thanks very much, guys. I just wanted to check on the capital management in terms of you guys completed the $75 million accelerated share repurchase in January. Has the board discussed the potential for the next accelerated share repurchase program? What would be the indicators of when timing-wise you might want to do that as opposed to being next quarter or 12 months from now? Is there anything that makes you in a better position or want to start a new one?
Quentin, as you remember, we talk about capital allocation with our board all the time as it relates to whether we're going to buy agencies or buy agencies and invest in people or return it to shareholders. What we do is we constantly evaluate the investment option of buying ourselves versus buying additional agencies or investing it in people, of which we're doing all of the above or have done all of the above over the last 12 months. We'll continue to talk to the board about it. We don't have, as Andy said, a stated buyback amount by quarter, nor a stated amount with the so-called ASR, a certain threshold. We continue to evaluate at all times.
Okay, great. Thanks. Just to touch upon the margin, Andy, you talked about obviously getting back to the 33%-35% long-term margin after the IT spending is kind of paying you guys back. Can you just sort of give us underlying thoughts in terms of what you mean by that in terms of, does GDP growth, depending on which Fed governor you're listening to, is about 1% right now. You're talking about rates flat to down 10% and some of the property cat lines down 15%-25%. In this environment, do you get back to that 33%-35% margin, or does something need to change?
Okay. Good. The answer to the question is, if we can, like I said, I've told you why retail organic growth was impacted in Q1. Having said that, our business, Quentin, is exposure unit or exposure basis driven. Payrolls, sales, number of automobiles. I call it the GDP of the middle market economy, not national GDP, the middle market economy. If you go to Miami and you look at what's being built in South Beach, you would be amazed. There are 15 cranes in the sky. If you go to someplace like another town in Oklahoma, maybe the economy is not doing as well, as an example. The rate environment currently, barring a precipitous fall in rates, meaning more than we're seeing in the other lines of business, we believe that we can, knowing that we're going to start incurring some expenses.
You probably need to adjust for the expenses with the technology as some of those come on in the near to intermediate term. As we've said, I think Charles asked about we continue to invest in people. We want to continue to invest in people. We're going to continue to do that. I believe that that margin is definitely achievable.
Okay. That's great. Just to follow up on that, though, in terms of your middle market economic growth and the exposure growth, can you talk about the exposure growth trend? You talked about some of your clients now seeing some hiring. That's been a trend we've been seeing maybe for the last 12 months plus. Was it better this quarter than it was last quarter, or has it been sequentially improving or sort of staying in a similar place?
I think it's sort of staying in a similar place as we talked about. We're seeing parts and flashes of 2015. That's how I would describe it.
Great. Thanks very much, guys.
Thank you.
We'll take our next question from Mark Hughes with SunTrust.
Thank you very much. Good morning.
Good morning.
The $3 million credit was for a stock incentive program. Was that the net impact of the program in the quarter until it was a $3 million credit?
It was, Mark, $3 million. That just represented a final true up for some estimates that we made at the end of last year.
I think you had given guidance about $23 million-$26 million for the full year. Where does that stand now?
Still a good estimate on the range. As you probably saw, and as we talked about when we released year-end earnings, we've combined non-cash stock compensation with compensation and benefits now as one line item for the fact that we're on annual grants at this stage. That what we used to have historically of doing this, kind of the larger grants every two and a half years, put some ups and downs in the numbers, which caused some volatility, hard to understand. With annual, we don't think that's necessary anymore.
Okay. Then the premium tax refund, was that a revenue item or was it some sort of contra expense item?
Contra expense. Other expense.
Okay, it just flowed through below the line, not the top line?
Correct.
The share count in 2Q, what should we sort of start at, would you say? Is it similar to Q1?
Sorry, one more time, Mark.
The share count-
Yeah
should it be similar to Q1 and Q2, given that the accelerated buyback was done in January?
Yes. The weighted average at the end of Q1, you just have to pull it down a little bit for those 363,000 shares that we completed. That'd probably be a good marker for the second quarter, barring any other purchases.
One final question. Professional liability, you said rates might be up in certain areas. Any specifics on that? Any professional liability lines that were better?
Well, if you think about it, we've talked a lot about it over time, employment practices liability continues to be a challenge in certain classes of business. There could be certain classes of D&O that is under pressure. At the end of the day, it's spotty. What we're trying to say is that's one of the segments. Commercial auto and professional liability are two areas that are more flat to up ever so slightly. Commercial auto in particular because they're running temperatures with most of the carriers. If you talk to most of the standard carriers, their auto and personal lines are running temperatures.
Thank you.
We'll take our next question from Michael Nannizzi with Goldman Sachs.
Thanks so much. Just a couple clarifications. Andy, the gain that you mentioned in retail, I'm not sure, did you quantify what that was in terms of the benefit to margins in that segment?
No, we didn't. It's under a couple million dollars.
Okay. That's a few basis points on margin.
You can see most of it right in the income statement. It doesn't all sit there, but most of it does.
You said where in the income statement?
Just go to the income statement where it's got the gain losses right there.
Okay. Sure. Got it. Okay. Just on the infrastructure spend, I think you had said that you expected to spend that whatever $40 million or so over the year or this year, but didn't spend a lot in the first quarter. Does that mean that we should assume that $40 million will now get spent ratably over the remainder of the year? Maybe whatever that margin impact was, it'll be a little bit higher on the rest of the year's margin basis, is that fair?
Yeah, let me clarify. This would be an important point, is we had said $30 million-$40 million over a two or three-year period, not in one year, Michael.
Okay.
Yeah. We said that around a 40-50 basis point impact this year.
Okay. That's still sort of within the range then?
Yes. Still a good range that we see right now.
Okay. As far as the margins in the program segment, that $3 million is full benefit to the margin. Is that right, that the margins in that segment would've been closer to like a 32%? Is that right?
Correct. Yeah.
Okay.
Yes, that is.
Is that right? Okay. We've talked a little bit about property. I think you guys sort of highlighted that. Is there a way to think about every 100 basis points of property rate, what that means to your business? Because we're just trying to figure out how much of a headwind might that be for you guys if that trend remains in place for the rest of the year.
No, Michael, there really isn't. We haven't quantified that because what you're seeing is, remember, we talked a lot about catastrophic property, but that doesn't mean that traditional inland property isn't ultra-competitive. Some carriers, as you know, want to play in areas where the rate online is higher, which might be in a cat prone area. Whereas other carriers have a risk appetite that says, we don't want to play in, let's say, coastal property, but we want to play on inland property. All of a sudden that becomes competitive and the perception of risk is maybe different at one carrier versus another, meaning rate online, what they want to put in their portfolio, all that other stuff. I don't want to just give you the impression. We talked about property in terms of cat property because the prices are down dramatically.
That does not mean that inland property is not very competitive, and we see sometimes people do crazy things there too. No, we have not given any guidance on that.
Okay. I guess, just to sort of bring it all together, it looks like you've got some sort of investments. Charles sort of alluded to the headcount scaling upfront that you're doing maybe ahead of some growth. We've obviously got the infrastructure spend. It looks like on the quarter that your margin, when you adjust for some of those two tailwinds, Andy, that you're below that 33-35 range. Is it only until after we digest the infrastructure spend and then scale up some of these businesses where you're doing the hiring, that that 33-35 is reasonably attainable, or are there things that can happen ahead of that can help us get into that range?
Can I take that, Michael, for just a second?
Sure.
Let's make sure that, and we've tried to articulate this, that some of our businesses that are impacted are higher margin businesses than others, or there is a growth in a business which might be a de novo business, like a program that we start.
As I said earlier, and this is not an excuse, this is a statement of fact. One, we had a services business, the TPA, that had very limited claims activity, which impacted our margins. Two, cat property programs, which are higher margin businesses than, number one, a startup, but two, some of those programs that were growing nicely in Q1. Three, would be the investment in new teammates. I don't want to say that it's just investment in new teammates, because just like anything else, some parts of your business are under constant attack, and then others might be moving right along nicely. We just happen to have two or three segments, meaning in particular a services piece and in our cat programs, that have been under competitive pressure, and we think that'll continue for a while.
To answer your question, our margins may be like that if we continue to have results like we've just outlined in those three segments. That is not what we want. That's not what you want, and we don't manage our business that way, but we intend over a long period of time for it to work out.
Got it. Okay. Thank you.
We'll take our next question from Ryan Burns with Janney.
Hi. Thanks. Good morning, everybody. Just had a clarification question on the $3 million non-cash comp swing for the true up of 2015. Was that independent of the first quarter 2016, or was that just the net impact for the quarter?
That was independent of the 2016.
Okay. There was a non-cash comp charge for 2016. Okay.
Yes. There was. Yep.
Great. Then secondly, just had a question on the mechanism of buybacks. It seems like you guys have a strong preference for accelerated share repurchases. Just want to get your thoughts there, I guess, obviously, if there was a big market downturn, could you guys be flexible enough and nimble enough to buy outside of an accelerated share purchase? Just want to get your philosophy on that.
Generally trend towards ASRs is we think they're a very efficient way in which to buy shares back out of the marketplace. It does give us an upfront share pop, which we like as part of the program, allows us to buy through blackouts, et cetera, so they can run, it puts ultimate execution back on whoever the agent is. That's what they do every day. That's why we prefer them. We think they're a cost-effective way to go. That doesn't mean that that's the only way that we would ever buy shares back in the marketplace. So we're always looking at different opportunities and different programs that are out there. If there ever was a significant dislocation in our market value or price, we would look at the appropriate options that are out there.
Irrespective of any of them, you still got all of the 10b-18 rules that you still have to comply with.
Great. Thanks a lot, guys.
Sure. Thank you.
We'll take our next question from Kai Pan with Morgan Stanley.
Thank you for the follow-up. Just a larger picture question. We have seen some technology startup companies getting into the distribution for Business Insurance, starting from employee benefits, now expanding into some of the property casualty insurance. Just get your view on these sort of potentially emerging trends and any sort of initiative on your side you think you could plan for that. Thanks.
Kai, as you have seen and read, some of these technology-backed companies are very well-funded, and some of them are coming either to a stop or they're going through gyrations. What I would say is this, do we believe that there could be a segment of small commercial purchased online? The answer is yes, that could be the case. The carriers are careful about what I would call comparison shopping. If you have a model which actually lets you basically compare three companies, standard companies that you know by name against each other in their small business units, they don't like that because they try to differentiate their product on coverage and service, and which some can and do. In that instance, when you have an online rater, many times you're just stacking them up against each other, and it's a spreadsheet.
That said, what we've found, whether it be in personal lines or in small commercial, there are certain complexities that come with risk, particularly as you, as an individual or as an business, start to accumulate assets, which they may not be familiar with the coverages that would be appropriate. There is a possibility that they have what I call coverage that is stripped down that may be cheaper. They may be buying a Yugo as opposed to a Chevrolet or a Cadillac. Do they actually know the difference in the coverages? I'm not aware of anything yet. That does not mean that we're dismissing that out of hand. Quite the contrary.
We think about how technology can play a role in our small business units as well, and as we invest in our personal lines business, which is actually a $90 million business, as you know. What we'd say so far, though, so far, is the technology companies that I'm aware of, they've done a good job of sizzle in terms of the marketing, but I don't think that they've done as well a job in the execution of the plan where they're able to make money over a period of time. It doesn't mean somebody is not going to do that. It just means that we continue to watch it carefully, and whether it was the online benefits related company or when Google started trying to, the search engine, I should say, started looking into selling coverage online and then has pulled back from some of that.
We watch with great interest, but we're thinking about how we invest in our small commercial from a technology standpoint and personal lines independent of that.
That's great. Thank you so much.
We'll take our next question from Charles Sebaski with BMO Capital Markets.
Thanks for letting me in one more time. Two quick ones. One, I'm just adding up the one-time events in the quarter, I just want to make sure I have something right. There was a $3 million tax benefit, a $3 million stock comp benefit, and a $1.4 million gain on sale. Do I have those numbers correct?
Yeah. The first two, correct on it, Charles. Then we said that the gain on the sale was just a little under $2 million.
Okay. Additionally, I know it's early and this just happened on the claims, the TPA business on what's going on in Texas with the flooding. Wondering what your guys' footprint is there, and you're already seeing that that's obviously concern for everything that's going on, but something where we could see an effect in the second quarter given the scale of what's happening there.
Yeah. The answer is we have had some activity. Once again, things kind of evolve over time. You have immediate claims, and then you have things that sort of roll in as well. We would say that the magnitude of the impact, we don't know the full impact yet. It's too early. We can just tell you that we've had a good number of claims already.
Yeah. There's really kind of two storms there. If you go back, there was the mid to late March hailstorms in Texas.
Yep.
With that drove also some other damage. We've got claims off that. Obviously we've got the most recent flooding that's going on just over the last couple of days. As Powell mentioned, those, they kind of build over time, it's hard to determine what it'll look like right now.
Okay.
We are starting to get some claims in.
Excellent. Thanks very much for fitting me back in.
Thank you.
Yep.
We have no further questions. As a reminder, again, that is star one if you'd like to ask a question.
Okay. Thank you all very much, and we look forward to talking to you at the end of the second quarter. Have a wonderful day.
Thank you. Bye.
This concludes today's conference. Thank you for your participation. You may now disconnect.