Good morning, and welcome to the Brown & Brown, Inc. second quarter 2015 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 second quarter of 2015, and are intended to fall within the safe harbor provisions of the securities laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired, or referenced in any forward-looking statements made as a result of a number of factors.
Such factors include the company's determination as it finalizes its financial results for the second quarter of 2015, that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday. Other factors that the company may not have currently identified or quantified, and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission. Additional discussion of these and other factors affecting the company's business and prospects, as well as additional information regarding forward-looking statements, is contained in the slide presentation posted in connection with this call and 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 will now turn the conference over to Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Tracy, and good morning, everyone, and thanks for joining us for our second quarter earnings call. I'm on slide four. We delivered $419.4 million of revenue for the quarter, growing 5.4% in total and 1.9% organically. Each of our four divisions delivered organic growth again this quarter. We continue to see overall economic conditions improve slowly, which is good. However, we, like the entire industry, continue to experience headwinds related to rate declines. The downward pressure on rates continues to be driven by good overall loss experience, minimal weather-related events, and the significant amount of excess capital in the market chasing returns. We expect this trend to continue unless there's a material change in one or all of these factors. As we've discussed on our previous calls, teammates are our most important asset, and we're continuing to make incremental investments in new revenue-producing teammates.
This is mainly for producers in retail but also includes brokers in wholesale. These investments impacted our margin this quarter as compared to the second quarter of 2014. We're making these incremental investments as we see the economy continuing to improve so we can build our team to capitalize on new opportunities. We recognize this approach has some short-term margin compression, but we expect these investments in new revenue-producing teammates will deliver additional organic growth and margin expansion in the future. Our GAAP earnings per share were $0.43, growing 2.4% for the quarter. We're pleased to report that our board of directors has approved the purchasing of up to another $400 million of outstanding shares, which is part of our continued disciplined capital allocation plan. We now have authorization to purchase up to $450 million of our shares with the remaining amount on the previous authorization.
We've announced our quarterly dividend payment of $0.11 a share. Lastly, during the second quarter of 2015, we acquired four agencies with annual revenues of approximately $19 million, and for the year, we've acquired seven agencies with annualized revenues of approximately $31 million. While there are plenty of deals out there, we continue to see aggressive pricing for acquisitions, and we remain disciplined in what we pay. We believe we can continue to acquire good businesses if they fit culturally and make sense financially. Slide five provides additional detail on some noteworthy items impacting the market. We continue to see slow economic improvement in some markets in certain areas in the country, but this is not consistent.
We see exposure of unit growth in certain regions but don't see consistent hiring across the board in the middle market. We believe this is partially driven by possibly a lack of qualified candidates, but more specifically, the implications of ACA adoption that many employers are facing. We're experiencing further uptake in our private exchange offering during the quarter and now have over 4,000 covered lives, but adoption continues to be slow. We continue to see small and medium-sized employers evaluating public exchanges, technology, and plan design alternatives in order to manage their healthcare and ancillary costs. Those may include partial self-insurance and continuing to move to a per-employee per-month payment model in order to manage costs as they implement the Affordable Care Act.
Similar to what we've been seeing for a number of quarters, the favorable loss experience, the excess capital in the market, and the prolonged period of limited weather events is driving most rates down. We continue to see declining rates for Coastal properties, also seeing admitted property rates trending flat to down 5% in some cases. We're seeing commercial auto rates generally trending up, but it really depends on the specific loss experience, and professional liability rates are flat to up 5%. Overall, weather events and the associated claims processing revenue to those events remain at very low levels and well below the 10-year average. With that, let me turn it over to Andy, who will discuss our financial performance in more detail.
Great. Thank you, Powell. Good morning, everyone. Let me first discuss our overall financial results and talk about some of the key metrics for the quarter. On slide six, it shows our consolidated results for the quarter. We delivered 5.4% revenue growth and grew organically in all four divisions with a total organic rate of 1.9%. We will discuss the drivers of this growth by division later in the presentation. Our pre-tax income declined year-over-year by 90 basis points, driven by incremental investments in teammates and the additional interest expense associated with our credit facility and bonds. We will be on a more comparative basis in the third quarter of this year as it pertains to year-on-year interest cost. We believe EBITDAC is the most appropriate measure comparing our performance across periods. EBITDAC for the second quarter was $137.8 million compared to $134 million last year, an increase of 2.2%.
Our EBITDAC margin decreased by 100 basis points, primarily as a result of our incremental investments in new teammates, which Powell described earlier. We expect margins to experience slight downward pressure year-over-year for the next few quarters due to these incremental investments. As the new teammates begin to produce revenues, profitability will rise. We continue to seek EBITDAC margins in the 33%-35% range over the long term. As we have mentioned before, at times, we might be below this range on a quarterly basis as a result of incremental investments. However, we do not believe a variance outside of this range for a few quarters will impact our margins expectations as we have built a very robust operating model. Our net income decreased by 1.3% in the quarter, which is slightly larger than that of the pre-tax income.
This was a result of our effective tax rate increasing at 39.6% for the quarter versus 39.3% in the second quarter of last year. The increase in our effective tax rate this year was primarily driven by the State of New York's new consolidated return approach and lower tax credits. At the midyear point of the year, we are now expecting our overall effective tax rate to be in the 39.5%-39.7% range for the full year. Our earnings per share grew 2.4%, and our weighted average number of shares outstanding decreased by 2.2% year-over-year, driven by $175 million of share purchases over the last 12 months. As a reminder, we initiated a $100 million Accelerated Share Repurchase program during the first quarter of this year, and it is now projected to be completed early in the third quarter.
In the current environment, we continue to evaluate share purchases as a good use of our cash to drive shareholder returns. Moving to slide seven. I would like to highlight the key components of our revenue performance for the quarter. Other revenues were down about $1 million year-over-year, driven by a gain on the sale of a book of business last year. This line item will fluctuate each quarter, as it is not one that we can project. We did recognize just under a $1 million increase in continuance and guaranteed supplemental commissions, primarily from our programs division. Both of these basically offset each other from a profitability standpoint. The largest driver of year-on-year growth of fees was from our net acquisitions, delivering $19.2 million of growth, followed by organic growth of $17.4 million.
Moving to slide eight and transitioning from our global view of the company, we'd like to discuss each of our divisions in more detail. We'll start by looking at the retail division. Over the last three months, our retail division has delivered 12% growth, primarily driven by acquisitions during the last 12 months. The organic revenue growth for the quarter is 70 basis points with a year-over-year EBITDAC margin decline of 110 basis points. Similar to the first quarter of this year, there are a number of key items impacting overall growth and profitability, which have continued into the second quarter. First, as we noted in our Q1 call, there's been a change in the State of Washington's regulation related to bona fide associations that resulted in several of our association health plans terminating as they were determined to be non-qualified.
The change is continuing to impact our overall revenue growth by 60 basis points in the quarter and margins by 30 basis points, with a revenue loss of $1.2 million in the second quarter. As mentioned previously, we expect there to be about another million-dollar revenue impact for each of the remaining quarters of the year and also to have an impact on our margins. Next, our small employee benefits space, which we define as employers with less than 100 employees. We continue to see these companies be very focused on managing their costs and trying to understand the implementation complexities of ACA. These factors have and are expected to continue to put downward pressure on our employee benefit revenues. For sizing, our small employee benefits business represents about $90 million of total annualized revenues of our total employee benefits business of $250 million.
For the quarter, our large employee benefits business grew nicely on an organic basis, while our small group declined. To address this downward pressure, over the past few quarters, we've been analyzing all the complexities of ACA and what our customers need. As a result, in addition to acquiring new employee benefit capabilities through our recent acquisition of Strategic Benefit Advisors, we're also adding employee benefit resources to support our offices and continue to keep our teammates current on the ever-changing landscape related to regulation, compliance, and technology. We're planning some modest investment in incremental resources in the second half of this year that will then help facilitate growth and margin expansion of our employee benefit business in 2016. Shifting to property rates, coastal, or as we call them, CAT property renewal rates, are continuing to decline 10%-25% as compared to the second quarter of last year.
Last year, we noted they were down 15%-20% as compared to 2013. We are seeing consistency with what we experienced in the first quarter of this year. Property renewal rates continue downward for admitted markets and are generally plus to minus 5% versus the prior year. Lastly, we're seeing workers' compensation renewal rates varying from plus to minus 5%, depending upon claims history. Let me move to slide nine. Our national programs revenues grew 10.3%, mainly due to the acquisition of Wright. We continue to see interest from carriers and capital allocators to leverage our underwriting capabilities, technology, and broad distribution platform. We believe our expertise and capabilities will enable us to create new programs and help drive additional growth as we are an ideal partner for a carrier that wants to deploy capital but does not want to build the infrastructure.
We continue to experience good growth in Arrowhead Aftermarket, our lender-placed business, and our personal lines businesses. A lot of this growth was offset by our coastal property facilities, which are experiencing intense downward rate pressure of 10%-25%, and our California workers' compensation program is being impacted by a change in the risk appetite with our carrier partner. These two programs or businesses had slightly less than a 200 basis point impact on organic revenue growth for programs in the quarter. Lastly, the programs division, EBITDA margins benefited from the disposal of ICG in the fourth quarter of last year, continued cost discipline management, and scaling our platform. On to slide 10. Our wholesale division had another really good quarter, reporting revenue growth of 2% and organic growth of 5.1%.
This differential is related to the sale of Axiom Re that we completed in the fourth quarter of last year. The binding authority and brokerage businesses both contributed to the positive results for the quarter, and we continue to see growth across most business lines. We're seeing more net new business, and we're leveraging our deep carrier relationships to help provide innovative solutions for our customers. Even while facing major downward pressure on coastal property rates in the range of -10% to 25%, our brokerage business still grew nicely for the second quarter. This is a really impressive performance, as it shows the amount of new business the team is writing and retaining each and every month. The wholesale division delivered EBITDA margin improvement of 40 basis points. The primary driver of this expansion is due to the sale of Axiom Re in the fourth quarter of last year.
On to slide 11, in our services division, we delivered impressive organic growth of 7.8% for the quarter. This growth is driven primarily by our Social Security advocacy claims processing business that added new clients and our Medicare set-aside processing business that expanded customer relationships. While we realized some revenues related to the recent flooding in the second quarter in Texas, the incremental claims processing revenue versus the prior year was immaterial for the quarter. Our EBITDA margin declined by 190 basis points for the quarter. The main driver of this decline is some initial onboarding costs we've experienced associated with new client additions for our Social Security advocacy business. We expect margins to increase back to historical levels over the next few quarters. On to slide 12.
In the second quarter of 2014, we provided ranges of where we expect Wright to perform in its first fiscal year, which is Q3 of 2014 through the second quarter of 2015. We're pleased with the year one performance of Wright. We delivered revenues very close to our estimates and earnings per share in line with our estimates, even without material weather-related events to drive incremental revenues. As we mentioned in 2014, the original forecast included $7.5 million of revenues for weather events. For reference, this was based upon the 10-year average, but excluded Hurricane Katrina and Superstorm Sandy. In the first year, we only realized about $1 million of cat revenue for Wright. While the cat revenues were down from projections, the team has done an excellent job of managing their cost.
We're also pleased with the performance of our National Schools program, our new National Municipal program, and our food program. In summary, we're very pleased with the financial and operational performance and trajectory of the business. We'd like to thank the entire Wright team for their efforts over the last year in producing solid results. With that, let me turn it back over to Powell for closing comments.
Thank you, Andy, for a great report. In summary, two of our divisions had a good quarter and the other two divisions were below our expectations. We could see they're driving the right activities to deliver long-term organic growth and profitability. We remain actively engaged in discussions with many acquisition candidates, as I've mentioned before, closing an acquisition depends on when the seller is ready and if we can come to an appropriate financial transaction. I can tell you that we continue to be active in this space, are being prudent and disciplined as pricing and terms continue to be aggressive. Our disciplined capital deployment strategy across internal investments, acquisitions, and returns to shareholders remains a key focus to help us drive long-term shareholder value. In closing, we have some challenges and some opportunities, we're going to meet and seize them.
We're energized about the trajectory of where we see growth, our incremental investments in new teammates will position us well for revenue growth and margin expansion in the future. Now I'd like to turn it back to Tracy for the Q&A section, if you could just explain the process to everyone on the call.
Yes, thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are 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, we'll go first to Kai Pan from Morgan Stanley.
Good morning. First question is about your employee benefit business. Looks like they're under a little bit pressure from ACA implementation. I just wonder, what's your view about the process of implement ACA for your small accounts, and do you expect that they will move more towards the public exchange? Also related, your comments on the recent proposed merger between Willis and Towers, and what would that impact your liaison relationship? Thanks.
Okay. The first question relative to ACA is, I believe that many small employers are all over the board in terms of their preparation. Some are behind in getting ready for next year, some are on their way, and some are already there. I do not think that ACA in and of itself is going to expedite more public exchanges as much. I mean, that will be part of it. I do think that private exchanges will be another alternative. The reason I say that about public exchanges is, as you've read in the paper, a number of those exchanges are experiencing rate increases, and they will continue to experience rate increases, we believe, because of the unfavorable loss experience many of them have had over the last year due to the number of people in those pools.
Having said that, I would reiterate that the private exchange is an option, not the option. We believe that it is, one, a technology play, two, a coverage play, three, a compliance play, and you wrap all that up, and that is appealing to some smaller businesses. We're watching very closely as that continues to develop and deploy the appropriate resources to service our clients in that under 100 space. To your second question about Willis and Towers, that's an interesting question. One, the more things change, the more they stay the same. We're constantly in a state of flux in our industry, as you know.
Number two, there has been no information that I'm aware of put out on it, but I would assume, and we don't assume anything, that they will try to keep that separate, and we would obviously be looking for indications and assurances of which to make sure that we have that in our ongoing relationship. We also think that it's going to create some opportunities because there'll be disruption in the marketplace. We continue to keep our eyes open for new opportunities, and I think that'll be one of the many things that will create opportunities in the coming months ahead.
That's great.
Yeah. Hey, Kai, it's Andy here. Let me also add to that. One of the things that our employee benefits group does is they're always looking at technology that's out there. They're going to constantly be evaluating other options if we ever had something like that occur.
Okay, that's great. Follow up on the buybacks. Just want to see a little bit more detail about what's the board deliberation on the buyback program, because you just initiate the first buyback programs not long ago, and now they run double that buyback amount. Is that a signal that you don't see a lot of acquisition opportunity to grow the business? That buyback now is the most attractive way to return to shareholders. Also regarding to the $400 million authorization, how is that related to your free cash flow and your debt levels, the debt to EBITDA levels?
Okay. Relative to the first question, I would tell you that you're correct in saying we got our first authorization last year, which was $200 million. In our discussions with the board, we, as you've heard us talk about before, like to have options. You've heard me and Andy speak about before, the three areas we try to invest our free cash. One, internally in investment in teammates to grow the business organically. Two, external investments, and three, return to shareholders. In our discussions with the board, the idea was that this is an unlimited authorization, it does not mean that it has to occur in a set period of time. It will allow us to evaluate share repurchases periodically in the future. We're going to do it just like we've done it in the past.
As you heard me say earlier, we've done $31 million of acquisitions annually year to date, which is on the lower end of what we've done in the past. Acquisition terms and conditions are aggressive. That does not mean that we're not going to do acquisitions. It means that we're going to be very selective. That means that we're going to seriously consider, and we have the authorization to do it, additional repurchases when we think it seems to make sense. Now, Andy, would you like to respond to the second part about the $400 million?
Yeah, Kai. I think your question was, how does the $400 million correlate to our cash flows for the year? As you guys probably have in most of your models, we generate somewhere in the range of about $350 million a year in free cash flow prior to dividends and interest. Just gives you an idea where it is. I think the other one was around our debt to EBITDA levels. Right now, we're just a little over two times, debt to EBITDA. I think as J. Powell and I have mentioned in the past, we're not one that's going to go out there and do a leverage buyback. That's just not our approach on things.
This is just one of the options that we want to have as an organization for flexibility, when and if we need to deploy our capital in the right way with the goal of trying to make sure that we can drive shareholder returns.
Thank you very much for all the answers.
We'll take our next question from Michael Nannizzi from Goldman Sachs.
Thanks. Just one follow-up on Kai's question. Is there an expiration on the authorization?
There's no authorization on the $400 million. There was an expiration, or there is an expiration on the original $200, which we have $50 left, which is the end of this year.
Got it. I thought I remember you guys had an ASR that you announced in March, and that it was expected to settle in the second quarter. Doesn't look like that came through. Is that, Andy, maybe what you were insinuating that that's going to come through in the third quarter?
Michael, that was the $100 million ASR that we did just right at the beginning of March in the first quarter.
Based upon volume in the marketplace and the purchasing that was being done on it would be done by the end of June. It looks like right now, somewhere around the end of July, maybe the middle of August. All really depends upon volatility that's out there.
Got it. Okay. I would guess then, just given those parameters of volume, et cetera, that it would be unlikely to do more than that in the third quarter. Is there still the ability, just given that it's a sort of a pre-arranged transaction, that you could also be in the market next to that transaction?
Let me see. Would we do an overlapping transaction? That would be highly unlikely.
Okay
because the Rule 10b-18 rules that are out there.
Got it. Great. Thanks. Just maybe, Andy, in Retail, can you quantify, is it possible to just get some notion in terms of how much the investments that you made in teammates impacted margins in the second quarter? Just to kind of try to get an idea of what that headwind was in the second quarter.
Yeah. If you look back, our margins were down 110 basis points for the quarter. We mentioned in there that the association health plans out in the state of Washington had an impact of 30 basis points, leaving us with about 80. A large percentage of that was all of our incremental teammates.
Got it. When I look back at the second quarter of last year, my number was a little different on the actual. Looks like you did some reclassification. I'm guessing that had some sort of negative impact on last year's margin number. Is there a way to get an idea of what this quarter's margin would have been kind of in the old segmentation? Only so that we can kind of think about apples to apples relative to our models.
Yeah. No, I think if you remember back in the first quarter, we had mentioned that we had moved around some business units for reporting purposes.
We restated. Yeah, we don't have the ability to go back now and tell you what it was on the previous, because everyone's in the new framework.
Any of those expected to happen or anticipated from this point forward this year? Is that mostly done?
Not that we know of. We would only do mid-year restatements or reclassifications if something was really material. Most of those were driven, if you remember, with the Acumen and Axiom disposals last year. It allowed for some alignment of some businesses tighter across some of the divisions. No, don't see anything for the back end of the year.
I got it. Okay. Just in terms of, you mentioned some expenses on the benefit side that you expect as you kind of anticipate, make more investments for, hopefully for growth and margin expansion that's coming. I also remember you guys had talked about at some point, some potential expenses on, or investments on the system side. Is there a way for us to sort of quantify just during this investment phase, A, how long do we expect the investments part to overcome the sort of revenue piece and to be able to quantify what that might be in terms of a headwind to margins?
Michael, this is Powell.
Hi, Powell.
A couple of things. Number 1, good morning.
Good morning.
Let me hit the second question first and add it into the first response. Number one, we continue to evaluate the technology investments, and I believe that in the near to intermediate term, probably in the next six to nine months, that we'll be able to give better clarity about how that's going to play out. We're not there yet on that, but we're getting close. That's number one. As it relates to the level of investment, what I want to say, and this is not going to answer your question exactly, but we always are doing a certain level of investment, as you know. We've talked about that in the past. We allocate a portion of our revenues each year to support the recruiting of people that aren't already in our budgets at a local level. That's number one.
What we have done and tried to articulate to everyone in the last couple of quarters is there have been some opportunities for us to invest in people. Some of them are already in the business that have revenue-producing capabilities right out of the box, and some who are just very talented from other industries that we have to teach insurance to. You've got the revenue production investment, and then you've got the additional resource investment as it relates to employee benefits. We're very keenly focused on trying to grow, as you know, each and every segment of our business, and you heard Andy say that the under 100 declined in Q2. We are trying to, number one, keep ahead of and provide the right solutions for our customers for that segment.
All of benefits for that matter, but it will have some modest investment expenses, but we're not going to talk specifics about that in the next couple quarters.
Just if you would, Michael, our comment inside there about the next few quarters.
We're not saying a couple, and we're not saying years. Just to kind of give you some parameters around there. The reason why we think it's going to put a little bit of pressure in, or at least some downward pressure on margins in the back end of the year. I think as we've mentioned during some of our meetings, it generally takes two to three and sometimes four years to get some of the newer producers up and on a positive basis with their book and everything. That's just kind of normal run rate. Don't take any of this, and we mentioned this in the comments, that we're backing off on the range that we set on our long-term margins. We said we're very comfortable at 33%-35%. We mentioned this last year on the second quarter.
We're going to kind of bump around by quarters every now and then. It's okay. It's nothing that we're getting all anxious about. We think 33%-35% is really good margins for the company. We're very comfortable with that range.
Great. Thank you.
We'll take our next question from Elyse Greenspan from Wells Fargo.
Hi. Yes. Just a few questions. First, I wanted to spend a little bit more time on the organic growth within the retail segment in the quarter. I know you guys pointed out the change in legislation in Washington, and also some of the downward trends within the employee benefits book, especially with the small businesses. It seems like some of that was also creeping up in the First quarter as well. Just any more information you can give us on what kind of drove the sequential downward trend within that retail organic growth? Then just thinking out, I guess, for the balance of this year, just directionally, I guess, do you expect kind of where we're sitting today, would you expect the retail organic growth to improve from what we saw in the Second quarter?
Okay. Elyse, the first thing about the impact of Washington, I think we laid out pretty clearly it was a $1 million impact in Q1. It was $1.2 million in Q2, and we believe that it'll be a $1 million impact in Q3 and Q4. As it relates to other than what's generally occurring in retail, I would tell you the two things that kind of were a draw or a negative draw on retail this particular quarter. One, as you heard us say, CAT property rates are down 10%-25%. That's a small portion of it. We had some lost business. You heard me talk about a couple offices in the First quarter that were underperforming, and we continue to work on those underperforming offices. One quarter does not fix something. This is a multi-quarter strategy.
I have said, and we have said that we believe that our business and retail is a low to mid-single digit organic growth business. That's something that we're working very actively on growing more than it was this quarter and more than it was in the First quarter.
Okay, great. Back to just some comments that you guys had made on the margins in terms of also with you pointed to investments and I guess the overall, in terms of seeing potential margin deterioration, it seems like the next few quarters. I'd assume that's a comment, I guess, specifically to the overall company and then also within the retail segment. You're thinking, as we're thinking of our models, that we'll probably see your margins deteriorate, I guess, until Q1 2016. Just any more info in terms of directional there on the margin front.
No other direction probably, Elyse, other than your comments that you made there with it. We're very positive about everything that's going on inside of the business. We see great activity in all the core areas of what we know that's going to drive long term growth and profitability for us. Sometimes it doesn't happen in the immediate quarter. We'd all like to have that wand that we can put over the top. It doesn't work that way. Everything's looking positive on the activities and that's why we feel really good about the business, and it'll come back in the appropriate timeframe.
Okay. In terms of contingent commissions, those were a bit higher this quarter. I know you had pointed to seeing the contingents slow down in the back half of the year. Has anything changed on that front?
No, nothing from our previous comments. I said we picked up a little bit in programs in the second quarter. We do expect the fourth quarter to be down. Again, just make sure everyone's captured that in their models and that will primarily be in programs related to our force-placed business. Again, we've got advanced notice from Lloyd's that we will be down year-over-year. The ranges are still what we previously communicated.
Okay. Then lastly, do you have the share count on the diluted share count at the end of the quarter?
Yeah, hold on one second. We'll give you, it's just a little over 143 million. Remember, we have the two-step methodology, Elyse. If you look on our face, it's going to show the 139 in there. If you got to go back because we've got to allocate revenue or income to the participating shares. Just a little over 143 million.
Okay, perfect. Thank you very much.
We'll take our next question from Charles Sebaski from BMO Capital Markets.
Good morning.
Morning.
Couple questions. I guess first I'd like to hopefully better understand the investments in people. I guess one, sort of how many people you're talking about, and two, I guess my understanding of how the business works is that there's continual churn in the business. Producers come and go. You're hiring, people leave, et cetera. I guess what is different now that we're kind of getting a itemized, hey, there's a margin impact due to hiring? Is this seasoned veterans? Is this an increase in the development of young talent? What has changed where we're seeing this in the margin where we might not have seen this in the margin in years past?
Okay. As you know, we have historically and continue to hire people from other industries that we believe can be successful in our business, and we teach them insurance. So in your vernacular, I think the development of new talent is the predominant investments that we're talking about. We do that all the time, but we're doing more of it right now. You made a comment about the number of seasoned people, and we do that on a sporadic or limited basis when we find very talented people that we think can fit culturally in our system. We have made some of those investments as well. You've heard me make that comment in quarters past, specifically around Beecher Carlson, but it is not exclusive to Beecher Carlson. It is across the entire platform.
We have been sort of signaling this over the last several quarters that we are continuing to invest in our platform. When I say invest, you might say, we are over-investing now relative to historic levels. That is out of need, that is out of opportunity. We think there are some people that are and will become available that will be potential good additions to our team. I don't think, Charles, this is new, but it is new in the sense that we're saying that we are investing more in people. We are actually doing both steps, which is new talent, new to the industry, and existing talent that fits culturally. There are some opportunistic investments that we have made and will continue to make in people or groups of people in the near to intermediate term.
Charles, I make mention. If you go back to where we were kind of standing a year ago.
Yeah
We had almost this exact conversation when we talked about some of our investments. One of the things that we communicated and committed to a year ago is that we would help provide you guys with more insight. That's what we're doing right now. Again, this is just kind of a building story along through all of it in order to get there.
I guess what I'm curious about is, Powell, the opportunistic side versus the run rate. I guess what's going on, and you talk about the acceleration and investment in people through need of the business, I guess the question is, why is this going to cease? Why are we going to go 2 quarters down, and in the first half of 2016, the need to invest in the business and development of talent is going to somehow come back into line with where it was before and margins? I guess, in the continuation, a continual flow of new investment as the business grows, it would seem that you're talking about it getting back to what it was, and that would mean a slowdown in the investment come next year. I guess why is that versus today? That's what I guess I'm somewhat challenged with.
Okay. Like I said, we have a system that we don't talk a lot about relative to the people because everybody does their investments differently, and we think we're different. We have ramped up our intern program. We're hiring more people off college campuses today. There are a component of opportunistic investments. You're correct in saying that a certain level of this will always go on. That is correct. You're right. I will tell you that today and in the future, if the right opportunities present themselves, we will make opportunistic investments in our business. What you might be thinking is this. Let's call it what it is. There are a lot of acquirers out there, some of whom are paying what we might consider ridiculous prices in certain transactions.
We are considering making investments in people where there isn't a so-called acquisition, but bringing those capabilities and talents onto our team. That is a short-term margin hit until the revenue comes with them. You are correct in saying that there will continue to be an ongoing expense. I can assure you that there are components to these investments which are opportunistic, and we will continue to explore those when we're in an environment where acquisition pricing is up and we want to get more talent on our team in certain areas to serve our client base.
Okay. Finally, can I just ask about the size of the buyback authorization? I guess relative to the $200 million one you did last year with the ASR still going on, and as you said, there's limitations on due to volume or volatility on how that can be executed. If I think of the ASR that started in March and it's going to go through August, so you're talking about a five, six, seven-month timeframe. Why $400 million? I guess if I look at the $200 million and the timeline it took, it seems to be, if I look at that just trajectory, pretty long into the future. Just, I guess, any additional thoughts on the concept of where that number came to relative to cash flow or market cap or float?
Okay. As you know, we have $50 million of the authorization outstanding, which actually expires on 12/31 of this year. The $400 million does not have an expiration date. When I spoke to the board about what we want to do, I asked for a larger authorization, which would give us more of a window to invest over time and to continue to look at it on a case-by-case basis as we make investments, whether we do acquisitions, whether we invest internally, or whether we buy it back. There was discussion around free cash and market cap and all that. Basically, what it was is we bought out of that particular authorization, $150 million in a year.
If we got $400 million, we believed it gave us a multi-year, potentially, ability to buy our stock back if we think it is the right time to do it.
Charles, just again, maybe keep in mind the $200 million that was approved last year, it was the only buyback in our history. It's the first time that the company has approved and that we executed on one. It was an initial step, and that's why there were some parameters put around that one. As Pal mentioned, we want to have the flexibility as an organization not to be constrained on a specific time period and to be able to utilize this as part of our capital allocation. Not uncommon for most companies to have an authorization at that percentage of market cap. You can go out and look at some of our peers that are out there. They're not far off on the numbers as well as other companies. Pretty common what we've done.
Okay. I appreciate all the color. Thanks, guys.
Thanks, Charles.
We'll take our next question from Joshua Shanker from Deutsche Bank.
Yeah. Good morning, everyone.
Good morning.
Good morning. My first question, I was wondering if we could talk about growth as it relates to retention by segment. It's a very competitive market always. Have the competitive dynamics changed? Are you retaining more business than you have in the past in each of the segments? Are you writing more gross new business and retaining What's the math behind the retention versus churn sort of dynamics that's putting together these numbers right now?
Okay. What I would, on a macro level, say that there are some businesses that are impacting or drawing down on that for several reasons, depending on the actual segment itself. Let's talk about retail for a moment. We continue to write a lot of new business. As I referenced last quarter, and this quarter as well, there are several offices that have underperformed. In those underperformance, typically what you find is there's a higher lost business in those offices than elsewhere. An example that we've talked specifically about would be in the state of Washington with the health plans. Now, that was an action in the state, but still, that's an inordinately high amount of lost business in that particular business unit this year. Is there an opportunity to get some of that back in the future? Maybe.
That was a decision made at a local or statewide basis. If you think inside of wholesale for a moment, you have the biggest impact in wholesale is the downward pressure on catastrophic property rates. Wholesale has performed very well, not only this quarter, but this year and last year, and grown even in the face of some of that early downward pressure. As that pressure mounts, it is harder to grow that large property business. The impact on binding authority is slightly less, but there's still downward rate pressure on binding authority business. They have done a really good job of the retention of their accounts and writing a lot of new business. Inside of programs, you're going to have certain businesses that are involved with catastrophic property that have had a negative impact right out of the box.
Remember, you have one carrier partner we're working with. We're trying to underwrite over a long period of time to a profitable loss ratio. You have a number of other standalone or E&S markets come in and undercut that pricing, which if we keep it's down dramatically, or if we don't, we lose the entire account. Also, Andy referenced the workers' compensation change in appetite. It's not uncommon in certain instances in some of our programs, where if the carrier partner has had a little bit of a hiccup or doesn't like to see the development that they're seeing, they may change the underwriting guidelines slightly, and that would impact our ability to renew some of the existing business and write new business in that segment, whatever that is. It's not necessarily workers' compensation.
It could be any class of business that we write on a programs basis. What I would tell you is it's a combination of, one, rate pressure in some instances. Two, lost business in a couple of offices. Some of that is not just retail, but in programs and in wholesale. Three, the general state of the environment, which is, in the middle market, it is all right, and it's kind of bumping along, but we're not seeing a lot of people adding a lot of lives or the exposure unit growth is not significant across the country, across all segments. That's how I'd answer your question.
Okay. In the other income segment on the P&L, it's small, but in the past, we've spoken about it, and it was going to get much smaller, and then there was a little surprise. It looks like it did in previous quarters this quarter. Is that an anomaly now, or should we expect other income to be smaller in the future?
Yeah. I think, Josh, we talked about this on previous calls. Starting this year, Excuse me, starting in the fourth quarter of last year, we started reporting the gains, losses on sales of businesses down in the expense section to get rid of that noise out of revenue.
All that should sit up inside of other income now going forward is if we have legal settlements or some sort of judgments. The numbers should be pretty small in nature. We had a settlement this quarter. Again, that would probably not be an area that you want to. I think everybody seems to do this. They put $1 million, $1.5 million, $2 million in there. That one's going to float up and down. It could be zero sometimes.
Okay. Do you feel this quarter is higher than average? I'm going to put an average number in there. It's all I can do, is do you think this quarter, do you think $1 million is an average, or do you have any thoughts on that?
This quarter would be probably higher than normal because of the judgment that we had.
Okay. Thank you very much.
We'll take our next question from Meyer Shields from KBW.
Thanks. Good morning.
Morning.
Morning.
Can you talk a little bit about how, when you look at the national program segment, you talk about the change in carrier appetite for California workers' compensation. What's your process here for responding to that, finding another carrier or whatever?
Well, we have multiple carriers that we work with. What I'm referring to specifically is one of the larger carriers, and some of the other carriers may be able to pick up some of that. We're constantly talking with our carrier partners to make sure that we have, to the extent possible, some overlap in some of the programs that have multiple carrier partners. As I said, we just use that as an example, which is true, that it was impacted in workers' compensation, but it could be the same in another program as well.
We're always trying to work with our carrier partners to, one, make sure that it can be a profitable program for them over the long term, and that we can continue to write the amount of new business that we want and retain the business we want to grow our business organically in line with what we want and what they want. Excuse me.
Should we expect the shortfall in the quarter to then be made up when you find another carrier that's willing to write this business?
Well, once again, I would tell you that that's assuming everything else is in sort of a steady state environment. As I've said, in other programs other than that workers' compensation, we have significant downward pressure on coastal property, for example. If, in fact, you had the uptick in workers' comp, which you could have, but you could have more pressure on coastal property, which means there would not be an offset. It depends on the aggregate. If you isolate it in one program, which we have, as you know, over 35 programs, that I think could be correct, but I think that it's not a correct statement when you have multiple programs like we do, and so you could have other things happening in other programs simultaneously.
Yeah. Meyer, because we can have these ups and downs by the quarters, we also kind of look, where are we at the half year? Where are we on a trailing 12 months for programs? That gives us a better feel for trend on the business, and we don't see the second quarter as actual the trend. Kind of look back over history. That gives a better perspective of kind of at least our outlook on things.
To that point, Meyer, Andy called out in the deck that the impact of a couple of those programs this quarter was just under 200 basis points.
Right.
Some of that could change in Q3.
Yeah.
I would tell you that the coastal property pressure, we believe, is going to continue, at least for the foreseeable future.
Okay, great. Thank you very much.
As a reminder, it's star one if you'd like to ask a question, and we'll go next to Ryan Byrnes from Janney.
Well, thanks. Good morning, guys.
Good morning.
I just wanted a question on Wright. Obviously, as we get to wind season here, I know you guys have given the average kind of revenue associated to catastrophes the last 10 years, but that excludes two big years. Wanted to get an idea as to how big Wright's revenues were with Katrina and Sandy, just to get an idea of what could happen there.
Yeah. Maybe, probably, Ryan, the way to think about that one is, think about the $7.5 million incremental. That's off of those storms. Because, again, those two storms were historic in nature, right? If you go back, and again, this kind of gives a perspective, and a lot of people said, "Wow, boy, there should be a lot of revenue coming out of Texas." We made the comment that it was immaterial for us for the quarter. We ended up with a few, probably in Wright, it was just a little over 3,000 claims in total for all of the storms. It wasn't much. If you go back and you look at Sandy, we had over 20,000 claims. We're at very low levels right now.
Unless there was major storm or storms come through, at that level, we continue to expect very low revenues in this arena.
To specifically address your question, Ryan, we don't have that right here in front of us. We could get it, but we don't have it right here in front of us. It is substantially higher than that.
It would be a 2x of the average? I'm just trying to get a ballpark. I realize it's not in front of you, but that would be the right way to think about it, would be a multiple of?
It's a multiple of, I don't think you can just say 2x because every event is different, obviously. I think you're walking a tightrope on that one. I would say it is materially more. Could it be 1x, 2x, 3x? It could, depending on the size and the complexity and the devastation of the storm.
Yeah. Ryan, I'm not trying to be cagey on this one. I don't think we'd want to go back, though, and give you guys projections on previous storms for going forward, just because of all the variables inside of them.
Yeah.
Yeah, sure. Just helpful to see how much that could grow. Then my last question is, can you guys just maybe walk me through the thought process that you guys go through when you think about doing a buyback versus doing a deal? Let's say you have the opportunity to do a deal, let's say, again, they're getting more expensive now, let's say anywhere from 10 to 11 times EV to EBITDA, and then compare that to buying your stock at, I don't know, nine and a half times. How do you guys, if you have those two options, maybe just walk us through how you evaluate that?
Okay. Obviously there's a financial consideration of which you did some very basic math right there that would be part of it, number one. Number two, Excuse me, I'm about to sneeze. Sorry, I'm about to sneeze. The second thing would be the capabilities and the talent of the team. You have seen us make larger acquisitions, announce at 10x EBITDA that was slightly more than what we were trading at at the time, and we believe Excuse me. Pardon me. Sorry. Well, I got it done now. I can keep talking. We felt at the time that the capabilities that the group presented made sense for us to make that acquisition.
We weigh the talent, the capabilities, the specialization, if there's a segment that we're trying to expand or get into, if it's a capability that we're trying to enhance, that we have, would make better, or we don't have on the team. All of those are put in in our considerations. We look at a number of financial metrics back in part one. That could be anything from return on invested capital to internal rates of return to margins, growth, et cetera, organic growth on their part, all kinds of things, profitability over a period of time. We continue to do that. We think that, as I've said, in the current marketplace for acquisitions, it is competitive. As you say, the multiples are up.
At face value, if you were just doing a financial calculation based on what you just said, then you might say, well, you might buy some stock. That is part of the evaluation. You have to look real closely at each one of those acquisitions and see how they would help us, not only now but in the future.
Yeah. Ryan, if you look at this year, a great example of we're doing both. Pal mentioned in his comments is we can still acquire good businesses if we've got the cultural fit in place, and we can come up with the right financial transaction. We've acquired 7 businesses, over $30 million this year. We've also bought back some shares. When we talk about our capital allocation methodology and the disciplined nature to it, this is where we try to balance across all of these. Sometimes we'll be doing more of one or less. Sometimes we'll do both at the same time. Our goal is we're trying to drive shareholder returns.
We want the option to do all three.
Exactly.
That's, like I said, what we've tried to do is give ourselves options. We believe that we have that now. We did that through working on our capital structure last year. We've done that through our share repurchases year to date. We've done that through the authorization of $400 million. All along, we continue to invest in our business and are looking for additional acquisitions.
Okay, no, great. Thanks for the call, guys.
Thanks, Ryan.
Thank you.
We'll take our next question from Adam Klauber from William Blair.
Thanks. Good morning, everyone.
Good morning.
A couple of questions. What's the organic of Wright running at? Did Wright help the program margin during the quarter?
Let's see. Let me go back on. On the margins itself for the quarter is yes, it did have a benefit on the margins. As we know, that business itself has a little bit of seasonality to the profitability a little bit, but total Wright, as we disclosed previously and as it's been running, is up in the 30% margin business. Again, it flows back and forth anywhere. It can go from a 36% to a 32% in that ballpark. Second quarter, generally a little bit higher, and third quarter a little bit higher in-
Okay
the business. Some benefit inside of there.
Okay.
Again, we try to look at it over the full year based upon its cost base inside of there.
Sure.
Overall business is performing well. We talked about our new programs that we have inside of there within schools, foods, and new national program. When we look at flood itself on it, Adam, is one of the things that we try to do to figure out how we're doing and how we're performing in the marketplace is we look at our total policies in effect, and we look at that as a percentage of all of those written by FEMA. What we've seen over the last year is that our percentage of the total is continuing to increase. With that, we feel like the business is performing really well at this stage.
Okay, great. That's helpful. Finally, wholesale. Clearly, that's being impacted by the negative property. Wholesale, you typically have that accordion where business flows back and forth between the standard and the E&S markets. Where are we in that accordion right now?
I think that the accordion would be twofold. I think from a liability standpoint, I think that it's probably some of those that were viewed as E&S potential accounts are being seriously considered by standard markets, but that's on liability, not property. On property, I believe the way I would describe it's a little bit like a free-for-all. I call it like the battle royal in wrestling. You have a bunch of people in there wrestling for accounts, then periodically, you have one or two or three new wrestlers come in and get into the ring. That adds to the excitement. It also adds to the chaos in driving market rates down. Some of those newer players have very big balance sheets. I think that the property space will continue, in the E&S world, continue to be E&S centric.
You're E&S or you're not E&S, for the most part. On liability and some of the others, as the market continues to shift, the carriers are looking for areas to grow their business. Liability and wholesale may be one of those.
Okay. That's very helpful. Thank you.
Thanks.
We'll go next to Ken Billingsley from Compass Point.
Good morning. I just wanted to clarify a couple answers you had before, so I'd just like to follow up. One of the workers' comp partner-
Can you speak up, Ken? Your sound is really faint. Sorry.
Is that better?
Yeah, you sound better. That is much better. Thank you.
All right, very good. I just wanted to ask some kind of clarification questions on some comments from earlier. I know this was only one of many things you mentioned, but on the workers' comp appetite declining for that one partner, what were they seeing specifically? Was it an internal issue or external issues that is causing them to back away?
Yeah, I would say, I think that they saw something in a market which was limited to a certain geographic area, and yet the filing they had didn't allow them After they did a loss analysis in that area, the filing with the state did not allow them to address it on a geographic basis. It had to be more of a state basis. That's maybe more than you wanted to know, but I would consider it a little bit of both, if that makes sense. If you had a different filing, if they had a different filing, I think they could have dealt with it differently. Like I said, those are things that you work through with your carrier partners, and we worked through it with them.
It's likely that they would return or want to do more once they can get their filing in order.
Well, that would be what I would like it to be. I can't answer that because I don't have that information right here with me today. I know that we are talking to them and/or our other carrier partners about the ability to write that class of business in question. Like I said, maybe it's more information than you want, but in the program business, if you think about it, we are an outsourced insurance company, as you know. In doing so, we work with our partners very closely to make sure we have the right filings. In some states, that's very easy. In some states, that's more complicated. File and use versus an approval versus all kinds of different variations.
We try to work with them the best we can, and then when we're presented with a challenge or an opportunity with this, we either try to work with them and get it in a position with a new filing that will work for them. I don't know if they will do yet or not. We don't know that. Is there another carrier partner that works with us that will be able to take up some of that?
Okay. On the stock buyback, on the $100 million accelerated stock repurchase that you mentioned in the press release, is this in reference to the prior one, or is this going to be a new 100 million ASR?
Yeah. No, Ken, it relates to the one that we announced back in the beginning of March.
Okay.
That was, again, just for sequence on these, we did initially a $50 million on the initial $200 million. We did the $100 million in March, that leaves us with $50 million on that $200 million. That's what we mentioned, the $100 million we just did should be completed here end of July, sometime mid-August.
The reason it's not done is not because we don't want it done, it's because we can't buy in the open market. They can't buy that in because of the trading volume.
Right. Yeah. Because we're underneath of an ASR, in this case, we've got J.P. Morgan as our agent on this one. It's up to them to manage what they buy in the marketplace off of volatility and how they can purchase versus the VWAP or volume weighted average price. It's really up to them. We don't actually direct the day-to-day buying.
Sure.
Our goal was hopefully we were going to have it done by June, we didn't. That's all right. A couple of weeks is nothing significant in the grand scheme of things.
Okay. The last question was, again, it's a follow-up on the M&A side. I might have missed this, but normally, we listen to these calls, everyone talks about the robust pipeline of M&A activity, maybe I missed that comment, but can you talk about if there's any change or shift in attitudes towards that? I know you mentioned it's more competitive and multiples are up. Could you talk about maybe why you're not as robust maybe with the pipeline expectations, and then where is that competition coming from? Is it coming from the private side, public side? Is it private equity?
Yeah. I would say that the biggest participant in this is private equity. Ken, if you go back to 2006, as an example, 29% of all transactions announced were done by financial institutions, banks, and only 4% were done by private equity firms. In there, you have a big group of public buyers, and you have some private buyers. In 2013 and 2014, private equity was 44% and 43% of the announced transactions. In that same period, banks were only 8% and 5% of the transactions, while the publicly traded brokers, the percentage in the 20s, which has remained fairly constant over the entire period of time. We're starting to see private equity buy private equity, which I think is many times an indication of a frothy environment.
There are other publicly traded firms that you know that are announcing transactions, there are some private firms, but it's predominantly private equity. We are always talking to people out there, always. As I've said before, how and when, or why and when they sell is different and unique to each one. We would tell you, quite honestly, the reason that we did not make that comment this time is because the pricing continues to be very competitive. It's not that there aren't a number of transactions out there. There are actually a lot of transactions, there's a lot of activity because of the speculation of these high or higher multiples. We are going to continue to stick to our knitting, which is we are trying to execute better every day.
We want to sell more accounts. We want to retain the existing clients that we have. We want to work really closely with our carrier partners, which enable us to have additional success, investing in our teammates all along the way, and driving long-term shareholder returns for stockholders.
The last question I have that relates to that is, looking if it's the higher multiples being paid, regardless of who's doing it, what is different in that business model that paying that higher multiple makes sense given current market conditions and where organic growth prospects are likely to be over the next 18 to 24 months?
Okay. As you know, there can be a pro forma. Sometimes there's a pro forma of a pro forma. Anybody can make any pro forma make any number look good or potentially good, and some people are willing to accept lower returns than others. If you were in a, for example, private equity firm, and you were expecting a 20% IRR, and on the pro forma of the pro forma, as best we can see, it couldn't be higher than 14 or 15 or 16, then that's just a decision that they've made. As it relates to some people maybe don't look at their return on invested capital as closely, and maybe they do. Sometimes people bake in and calculate synergies from existing businesses that they already have, which might make a pro forma look a little differently or maybe a little rosier.
Everybody does it differently, and since I haven't worked at those other firms, I don't know exactly. I can only speculate. I can tell you that we put our pro formas together. We feel comfortable with our pro formas. As I like to say, it's a multiple of what? I've had several people ask me that some people may be saying they're paying seven times. I say, "Is that seven times revenue? Is that seven times a pro forma of 2018 earnings? Is it seven times what?" I don't think it's so much the multiple number, it is what are the earnings that they're calculating? That's where I think sometimes there's a divergence in that discussion. It's very interesting. It sometimes is challenging, sometimes comical, but we keep going.
Typically people buy emotionally and justify it intellectually. They will go where they think that they will be best served unless the number is so unusual and if nobody else can get to it. It's a very people-oriented business, as you know, and we continue to talk to all of these people to try to set ourselves up for the opportunity to acquire them when and if that opportunity presents itself.
Ken, when we look at this space, a lot of the really high multiples, or appears to be the really high multiples being paid is by the private equity side, as Powell mentioned. Their strategy is there's an exit to it, right? That means there's a liquidity event at some point in the future.
Wright.
That helps them quite often drive the returns in it. If you're someone like ourselves as a strategic buyer, we've got to make sure that we're going to get the appropriate returns over time because we don't have a liquidity event. We're planning on buying the asset and holding it for a really long time, having it part of our team that's out there. It's just a different philosophy maybe as to how each company thinks about returns inside of it.
Great. I appreciate you taking my questions. Thank you.
Sure. Thank you.
That concludes today's question and answer session. I'd like to turn the conference back to our moderators for any closing or additional remarks.
All right. Thank you, Tracy, and thank you all for your time today. We look forward to talking to you at the end of Q3 as we continue to work on our opportunities and our challenges. Thank you. If you have additional questions, I know Andy will be reachable throughout the day. Thank you.
This concludes today's conference. We thank you for your participation. You may now disconnect.