With us here, Powell Brown, the President and CEO of Brown & Brown. Brown & Brown is an insurance broker focused on small and middle-market commercial insurance. With that, I'll turn it over to Powell.
Thank you, Sarah. Good morning, everybody. My plan today is really to focus on three things. We'll talk about internal growth, we're going to talk about pricing, and we'll talk about acquisitions. I like to respond to questions and answers, so there'll be plenty of time at the end for Q&A after the automated Q&A that Sarah's arranged. Brown & Brown, we really do four things, and those four things are in our divisions. Retail, where we come to see you. You're the owner of a business. That means you could be a small contractor, you could own 12 nursing homes, you could own a group of hotels, or it spans the gamut. Really, we write from very small to very large accounts across the country. That's the largest segment of our business.
In that business segment, we write personal lines, we write commercial lines, and we write employee benefits. Of that, about $225 million last year was employee benefits revenue. The average new piece of business in the last four years in that space, written new across our 111 retail offices, was $12,500 in commissions. Note that I said commissions. Most of our business is on commission rather than fee. Two, that's $100,000 to $125,000 in premium, roughly on average. Second part would be National Programs. National Programs last year at $253 million of revenue. That's where we did the large acquisition 18 months ago with Arrowhead General Agency. That is where we develop a proprietary product on behalf of an insurance company and distribute it through a network of so-called approved agents. Those agents could be Brown & Brown, but most of them are independent agents.
This National Programs space ranges from anything from California earthquake on a residential and commercial basis to force-placed coverage on financial institutions to AAA construction condominiums in Dade, Broward, and Palm Beach County and dental insurance. Dentists, meaning professional liability and office packages for dentists across the country. Third would be wholesale brokerage. Think in wholesale brokerage, the accounts that the large standard carriers are not going to write. They're property, liability, and professional liability. It could be property for a cold storage warehouse in Tampa, Florida, $50 million. It could be a dynamite manufacturing operation. It could be the public company D&O on a technology company with very unusual earnings patterns. That all fits in there. About half of that business is binding authority, where we assume the risk on behalf of a risk bearer inside of a box. We're not a risk bearer.
We don't want to take risk. We are not an insurance company, we do not want to be. Although we actually can assume risk on behalf of insurance carriers in this space. The other half of the business is the large transactional brokerage that I was referring to. If you owned a $50 million cold storage warehouse in Tampa, no one carrier is going to write all that due to the potential hurricane exposure. In our services division, we have a group of businesses, two work comp TPAs, third-party administrators, two Medicare set-aside companies, one Social Security disability advocacy firm, and one specialty flood claims business. Where do we do all of this? This is our footprint. We're asked many times, being based in Florida, founded in 1939 in Daytona Beach, is do we have too much concentration in Florida?
If you look at California, in the Northeast, New Jersey, New York, Michigan, Washington State, the answer is, if you looked at this map seven or eight years ago, probably 60-plus% of our revenue is in Florida. Our acquisition strategy has not been a conscious one to diversify away from Florida. It's just meant that there have been more acquisitions that meet our criteria outside the state of Florida. If there were three high-quality businesses in Florida that became available today, we'd buy all three.
I like to joke when I come to New York about this, but the Florida economy will continue to improve, and there's one thing that we can all say with certainty, particularly for those of you that live here in the Northeast, that in February of this year, on any Thursday afternoon at 4:30 P.M., it's going to be cold and dark. On that same Thursday afternoon at 4:30 P.M. in Florida, it's going to be 72 and sunny. People want to come to the sun and the warmth, particularly in the wintertime. We're very pleased with this. This is not something that we have tacked up on a wall that says, "Oh, by the way, we need to fill in and get the white out." That's not the case. We're not trying to be in Alabama. We're not trying to be in Idaho, necessarily.
If we found the right people that fit culturally, we would go there. We're more focused on people, which drive good businesses, and then we get geography as a result of that. Someone would say internal growth. That's the thing that the investment community seems to put the highest interest and degree of emphasis on. We've been a company historically that's always grown our business organically, and we've had very good margins. Along came 2007 to 2011, and we went through a period where our organic growth was negative, not something we were pleased about. We've said that our business is highly contingent upon exposure units, far more so than pricing. We're going to talk about pricing next.
What this shows, particularly the years of 2007 to 2011, the middle market economy, and particularly our clients, they were really impacted with those businesses, and therefore, we could not write enough new business to fill in the hole. In a more steady state environment, as we are in today, we can grow our business organically, and we have enjoyed some very nice growth in Q1 and Q2. Some of you might be sitting there thinking, those numbers look higher than normal, or why is it higher than normal? The answer is, some of you have said that we have a business called Colonial Claims. As a result of the unforeseen circumstances here with the Superstorm Sandy in the fall, we adjusted a lot of those claims. There is revenue in there from Colonial Claims in Q1 and Q2.
In Q1, it is about a $16 million uptick year, quarter-over-quarter. In Q2, I believe the number was $2 million. Right, Corey? Even though you strip that out, the rest of our businesses are growing organically, and we are really pleased about it. We have not given organic guidance in the past. We are not going to change that. Many moons ago, our chairman, my father, used to say, "You can figure it out. We are going to grow 0%-5%." It was kind of a standing joke that we were going to be in there, but sometimes we would exceed it. If you look at that, the average over an extended period of time is between 4%-6% in that chart. The other period I would guide you towards is the years of 1998 and 1999.
That was a period where rates were going down 4%-7%. The economy was not booming, but it was still on an uptick, and we grew our business organically. That leads into the next slide. Pricing. Everybody here has got their own view on pricing, and I have probably been criticized for being a contrarian for a long period of time. I do not know if I would call myself a contrarian. I would call myself a realist as it relates to what we see in our business. You will hear, if you follow large standard insurance carriers in the U.S., that they are experiencing rates that are higher than those shown on this. It is kind of hard to read. It is basically saying it was 5% up for a couple of months, then it is now about 4% on average, all lines of coverage. Okay, 4%.
What does that really mean for this year, next year, and is there a difference in certain lines of coverage or separate segments of the marketplace? The answer is yes to the final question, broadly, the answer is yes. My personal belief is that what we are seeing in our business is that rates are stabilizing and moderating slightly. That does not mean that they are going down. That is an important distinction. If they went up 9% or 7% or 5% last year and the year prior, they are not usually getting another 5% or 8% or 9% on top, just the reality of life. There has always been a discrepancy between new business pricing and renewal pricing. That gap is large today. It does not mean it has not been large in the past.
I would tell you that we believe it is somewhere between 10%-20% on the extreme side on a new business pricing. That means if Company A had a beer distributor in Garden City, N.Y., and it was priced at $100,000, and they want a 9% increase to go to $109,000. If we took the same account, different name to the same carrier, we couldn't do this, but conceptually, they'd price it at $85,000-$90,000 to get it. Okay? In the standard market, the hotspot, as you know, workers' compensation, personal lines, and everybody has a little twinge about coastal property all the time. Everybody's got a view on coastal property. That's typically moved already to the E&S market. But if you have big concentrations with a standard carrier, they always are kind of a little fickle on that.
What is different in the near term in pricing as we see it, and specifically I see it? If we do not have a natural disaster this fall, hurricane. If we don't have a hurricane come onshore in the Gulf States or in the Atlantic seaboard into Florida, I believe that pricing in the E&S property market will flatten into January and potentially go negative. That is not a negative for us. That is just an observation. The other thing is there is another company which somebody might ask me about, which is affiliated with a gentleman named Warren, and they're in the business now, Berkshire Hathaway. And they are going to be a moderating effect on pricing for E&S property when they become. They're already, they're becoming very selective through a unique set of distributors, one of which is our firm.
We believe that they're going to influence this right here. I don't see the standard markets going negative anytime in the near to intermediate future. Back to my contrarian comment. I like to say, make it real basic. My wife and I have four great young kids, and so I keep it real basic to the extent possible. The answer is, there's $570 billion of surplus in a market that has $493 billion of written premium. There are reserve releases which seem to go on almost forever, but projected to slow down by 14. I don't buy that necessarily. And the investment community, or the investment returns are low, but there's speculation with the changes in interest rates, they could get better.
All said, even if the investment options were not going to be, if they were going to be static 90 days ago, I just believe there's a constant pressure on the insurance companies to get premium. Truly an insurance company, no one can tell you exactly what their cost of goods sold are on the individual risk. So you can project the cost of the property in this building with other buildings in New York City, but there are unique things to this building of which I don't know. We don't insure this building at the present time. But I would tell you that it's very difficult to do that. And so if you don't know your cost of goods sold, how do you price it? Now, it's a real basic way to think about it. They're very smart. They have pricing mechanisms.
They use statistics, they have models that model everything. The point is, on that one building, whether you're in New York City or Des Moines, Iowa, you can't really fully anticipate the full cost of that building. All right. Let's talk about acquisitions. The slide that I'd like to go to is really this slide. If you look at this slide, before I discuss this, what I say to people when asked about acquisitions is we usually average between $50 million and $150 million of acquisitions a year. That said, if you look at this slide, six of the last 10 years, we've done over $100 million in acquired revenue. Acquisitions are a function of good firms run by very good, high-quality people that fit culturally. We have a unique business. Everybody says that. Everybody's business is unique.
I'm just going to tell you, Brown & Brown is a very decentralized, very flat management style organization where you actually are compensated individually as a leader or a producer on the results that you drive. If you run a business unit or multiple business units, your compensation is tied to the performance of that business unit, whether it be in an office, the office, a region, whatever the case may be. We're about growing the business. We are a business that is an operator of businesses. We are not an acquirer of businesses. We are an operator of businesses that happen to do a lot of acquisitions. Let me clarify that statement. Sometimes we're asked the question, which I actually cringe when I get this question: Tell me about your roll-up strategy. We don't have a roll-up strategy. We're not a roll-up.
Roll-up has a connotation of, one, short-term in nature, two, that means they're going to flip it, three, I think it means PE-backed, typically. Not a criticism, but it's a shorter investment time horizon. When you come to Brown & Brown, one of the things that you get with us is not only you get a very strong balance sheet, but you get certainty. Certainty is the fact that we're doing this for a long, long, long time. Our intermediate goal is $2 billion. When we get to $2 billion, then we're going to make another goal. It'll probably be four, then it'll be something else, then it'll go from there and there and there. We can do this for a long time. If you are just putting disparate companies together, then they don't have a culture.
That's why we, and yours truly, protects our culture as much as I do and we do. That's one of our biggest things and one of my biggest things is to drive and continue to drive the culture in our company across our 7,000 teammates, going to north of 10,000 when we're at $2 billion plus. We talked about, or we announced an acquisition on 7/1, Beecher Carlson. Beecher Carlson is a business that's three components. The smallest is a programs business, about $10 million of revenue, fits perfectly into our program space with $253 million last year. The largest program, about half that revenue, is a Tribal Nations program Native American Program here in the U.S., and several other programs there. The next piece, agency business of 25%, that's traditional agency business, just like our retail business.
$20 million of that $30 million, or the $27 million is in Oregon. We now are the largest agent in Oregon, we believe. We have about $32 million in Oregon with our office and their office. I'm actually going to Oregon. We'll be in our offices on Friday afternoon to meet with all of our people and meet all of our new teammates from the Beecher Carlson acquisition in their offices on Friday afternoon. The final piece is the large account segment. Last year it was $68 million of revenue, and this is primarily fee-based business. Of that $70 million, about $50 million is fee-based, and you heard me say earlier that we don't do a lot of fee-based business. We do some. We actually have more large account business in our system.
Most of it is commission-driven and large account defined as $100,000 or more in commissions. We have more revenue than they have. You put the two together, and we believe that there's a great benefit. They have, now we, Beecher Carlson has a great model for certain large accounts, and they've done a wonderful job in growing their business organically. At the end of the day, the two leaders and all of the leaders across the board, but Steve Denton and Dan Donovan, and all the rest of the leaders there have done a great job of attracting, retaining, and rewarding a bunch of very high-quality people. We're really excited for them to be on our team. This would be the combined revenues of the firm if you just look back on 2012.
Margins is the final thing, we get questions on this all the time, and I anticipate some this morning. We have the highest margins in the industry. The question ultimately is, why? Is it sustainable? We've been doing it a really long time on the second question, but I would go ahead, and we're very sensitive about a term called reversion to the mean. One of the reasons we have such a decentralized company is those that are in charge of those individual businesses, their compensation is based on the performance of those business units, and so therefore, they want to grow those businesses organically and continue to maintain and drive high-margin business for Brown & Brown. Can we continue to do that, and can it improve?
Corey, if you'd ask Corey, our CFO, the distinguished gentleman in the back that's a little light on the hair, he would tell you, and he does a great job of it. He would tell you absolutely categorically, and we could move back towards the historical levels and beyond. I say the answer differently. My answer is very simple. We're going to grow our business organically, and that is what is the most important thing. I'll be interested to see what you think, but that's the impression that we get, and we cannot not grow our business organically. We're going to grow our business organically, and the margins are going to continue to do very nicely. If you notice, our $2 billion goal doesn't have a margin number nor a time frame with it.
When asked, "What's your margin going to be?" I said, "It's going to be good." "When are you going to get there?" Soon. Depends, I don't mean to be evasive, but what I mean to say is this: We're not in a rush to get there. If we wanted to be $2 billion in revenue, we could've gotten there last week, but we're not doing it for the short-term nature and the things that we talked about. What we're doing it for is to be sustainable in a long distance. This is a long-distance road race. This, can it improve? Yes. I've actually said that we will continue to do what's in the best interest of all parties involved to drive the growth of our company and create value.
I call that wealth building in our company, that wealth building is for people who have contributed greatly to our firm's success. We announced a new SIP plan in July as well. That's part of the wealth-building mechanism. At the end of the day, this is a sustainable long-distance road race with very good margins. It's interesting to us because when we grow our business organically, which everybody was asking us to do during the slowdown, now they ask about margin improvement, and we still have the twice the industry average. We get a kick out of it, but we're going to continue to push on that and improve our operating results. Sarah, with that, I've got one other slide, then we'll turn it over to questions.
The other thing I want everybody to know is there's a lot of reasons that we're different at Brown & Brown, but this is a big one. 29% of teammates. 29% of our company is owned by teammates. They're either in this room this morning, but more particularly, they're in an office somewhere servicing a client or trying to get a new client. I would tell you that there's a lot of ownership in this. When I go into offices and the person who I call the director of first impressions. You might call that person a receptionist. I don't. That individual creates the first impression of Brown & Brown when he or she answers the phone.
When that person says not, "Hello, Powell, how are the kids?" They say, "Hello, Powell, what's up with the stock?" You get it, because they own it somehow, some way. 70% of our teammates own stock somehow, some way, through either, one, employee stock purchase plan, two, 401(k), or own it in the open market. Having said that, I look forward to your questions, I'll turn it over to you, Sarah.
Great. Thanks, Powell, very much for that overview. Before we go to Q&A, we're going to turn it over to our automated response system. Each of you has a keypad in front of you. I'm going to put a series of questions up on the screen and encourage everyone to participate. You'll have 10 seconds to key in your response to the question, and it'll automatically show the percentage of answers for each question. Why don't we go ahead and put up the first one here? The first question is, if you currently don't own shares of Brown & Brown or are underweight, what would cause you to change your mind? We'll give everyone 10 seconds to key in their response. Okay, why don't we put the response up there? It looks like the winner is with 39% lower valuation.
Seems like a high-class problem. Followed by number 2, an improved U.S. economic growth. Okay, why don't we go to the next question here. What do you view as the most important metric for Brown & Brown shares? Organic growth, pre-tax margin, reported EPS, or cash EPS? Okay, why don't we put up the response? The winner here with 55% is organic growth, followed by cash EPS. Powell, I'd be interested to get your thoughts on that.
On this one or the first one, or both?
Oh, both would be great.
Well, on this one, it's very clear to me that organic growth is the thing that everybody wants. That doesn't mean we don't want it, but there's always this kind of give and take from a standpoint of organic growth with the margin. We've tried to balance that the best that we can. We're going to do our very best to grow the business organically more. I would tell you that I agree with the statements. I'm a cash EPS person. Corey and I talk a lot about cash. The more the GAAP earnings get sort of complicated, as I like to say it, I'm really interested in how much do you have to invest in the business at the end of the day, and we talk a lot about that. Yes, I would agree with both of those.
Okay. What about on the first question?
On the first question, actually, that doesn't surprise me, about the valuation. Although everybody has their own opinion on the valuation on any given day. If you look at people's responses over a very long period of time, that's a common response. What we try to do is just continue to grow the value of the company, and at some point, if somebody wants to get in, then they get in. If they don't, they don't. We're going to just keep doing our thing.
Okay, great. Why don't we go to the next question? Brown & Brown's organic growth was the highest among the publicly traded insurance brokers in 2Q13 at 7%. What is your outlook for Brown & Brown's organic growth in 2014? Up 3%-5%, up 5%-7%, up 7%-9%, or up 10% or more. We have an even split between 45% of people saying up 3%-5%, and 45% saying up 5%-7%. Do you view that as a reasonable result, Powell?
I can't answer one way or the other.
Okay.
Well, the answer is it sounds good.
Okay.
I can't answer one way or the other.
Not many people are looking forward to accelerate beyond the 7% currently, which seems interesting.
No comment. We don't give growth guidance.
Why don't we go to the next question? Brown & Brown's margins are higher than its competitors. What is your outlook for Brown & Brown's margins over the next few years? Significant improvement, modest improvement, stable margin, modest deterioration, or significant deterioration? The highest response is at 55%, is for modest improvement. Your thoughts on that question, Powell. Anything to add?
Remember, as I like to say, Corey's more vocal on that. We're going to grow the business top line, the margin should follow.
Okay. All right. We have one last question here before we open it up to the audience for Q&A. Brown & Brown targets $2 billion in revenue in the intermediate term. What is your confidence level in the company's ability to achieve this target over the next few years? Very high confidence, high confidence, medium, low, or very low? We have 60% saying high confidence. It seems like there's a lot that view that as reasonable over the next few years, and I would agree.
Me too. I would agree.
Great.
Can I open up to questions now?
Sure. Absolutely.
I don't know if there's a mic, but if you just state the question, I'll try to repeat it for everybody in web land, and then we'll go from there. Who'd like to ask the first question? Yes, sir.
The slide that you showed, giving Q1 of 2012 against Q1 of 2013, then Q2 against Q2.
The movement upward in the second quarter was so striking in terms of the increase in organic growth, I was just wondering how much of that is companies coming back to you for business that they used to do, they cut out and self-insured as a cost pressure? How much of it is actually instead new programs opening up in some fashion or other, or new risk being covered?
Right. The question really is, in the growth organically in Q1 to Q2 year-over-year, how much of that is businesses coming back and buying coverages that we didn't have versus new-new, as I call it? We don't break it out exactly, but this is the analogy that I would give you. What we look at on a broad basis is how many in an office additional premium audits are we receiving versus return premium audits. When the economy started to slow down, individual clients could not anticipate the depth at which their businesses would be impacted or slow down. Therefore, the businesses were going down, and on top of that, we were having to give back return premiums, which return commissions, so it's like a double negative.
As the economy has started to improve slightly, clients have been conservative in terms of their estimation of the uptick, and they'd rather pay 12 or 14 months from now an additional premium than pay it all this year because they've had three or four years of down. We're starting to see more and more additional premiums on audits in offices. We always write a lot of new business. I would tell you that we've written historically the same amount of new business as a percentage as we did prior to the slowdown and even during the slowdown. What you have is that double negative where clients are going down substantially, and as they're going down substantially, there's another negative, which is the return premium on top of it if they weren't able to estimate how their businesses were going to be impacted. It's a combination.
I don't know the exact percentage, but I would tell you that if you talk to an insurance company prior to the slowdown, they would tell you that 2%-4% of their total written premium in a quarter was related to additional premium audits. Yes, sir.
Thanks. Could you address your thoughts on acquisition structure when you buy these companies and how you view equity compensation and buyouts? You've talked about the high level of ownership of employees of the company.
Maybe you could just describe equity creep the last few years.
Yeah. Okay. In acquisitions, first of all, we hope and try to be as tax efficient as possible. We seek to buy assets over the stock, number one. Number two, we buy with cash. It's hard to argue about cash in USD. If they want to buy the stock, we are all for them buying the stock. In our acquisitions, there's typically an earn-out over a two to three-year period. That will give them an opportunity if they grow their EBITDA, we call it operating margin, up to a certain %, then they can so-called maximize the earn-out. What I would tell you is we don't have any plans on changing that. I don't like to say never or always, we're a cash buyer. Fortunately, we generate a lot of free cash, which we can reinvest in the business.
As it relates to equity creep, here's what I would tell you, and this is something that I've thought a lot about, and for the leadership in our organization have talked to our board about. We actually, in the past, our chairman never participated in any equity plans, okay. That's my father. It worked out really well for him. The business has grown substantially. He did an awesome job. I do participate in those plans, and the other senior leaders participate in those plans. There's been, over time, a slight shift in the philosophy. The philosophy has evolved from a 15-year cliff vest in equity with 20% price hurdles to a seven-year, where 50% of it is based on the company growing the earnings per share, 7.5% or more a year compounded, and on personal production.
If I'm a producer in Florham Park, New Jersey, if I grow my book X amount, then I get the other half of that. We have viewed the movement towards. Is that a two-minute? Is that what that says? Oh, ESPP, sorry. We have considered how do we enhance in driving the value of the company, but how do we enhance compensation with things like that which will continue to evolve over time. The other thing that you need to know about is we have something called an employee stock purchase plan, where we allow teammates. Every teammate can participate. They can allocate up to 10% of their income, total income, not to exceed $25,000. They get to buy the stock at the lower of two strike dates, less 15%.
For example, this year, on August 1st, people were buying stock in Brown & Brown at 21-something. It's a significant. It's like a 50% appreciation. They can sell the stock immediately, or they can hold it for capital gains. That's one of the reasons and ways that we have 70% of stock ownership, because you have a lot of people who have allocated money from their salaries and total incomes to buy stock at a discount over a long period of time.
Do you guys subsidize that discount?
We do. We subsidize that discount.
The growth rate that you have to earn to take advantage of that
Yes.
What is the quarterly growth rate?
The growth rate on the first SIP grant?
Yeah.
Right. Are you talking about?
For a producer.
Oh, yeah. On a producer, he said, what is the growth rate? Typically, it's a fixed dollar amount based on where their book size is. Basically, we want people to get into the traditional plan once they achieve over a half a million dollar book of equity. We do use some grants for new hires on a limited basis where we are evaluating their ability to contribute to the team over a five-year period, which we're very pleased with as well. That's all new.
Great. Well, please join me in thanking Brown & Brown, and the breakout will be in the Madison Suite if you have further questions.