Good day. Good morning, welcome to the Brown & Brown, Inc. 2013 second quarter earnings call. Today's call is being recorded. Please note that certain information discussed during this call, including answers given in response to your questions, may relate to future results and events or otherwise be forward-looking in nature and reflect our current views with respect to future events, including those related to the company's anticipated financial results for the first quarter of 2013. Such statements 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, including the company's determination as it finalizes its financial results for the first quarter of 2013, that its financial results are different 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 in 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 are contained in the company's filings with the Securities and Exchange Commission.
We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. With that said, I would now like to turn the call over to Mr. Powell Brown, President and Chief Executive Officer. You may begin, sir.
Thank you, Kyle. Good morning, everybody. We had a 7.4% internal growth in Q2. We're very pleased about that. All four divisions contributed to our $21.1 million of new growth dollars. Retail was up 2.3%. Wholesale national programs and services were up 10% or more. With that, I'd like to turn it over to Cory for a financial update.
Thanks, Powell. We did have another very good quarter. Like we'd said previously, we like the steady and consistent growth that our internal growth reflected. Our net income for the second quarter of 2013 of $52 million was up 22.4% over the second quarter of 2012. Correspondingly, our net income per share for the quarter was $0.36. That is 24.1% over the $0.29 from the second quarter of 2012. From the revenue standpoint, our commissions and fees for the quarter increased 11.8% to $324.2 million. That's up from the $289.9 million from last year's second quarter. We did receive $7.9 million of profit-sharing contingent commissions, which represent the net increase of approximately $6.8 million. That's from the $1 million we received last year in the second quarter.
Of the $6.8 million of net increase, $1 million came from a wholesale brokerage division and $5.8 million came from our program division, of which $4.5 million was generated in our FIU program. As long as the wind continues to be quiet and not blow, we should continue to see nice profit-sharing contingencies from FIU. Our best estimate of how much profit-sharing contingent revenues that we should receive in the second half of 2013 is between $13 million and $15 million, of which we think $10 million to $11 million may come in the third quarter. Then possibly $3 million to $4 million in the fourth quarter. Additionally, we accrued $1.7 million of guaranteed supplemental commissions in the second quarter of 2013. That is $560,000 less than the $2.3 million that we accrued in the second quarter of 2012.
This reduction is again in line with the fact that several carriers that used to pay us GSCs in lieu of profit-sharing contingent commissions have switched back to their profit-sharing contingent commission contracts. Looking at the internal growth schedule, as Kyle mentioned, we had a consolidated internal growth rate of 7.4%. For the second quarter, our total core commissions and fees increased 10.4%, or $29.6 million of net additional commissions and fees. However, within that net number, we had $8.5 million of acquired revenues. That means that we had $21.1 million of additional commissions and fees from essentially the same store sales basis. As Kyle mentioned, all four of our divisions had strong positive internal growth, and he'll talk about those a little bit later.
Our investment income was nearly flat with 2012. Our other income was up slightly of about $616,000. That's due to a sale of certain books of businesses. Our pre-tax profit margin for the second quarter of 2013 was 26.5%. That's compared to the 24.5% we had in the second quarter of 2012. That's an increase of 200 basis points. Employee compensation and benefits as a percentage of total revenue was 50.2% in the current quarter. That's a decrease from the 51.8% cost factor in last year's second quarter. The total dollar increase on a net basis in employee compensation benefits was approximately $12.8 million or 8.5% increase, of which only $1.7 million was attributable to standalone acquisitions since last year. Therefore, excluding those impacts of the standalone acquisitions, we actually had $11 million of additional compensation on kind of the semi-same store sales basis.
Of this increase, $1 million came from new salaries for new producers. $1.6 million was due to increased commission producer expenses because of the net new business. $5.6 million was due to an increase in staff salary, of which almost $3 million of that portion related to the new Automobile Aftermarket and the Everest programs in our national program division. We did have about $2.1 million of increased profit center bonuses and other bonuses because of the increased profitability, and that includes the net effect of the $1.3 million we accrued last year relating to the 5% bonus program for our retail commission producers. Finally, there's about $1 million of additional payroll taxes relating to the increased compensation. Our non-cash stock grant compensation was down slightly by about $115,000.
However, on July 1st, 2013, our board of directors approved a stock incentive plan grants to certain Beecher Carlson employees as part of the acquisition agreement. The board also approved SIP grants to existing teammates. These SIP grants are generally based on five-year performance measurements and vest over a five, six, and seven-year period. The total annual cost of these SIPs, including the grants to the Beecher Carlson teammates, is estimated to be about $15 million per year or about $0.06 per share. Looking at our other operating expenses, they remain flat at 14.5% of total revenues for both second quarters of 2012 and 2013. The other operating expenses increased $5.2 million, or 12.3%, over the same quarter of last year. The new standalone acquisitions amounted to about $533,000 of a new cost.
When you look at on a semi-same store sales basis, the net increase in other operating expenses was about $4.6 million. This net increase related primarily to $1.2 million of additional insurance inspection and servicing expense fees as a result of net new business. There was a $1.8 million increase in legal and errors and omission reserves, which is partly the result of last year in the 2012 second quarter, we had an $826,000 credit due to our legal E&O reserve reductions for certain cases. We had $1 million of additional costs relating to our data processing and software licensing fees. We had about $700,000 increase in various employee meetings. From an EBITDA standpoint, our consolidated EBITDA in the second quarter of 2012 was 32.4%.
With the internal growth, as we mentioned that our leverage, our EBITDA margin for the second quarter of 2013 went to 34.1%, and that's 170 basis points improvement. If you look at our retail division, last year second quarter, our EBITDA margin was 32.8%. With their nice 2.3% internal revenue growth, the margins for the second quarter 2013 was 34.7%, and that's 190 basis points improvement. Our program division last year had a 31.2% margin, and it moved up to 31.8%, 60 basis points improvement. Our wholesale division went from 32.8% EBITDA in 2012 second quarter to 36.3% margin. Our service division went from 24.7%, and it shrank slightly down to 24.1% margin. Overall, very nice improvement on our EBITDA margins. Our amortization depreciation aggregate was up about $720,000, and that was due primarily to the acquisitions.
Our interest expense was flat, with essentially no new debt as of June 30th of 2013. However, on July 1st, relating to the Beecher Carlson acquisition, we did add another $60 million of debt, so the interest rate will move up based on that in future quarters. Our change in estimated acquisition earnout payable was a debit in this year's second quarter of $656,000 versus last year in the second quarter, we had a $602,000 credit balance, so that's a $1.3 million swing in GAAP expense charge. Our effective tax rate for 2013 is currently expected to be running at about 39.7%. Really in conclusion, with our net income of $52 million, it reflects a very nice 24.1% increase. We're very pleased with that. With that financial review, turn it back to Powell.
Great, Cory. Thanks. A good report. On a retail basis, we're up 2.3% versus up 80 basis points in Q1. In Florida, coastal property, we're seeing flat to up 10%. Inland property, usually flat to up 5%. GL rates could be down 2% to up 5%. Auto could be up 5% to 7%, flat to up 5% to 7%. Work comp is tightening. Carriers are less willing to offer consent to rate in Florida. Work comp and auto actually are the toughest lines to place in Florida at present. Everybody's working off a model. Profitable accounts are hard to get rate on. Inland property, you could actually see rate decreases every once in a while. Poor construction, it's still hard to place, and contractors' payrolls in certain areas are up slightly.
In the Southeast U.S., particularly Texas, Oklahoma, Georgia, South Carolina, coastal property is +3% to 8% in South Carolina and Louisiana. Inland, it's usually flat to up a little bit. In Texas, the coastal property is under a little more pressure, 5% to 10-plus percent. GL and auto rates are flat to up 5%. Work comp would be down slightly to up 10% in rates. Exposure units in that part of the country are flat to up slightly. Work comp continues to tighten. Regional and monoline carriers continue to remain aggressive with scheduled credits. Texas, of the states listed, seems to have the most rate pressure and the most exposure unit growth. In the Northeastern U.S., property inland is typically up 2% to 6%. Coastal is up 10-plus percent, and deductibles are being forced higher. Casualty and GL and auto are flat to up 5%.
Work comp is flat to up 7%. Exposure units, depending on the class of business, but is flat to up no more than 5%, typically. New business is still very competitive and seems to be actually a little softer in the Northeast than Q1. There's still 10% to 15% pricing difference between new and renewal accounts. Construction, GL, and umbrellas in New York City continue to be tough. Monoline work comp in the city is very tough to place. We are seeing some New York City developers, though, that are becoming more active. We're going to see that roll through into the construction payrolls in the near future in the city. In the Midwest, property is typically up 5% to 10%. GL rates are down 5% to 10%. Now, property carriers or carriers that are writing that property are looking closely at the valuations as well.
Limits are going up and the rates are going up. If rates are going up 5%-10%, and then the limits are going up, they can be getting a pretty healthy increase in premium dollars. Automobile is flat. Work comp's up 2%-3%. Payrolls and sales are up about 5%-8%. Midwest regional and super regionals continue to be the most aggressive. In the West, property, general liability, and automobile are flat to up 5%. Work comp rates are up 5%-10%. Exposure units are flat to up 5% on a very broad basis. Work comp in California and Arizona, they continue to tighten. We're starting to see some signs of life in the construction industry in Arizona. Some of the exposures on some of our contractors are up 5%-15%.
Regionals continue to be very aggressive in that part of the country as well. In the Northwest, Oregon and Washington, carriers continue to cut back on earthquake limits and increasing their price for that earthquake coverage. As a general statement in the Pacific Northwest, I think people are feeling better about the economy, but we're not seeing much new hiring. People are doing more with the same amount of employees. On employee benefit side, on the small group basis, we're seeing rates probably up 8%-12%, and large group could be up 10%+, depending on the experience. We're not seeing a lot of new belly buttons added. Once again, kind of flat number of employees. From a wholesale standpoint, we're up 10.8% versus up 8.8% in Q1. Binding authority, we're seeing slight exposure increases. Rates are up or flat to up 5%.
Coastal rates are up, inland is flat to potentially down. Liquor liability continues to harden, thus, bars and nightclubs continue to be under pressure, meaning going up. Habitational GL rates are also going up as well. On a brokerage standpoint on property, coastal property, it's typically flat to up 5%. We are seeing some large accounts that are seeing rate decreases now for the first time. New Jersey and Long Island continues to present challenges for poor construction. As it relates to Citizens, we always get a couple questions about that. In Florida, if the building is older or not A-rated, meaning under $10 million of value, Citizens keeps it. If it's larger and A-rated, meaning over $10 million in value, the E&S market has a chance because it's not total parity, but it's close. From a liability standpoint, rates are flat to up 5%.
In the brokerage liquor market, liquor liability continues to harden, as in the binding market. Habitational rates are also going up. Professional liability, private company D&O is up 5%-10%. It's all driven by employment practices claims. Standalone employment practices coverage, these higher claims are leading to increasing retentions and at least a 10% increase. Non-real estate accounts are flat. Real estate related is up 5%-10%. Public company D&O is up 5%-10% on the primary. On the excess layers, they're down 5%-10% or even more percent. National programs are up 18.3% versus 12.3%. Had a great quarter for programs. We had some nice growth in a number of our programs. The big winners were in Arrowhead. I want to say way to go to Chris Walker and his team.
We are hearing in the national programs area about some downward pressure on reinsurance rates, we're not seeing the primary carriers pass those decreases through yet. We hear it on the retail and the brokerage side as well. Like I said, we haven't seen it yet be passed through the primary carriers. On the services side, we had 10% organic growth versus 62.8%. Obviously, in the first quarter, we had a big quarter with Colonial. I'll tell you, in Q2, Colonial Claims did $2.4 million more in the second quarter than they did last year in the second quarter. There was some things that rolled over from Hurricane Sandy into Q2 that we did not anticipate. Those are pretty much closed now. It was a good quarter for services. On an acquisition front, we're really pleased that the Beecher Carlson transaction is closed.
Very excited to have the 400 teammates from Beecher Carlson join Brown & Brown. We're writing a lot of new business. We're excited about that. We continue to actively look for acquisition opportunities. As you saw, we also closed another very fine acquisition in N.Y. State, 61, just outside N.Y. City, The Rollins Agency. In conclusion, all carriers want rate, the competitive pressures are moderating those rates more today than in Q1. Regionals continue to be very aggressive. The acquisition pipeline continues to be good, as I like to say. Last year it was good, and a year from now, I think it'll be good.
We continue to talk to lots of people, when they sell and if they sell is up to them, we look forward to talking to them. We continue to deliver for our existing clients and aggressively seek new business. With that said, I'd like to turn it back over to Kyle, and we'll start with our questions. Kyle?
Thank you. If you have a question on today's conference, please press star one on your telephone keypad. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that'll be star one. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Michael Nannizzi from Goldman Sachs.
Thank you. Just a quick question on the wholesale brokerage segment. Can you talk a little bit about organic growth there? I think last quarter you'd mentioned some rate increases in loss-affected areas that helped contribute to the organic growth. Was that relevant again this quarter, or was there something else in there?
I'd say, Michael, the way I would focus on the wholesale arena is, as you know, you could have sometimes a little bit more violent swings in rates up or down. I would tell you that at this point in the cycle, it's more of a function of, one, there are accounts that sometimes are in the standard market and sometimes they're in the E&S market. I would tell you that we call those tweeners. Those tweener accounts are starting to move back towards away from standard market into E&S carriers and wholesale markets. They typically look like a wholesale account. I would acknowledge that up front. Number 2, we're just aggressively out looking for and soliciting and getting a lot of new business. You have the fact that you have a lot of new business.
You have accounts that are moving across somewhat from standard markets that are typically E&S markets moving back to the E&S market. We are getting a little help with the rate. I would say that it's more just a function of that market expanding slightly and our ability to get more new business. Tony Strianese and his team's done a great job. They've done a really good job a number of quarters. We're really pleased with that 10.8.
Great. Then in the national programs business, just want to get a little bit more color. You saw margins expand, even with the contribution, sounds like Arrowhead and ESIC contributed nicely to premiums. Can you talk about just the margins there? If you were to kind of peel those two out, what were the kind of legacy margins in that segment? Then maybe just give us a little bit more color on Arrowhead and ESIC in particular. Thanks.
In the programs market, we've been able to enjoy 35+% margins historically. If you remember, when we acquired Arrowhead, they had $40 million of EBITDA on $107 million of revenue. They've obviously grown a lot organically, which we're very pleased about, Chris Walker and his team. The Automobile Aftermarket program that came in effective October 1 of last year, we said it was going to be $20 million-$25 million of revenue in the first year, and it was going to be about a 10% margin for the first two years. Then it will move towards our historic margins. As it relates to the Everest program that we picked up on 5/1, we've said that that's $7 million of revenue and haven't yet given any color around the margins.
Ultimately, we would expect that to be in the traditional operating range of the rest of our programs.
One other item just to clarify. On the national programs, we did receive $5.7 million of profit-sharing contingencies, that's obviously high margins. When you extract that probably added about $4.7 million to EBITDA. Because of the Automobile Aftermarket that Powell was talking about, and that's considered net new business since it was like selling a brand-new account, those margins are lower than what historically Arrowhead or the national programs had. When you extract the EBITDA impact of the profit-sharing contingencies, the margins on the rest of the business did actually shrink a little bit, primarily because of this lower margin business on the aftermarket, we believe it will continue to grow over time to the segment's average.
Yeah. Key point, Michael, two years. October 1 of 2012, it started. Two years from then, we think that business will start going up. We're going to have some expansion just by growing the business organically. We think there's two embedded positives.
Great. I'll re-queue. Thank you so much.
We'll take our next question from Mark Hughes from SunTrust.
Thank you very much. On the expense front, Cory, the E&O reserve and then the software licensing increase, are those going to persist in Q3 or thereafter?
No. First of all, on the E&O reserve, that's an item that can fluctuate each quarter and depends on how the whole legal environment works in the cases we have outstanding. Looking at that as a net increase is really not the right way to look at it. It came about just because of an unusual quarter last year in 2012, where we had that $800,000 credit balance. Okay. Clearly, what we saw this quarter is probably on average. It's only up because of that credit. From a standpoint of software licensing, that is a combination of some of the roll-in acquisitions, the fold-ins that we had, and some increase in some of the software costs. I don't think that would continue at that same level each quarter, but it will be overall up a little bit.
The $0.06 a share in the stock comp, how much of that is for Beecher, which I assume you would have incorporated into your guidance when you provided it, how much of the legacy plan expenses might be dropping off?
Well, I can answer, Mark, the first one. About $0.01, $0.013 on the first part of the question with Beecher, that's meeting certain growth and profitability hurdles, which we feel good about, number one. Number two, Cory, are you referring to the expenses dropping off on old PSP?
Right.
Yeah. Can you answer that?
That would just be a gradual amount. No big drop-offs in the foreseeable future.
Okay. Thank you.
Our next question comes from Greg Locraft from Morgan Stanley.
Hi. Good morning. Great quarter. I wanted to just ask about the margins. Again, you guys are showing tremendous improvement year-over-year in margins. I think you've called out the last couple of quarters, including this one, some reasons why. I guess this is more of an out-year type question. Can you continue this trajectory, or should we begin to see the year-over-years decelerate? I'm wrestling with whether you can get above historical averages as a corporation on the margin line, given how the mix is shifting.
Greg, this is Powell. I was going to say, remember if you've heard some of the last earnings calls, I've said that we, and yours truly, reserves the right to do whatever we think is necessary to grow the company organically and profitably. Do we think we can have the margins go up? Yes. If you notice, our next intermediate goal is $2 billion of revenue. There's not a margin component with that. There's not a timeframe upon which we will accomplish that. What we can say is that the margin's going to be good, and we're going to be growing organically. We're very pleased with our organic growth. As you saw with all of our businesses growing as they did, we had nice margin expansion. We think that there's continued opportunity for improvement.
The most important thing is we grow and grow profitably.
Okay. Yeah. Again, it's not one-off, it's actually the core business is performing just super well. I guess we'll continue to kind of be conservative, but you guys are in a really good spot on the margin line, so, okay. The other thing is just the impact of, you mentioned that the reinsurance market, you're seeing a little softening there, especially it sounds like on the large account side, but it's not passing through. I think in your commentary, you mentioned not passing through yet. I'm just curious, in your experience, how does this typically work when reinsurance comes off, when you begin to feel that in the retail side?
Well, let me clarify, Greg. I've only been doing this for 23 years, so unlike our chairman, I don't have 60 years, 50 plus years to draw on. I would say the following, when reinsurance rates go up or down, typically they don't pass through right away. If you're talking to a primary carrier, they're going to say, "We're bearing either more of that cost or less of that cost," and they can't pass it through, i.e, in an increase. If they get a decrease, they don't want to pass it through as quickly. I would answer the question a little differently. What I would say is this, I think that the rate market is moderating already. I think that that will continue as a result of if primary carriers have downward pressure on reinsurance.
I also think that if we do not have a large wind event this fall, somewhere in the Gulf Coast, Florida, or the Northeast, that the E&S market will flatten and potentially go down in terms of rates slightly, starting January of next year. That's not a negative for Brown & Brown. We can still grow when we're doing that. The answer is it creates lots of opportunity for us to do a good job for not only our existing clients, most importantly, but for new clients that we don't already have. Although some people say, "Wow, the rates are going down, so therefore the reinsurance rates are going down and primary rates have to go down immediately." I believe there's always a lag. I think there are other external factors. I think that it's a very competitive environment, and there's a lot of surplus.
It's not just the reinsurance issue, Greg, that's going to moderate rates further.
Okay, perfect. If I can sneak one last one in, just because you're sitting in the markets, are you seeing Berkshire Hathaway yet? What are your thoughts on their initiative? Anything you can help us as we think through them in the market that you care to share would be great. Congrats again on a great quarter.
Thank you, Greg. Yes, we are seeing, they started really open for business on 7/1. They have a talented team of leaders. They have an unencumbered balance sheet. As I understand it, they don't have to buy reinsurance. All of those things, in our opinion, will lead to good things over a long period of time. We consider them and will consider them a good trading partner, already do. They're growing, and we look forward to growing with them. As it relates to specifics, they have done, I don't know all the particulars. They've written some good accounts on 7/1, I understand. I haven't seen them personally write much yet. I think that in the coming months that I will, and we will. We look forward to it.
Great. Thank you very much.
Our next question comes from Adam Klauber of William Blair.
Good morning. Thanks.
Hey, Adam.
Were audit premiums more positive in the second quarter versus the fourth or first quarter?
I would say they're probably similar.
Okay. Is momentum building, or is it still just slightly positive?
I think it's more slightly positive. As I said in Q1, Adam, I think people generally feel better about the economy. I think that people are cautiously optimistic about how they invest in their businesses. As I think I said, the example I used in Q1, something close to this, if we need to buy a new $3 million machine, we may be reticent and may want to do some maintenance on that machine rather than buy the brand-new machine and make sure that our business continues to grow as we anticipate a little longer before we go out and borrow the money to buy the $3 million machine. That's really what we're seeing. We're seeing uptick. If I made a broad statement, I think that you see sales outpacing payroll growth, obviously. I can't tell you how much, but that's a broad statement.
Some of the information that I shared this morning showed a similar, a one for one increase, like in the West, or I think, no, Midwest, 5%-8% increase is up in sales and payrolls. I think most of the places around the country, though, there's a little bit of a divergence there. Sales are going to be up more than payrolls. People are slow to add new headcount. We are starting to see, though, continued positive on audit premiums, yes.
Okay. As far as Arrowhead, clearly they've had strong performance. Which programs are growing? Is Zurich beginning to grow, or is it a little too early for that to happen?
Yeah. The answer is, we've been very pleased with some of our Earthquake programs and some personal property programs in that area. As you know, we had a change in the auto program from a prior carrier to Everest, so that's coming back online. I would tell you that the Zurich is a great trading partner, and we are working through a couple things that will help us enhance distribution in terms of they're totally committed to it, but I'm talking about ease of getting it done. We're working through that. We haven't seen the growth yet organically that both groups would want, but we can see how to achieve it, and we're working towards that.
Okay, one last question. Organic in the benefits, was that better or not as good as the overall organic in the retail area?
Organic. Yeah. We don't break out the difference on benefits and other than benefits, I would say that the growth in benefits was good.
Okay. Thank you very much.
Our next question comes from Ryan Burns of Janney Capital Markets.
Good morning, everybody.
Ryan.
Just one quick question on obviously, the retail organic growth showed solid promise or growth this quarter. Just trying to figure out with any kind of one-timers in there. Secondly, obviously, it's shown nice improvement quarter-over-quarter. Should we expect that further in the back half of the year?
Number one, relative to retail, we're very pleased with the performance, Charles Lydecker and the team has done a great job. As you remember in Q1, Ryan, we said that retail operates in a range. Q4 of last year, we did 5.4% organic in retail. Q1, we did 80 basis points. Now we've done 2.3%. Our budgets see that retail can improve over the year, until we deliver it, we don't believe it. I like to say show me first. We're out trying to grow our retail business, which as you know, is now on a run rate about 57% of our revenue, whereas it was 54% last year. As the economy continues to grow, the middle market economy, we believe that we will see more positive growth in retail. We feel good about it.
Okay, great. My last one is it possible to break out the revenue coming from the Zurich and Everest programs in the quarter?
No, we can tell you what it is on an annual basis.
Okay.
Some of it is lumpy, I shouldn't say lumpy, we haven't gone through an entire year. What I would tell you is Zurich is $20 million-$25 million annually, Everest is $7 million annually.
Great. Thanks, guys.
Yeah, absolutely.
Our next question comes from Brett Huff from Stephens Inc.
Good morning, Powell and Cory.
Hey, Brett.
Two quick questions. One, contingents were a little bit higher than we thought. Cory or Powell, I'm not sure who wants to take this, what is your sense of how the annual contingent number will look sort of over time? Should we expect sort of the levels that we've seen in 1Q, 2Q, and then I think, Cory, you articulated what you expect for 3Q and 4Q. Is that a level that should be sustained, assuming no big changes in losses?
I think there's two ways to look at it, Brett. I think that's a fair assumption with a caveat, the caveat would be, certain carriers were asked nicely to change to guaranteed supplemental commissions, and some of those that went to GSCs have now reverted back. In the reversion or reverting back, you always want to know exactly how those contracts actually work. So the way people have in contingency or profit-sharing contracts might change. We don't know something. That's not like I'm not trying to lead you to something, I'm saying if in fact carriers change the way they paid those amounts, we don't anticipate that.
This is an important part of our business, and we think about it a lot. We think it aligns our interests and the insured's interest in our carrier partners, we think that we can continue to do a better job in growing that. That's a goal of ours.
Okay. Were there any one-time costs associated with the acquisition in 2Q numbers? Any closing costs or anything like that?
Nothing material.
Okay. Last question from me. Powell, you talked a little bit about rates in your overview of the different regions, but in particular, can you just tell us again how Florida units are looking? I think you said flat to up 5%. Any additional detail there, just given how much of your revenue comes out of Florida?
Yeah, sure. Here's the way I would break it out. If you go to Southwest Florida, that's Naples to Sarasota, the economy is still slow. Actually, it's just kind of bumping along, actually. If you go to Boca Raton on the East Coast to Miami, it's white hot. Construction, all kinds of things being sold. There's a lot of activity. If you go to Orlando, and you talk to a contractor in Orlando, and the contractors in Orlando are generally starting to see good pipelines. Now, I qualify that. Remember, pre-slowdown, that 18 months of backlog. Today, that's nine months to 12 months. You talk to a contractor, they feel good about it. Remember, if you had two years or 18 months, and it's only 12 months now, they don't feel as good. They feel better, but they don't feel as good.
In the North, from Jacksonville across the Panhandle, I would tell you that generally business is better. The mindset of Floridians is very positive. It actually is always positive. We know in Florida that we have a fine state. We have a tax advantage state relative to personal income tax. We know that when all of you all are up there in the wintertime, working hard in New York City and far off places in the North, at 4:30 P.M. on a Thursday in February, it is going to be cold and dark, and we know that it's going to be sunny and warm and probably 72 in Florida. People are going to be coming to Florida in the future, and if anybody on the call wants to buy some real estate or insure something in Florida, we could help you.
Okay. That's what I needed. Thanks for the overview, Powell.
Yep.
Our next question comes from Meyer Shields of KBW.
Thanks. Good morning, everyone.
Morning.
Good morning.
I don't know if this is a question for Powell or for Cory, but can you talk about the margin compression in the services unit? Is that related to the extra claim activity at Colonial?
I'm sorry. Could you repeat the very last, extra what? Claim? What was the last part of the question?
Just the-
No. Yeah, no, it wasn't. What we've got is, if you remember, we have in services, we have two large work comp TPAs, two Medicare Set-Aside companies, one Social Security Disability advocacy firm, and one specialty flood claims business. In Q1, we had obviously, a really big quarter. Two, this quarter, it's just like anything else. Some of the business and some of those the revenue in some of those businesses comes in sometimes it's not as predictable. There could be expenses incurred in Q2 that there's not an offsetting revenue yet, but that revenue may come in next quarter. There's no magic to it, Meyer. I don't
Meyer, there's two small things. First of all, on the claims management, the margins shrunk a little bit because of the revenue evaporation, you can't remove costs as quickly as the revenues moved in that. That's a little bit of that. The second thing is on our Social Security Disability, they have been staffing up a little bit more and some additional cost, as they are planning to grow in some of the individual marketplace. Their costs have increased slightly. Overall, there's only about margin compression of maybe $800,000 in that particular segment for the quarter over the previous year's quarter. It's those two major areas.
Okay, thanks. That was very helpful. From a different perspective, are you seeing any change in loss cost trend or loss cost inflation rate?
The answer is, on a broad statement, no. Are we seeing that in regions? Yes. Carriers are addressing it differently in different regions. On a broad basis, no.
Okay. Thank you very much.
Our next question comes from Michael Nannizzi from Goldman Sachs.
Just a quick follow-up if I could. I'm just looking at retail. In the last couple of quarters, you've had decent organic growth, but margins actually either outpacing or very close to that level. How should we think about the relationship there? I mean, what level of growth in retail do you think you need in order to continue to generate margin improvement?
Well, Michael, what we've said basically is we can expand our margin when we have organic growth.
Yeah.
Having said that, last year, as you remember, we had a one-time sales incentive that was an income event. That income event, as you know, was an additional 5% paid to retail producers who grew their book of 5% or more over the prior year. We had a potential expense of up to $12.8 million. Personally, Cory and I both wanted to pay the $12.8 million. We ended up paying out $6.8 million. 53% of our producers participated in that payout, and we were very pleased with the results. We've said that if we knew what we knew now then, we would have done it exactly the same way.
Having said that, we do not have that 5-point expense in there, as we've said earlier, I like to say that I reserve the right to do what we think is necessary to grow the business in any way we see fit organically and profitably. Thus, we have input or installed a new wealth creation mechanism. That's the new SIP grants. Once again, that's a performance over a multi-year period that producers and others can participate in, which creates wealth as opposed to income. The answer is, I know there are other firms that say, "Well, when we grow X, we have Y expansion." We are not really saying you got to get to this point. The way I want you to think of it, Michael, is barring unusual expenses, we can have margin expansion when we grow our business organically.
The more rapidly we grow our business organically, the better chance we have to rapidly expand our margins.
Great. Thank you. Just one last one, I guess. On the grants, you mentioned the July 1 grants. Have you talked about the sort of metrics or hurdles that either the company or the Beecher unit needs to achieve in order for those incentives to pay out? Have you discussed that?
Yeah. Well, the answer is, we haven't gone into the specifics as it relates to Beecher, but suffice it to say that they have to grow dramatically on the top and bottom line to hit those payouts, which we fully think they're capable of doing and hope that they will, number one. Number two, as it relates to the traditional SIP grants, remember, they're a five-year measurement period, which whether you're a producer, you are a leader of a business unit or an office or a group of offices, or you're a senior leader, everybody has a component of that 50% for producers and leaders, 100% for the senior leadership, where it's on earnings per share growth. That's 7.5% compounded annually over a five-year period.
As it relates to the producers and the leaders in offices and multiple offices, they have 50% of their grant based on either personal production as in a producer or as a leader on growing the business organically, meaning the organic growth and operating profit growth. That's typically the way the measurement periods work on SIP grants, and also on the Beecher grants.
Great. Thank you very much for the follow-up.
We'll take our next question from Elyse Greenspan from Wells Fargo.
Thank you. I just had a couple of quick questions. Just in terms of the organic growth, aside from the Colonial Claims business this quarter, was there any kind of one-time items that you would point to that we shouldn't expect to continue?
No.
Okay.
No.
Thank you. Just within retail, it seems that some of the questions you kind of are looking for that to continue to improve throughout this year. I know last quarter you had pointed to seeing the full year organic growth for 2013 to exceed last year's growth number. Would you still say that that's the case as well?
Yes.
Okay. Just on the programs front, in terms of, we've seen obviously some growth from the Everest and Zurich programs coming online. Are you guys looking at potential additional programs from here that you can potentially speak to, similar in nature that we might see in the near term?
Well, Elyse, the short answer is I wish that we did, I know that we've been asked before, is this a trend? I'd like to say that it would someday become a trend, at the present time, I would want you and everyone else to think of the two businesses that we have picked up in Automotive Aftermarket and the Everest as one-time events. If we're fortunate enough to pick up others, I still think that's a bonus. The short answer to your question is no, there's nothing pending. Would we like something to be in the pipe? Sure. These are very unusual. That doesn't mean that we're not talking to people, we'll always talk to people, but that's not different than any other time in our evolution. I would think of those two as isolated one-time events.
We need to grow our business and programs organically, just like we're doing in the other parts of our business, which we are, and we're excited about it. We think that there's some neat opportunities going forward.
Perfect. Thanks for the answers, congrats on a good quarter.
Thank you. Have a nice day.
We'll take our next question from Joshua Shanker from Deutsche Bank.
Yeah. Good morning, everyone.
Morning, Josh.
Morning. I have two questions. This is really the same question, where are we in terms of total commission volume generated by the state of Florida compared to where we were in 2007? What does that mean? It's hard to figure out with M&A and everything, what does that mean for the total commission pool outside of Florida?
I don't have the 2007 number right here in front of me, I'm going to be pretty close, I'm going to look at Cory. I would tell you that $333 million of revenue last year out of the $1.2 billion were in Florida. Of that number, about $168 million was retail. That means that the others were in program services and wholesale. That retail business, not all of that is domiciled accounts in Florida. They could be accounts in Seattle, Washington, handled by offices in Florida. Although that doesn't happen that often, it's very possible. Number one. The services business is not nearly as contingent upon the economic swings in commission levels. The wholesale business is. You've got exposures and going back and forth accounts from both sides of standard markets to wholesale and wholesale to standard markets.
In programs, a lot of that business is all around the country. I think the biggest probably indicator would be what our total revenue in retail was in 2007. If I had to guess, and this is a guess, I would want to check this. Pretty good guess, but $147 million. If I had to guess, it's somewhere between $147.
Versus, well, again, what was the 2012 number you said?
$168.
Okay. We're still, I guess, I think in aggregate, if I had to try and strip out M&A, I think we're slightly behind in total commissions generated from where we would be, I guess, in 2007. Where do you think that sort of the missing gap is in terms of growth, and how long do you think it would take you to sort of fill in those gaps?
I know you know, Josh, that we had $188 million evaporate between 2007 and 2011. As we know, that's bigger than a lot of firms out there, most firms. In places like Florida, if it's a Florida-specific question, the first area I'd point to is every office that writes construction business. One of the reasons we try to give that nuance around construction is we kind of believe Florida is a little bit of a service-based economy, and it's a little bit of the field of dreams a little bit. It's you will build it, and they will come. As the economy slowed down, they stopped building, and therefore people stopped coming. They stopped coming, therefore they stopped building. Now we're starting to see that uptick in building.
You can have accounts that were X before in 2007, that went down to 0.3 of X, 30% of what they were, and now they could be 55% of X. Are they incrementally better? Sure. We think that they're healthier. It's going to take potentially some time for them to get back, if they get back to that number, and some of those people went out of business. Do we think about, are we behind? I think that's a matter of opinion. Are we happy that the business went down $188 million? No. Did that impact other businesses? Yes. Do we think that we're positioned well to grow with our clients as they grow in their middle market endeavors and upper middle market? Yes. Are we writing a lot of new business? Yes. Are our margins expanding? Yes.
We feel like a lot of those indicators, Josh, are all pointing towards good things as opposed to thinking, well, we're behind. Well, by the way, on a combined basis, if you took last year's revenue with Beecher, we'd be at $1.3 billion, and if you put $188 million on top, we'd be just under $1.5 billion. That's a wishful concept, we believe that we're going to continue to grow organically with our existing clients and meet their needs and write a lot of new business, which translates into good organic growth.
Is your market share today higher than it was in 2007 for the state of Florida?
I would say the answer, I don't know the answer to that. I would say incrementally, yes. We don't think about market share. We think about revenue dollars. Because we can only invest revenue dollars back into our business by hiring and retaining and rewarding top people, quality people across the entire platform, and investing in new agencies.
Well, I appreciate the coloring. Great quarter. Congratulations.
Thanks, Josh. Have a great day.
You too.
We'll take our next question from Al Copersino from Columbia Management.
Oh, hi guys. Actually, Josh asked my question, but thank you very much.
All right, Al. Have a great day.
You as well.
If you have any further questions, that'll be star one again. We have no further questions in queue. I would now like to turn it back over to Mr. Powell Brown for any closing or final remarks.
Thank you, Kyle. We'd like to thank everybody today. We are very proud of our performance in Q2. We look forward to talking to you after our Q3 performance. Hope you have a great day. Bye-bye.
This does conclude today's conference call. Thank you all for your participation.