Good morning, and welcome to the Brown & Brown, Inc. 2013 first 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 relating 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 law.
Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially in 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 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 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 statements, whether as a result of new information, future events, or otherwise. With that said, I will now turn the call over to J. Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Celia. Good morning, everyone. We're very pleased with our 10.2% organic growth in Q1. This shows the contributions of all of our divisions and that our consolidated margins expanded. It shows, we believe, a positive trend for the future. Now I'd like to turn it over to Cory for our financial report.
Thanks, Powell. We did have a very good quarter. Our net income for the first quarter 2013 was $60.1 million, and that's up 21.6% over last year. Correspondingly, our net income per share was $0.41, and that's 20.6% over the $0.34 we earned last year. If you draw a line through the change in estimated acquisition earn-out payables, which was an expense of $1.5 million versus $388 last year, we really made $0.42, and that's compared to $0.34, which is really a 23.5% increase. Very nice. From a revenue standpoint, commissions and fees for the quarter increased 12.6% to $333 million, and that's up from the $296.5 million we earned last year.
Of course, as always, in our press release, we have a table that summarizes our total growth rates and the internal growth rates from our core commissions and fees, and that excludes our profit-sharing contingent commissions as well as our guaranteed supplemental commissions, the GSCs. For the quarter, we received $25 million of profit-sharing contingent commissions, and that's approximately $818,000 more than we earned last year in the first quarter. If you look at the breakdown of that $818,000, our retail division increased their profit-sharing contingent commission by $3.7 million, and the wholesale brokerage division increased theirs by $500,000. Those are both as a result of basically better loss ratios from our insurance carriers. On top of that, the impact from the Superstorm Sandy really was not as big of an impact as we had feared.
Those increases then were offset by $3.8 million in less profit-sharing contingent commissions in our national programs division, and that's primarily due to our Proctor Financial operations. Looking at how much profit-sharing contingent commissions we're going to receive for the rest of the year, based on what we've seen so far and what we've talked to our carriers about, we think we will receive about $17 million-$20 million more of contingent commissions through the next three quarters. On an estimate of where that's going to fall out, we think that we might receive between $5 million-$6 million in the second quarter, $10 million-$11 million in the third quarter, and maybe another $2 million-$3 million in the fourth quarter.
Additionally, we did accrue in the first quarter of this year, $2.2 million of GSCs, and that's about $370,000 less than the $2.6 million that we accrued in the first quarter of 2012. Of course, this reduction is in line with the fact that several carriers that used to pay us GSCs have switched their contracts back to profit-sharing contingent commissions. That accrual base is about $2.2 million, should probably carry it forward for the next three quarters. Looking at the internal growth schedule, we did have a very nice positive internal growth rate of 10.2%. For the first quarter of 2013, our total core commissions and fees increased 14.5% to $38.8 million of net additional core commissions and fees.
Within that net number was $11.5 million of acquired revenues, that means that we had $27.3 million more commissions and fees on the same store sales basis. The most important aspect of that is that all four of our divisions had positive internal growth. Powell, we'll get into the activities of each of those business segments in a minute. Looking at our investment income, it was relatively flat relative to 2012. Our other income decreased by $4.8 million, that was due to the fact that in last year's first quarter, we had $3.1 million of gains on certain sales of books of businesses. We also had last year, $2.2 million of settlements from the enforcement of our non-piracy agreements, both those which did not reoccur this quarter.
Jumping down looking at our pre-tax margin for the first quarter of 2013, it was 29.7%, that's compared to last year's first quarter pre-tax margin, 27.4%. Our employee compensation and benefits as a percent of total revenue was 47.6%, that's a decrease from the 49.5% cost factor in the first quarter of 2012. The total dollar increase on a net basis in employee compensation and benefits was approximately $9.9 million. That's about a 6.6% increase, of which about $2.2 million of that was attributable to just new standalone acquisitions. When you exclude the impact of those standalone acquisitions, we had about $7.7 million of additional compensation, it's kind of on a semi same-store sales basis, because that does include some of the fold- in acquisitions. Of this increase, $800,000 was due to new salaries or salaries because of new producers.
$4.7 million was due to increased compensation to our commission producers as well as our staff compensation. There was a $900,000 increase due to the increased profit center bonuses and other bonuses, that includes the effects from the $1.3 million we accrued last year that was related to the 5% bonus program for our retail commission producers. We also had an additional $700,000 of additional payroll taxes because of the increased compensation. Our non-cash stock-based compensation went up slightly by approximately $103,000, that was due to a few new grants in the month of January this year. In the current quarter, our other operating expenses decreased as a percentage of total revenues by 50 basis points to 13.8%, that's down from a 14.3% ratio in the first quarter of last year. Other operating expenses increased dollar-wise, $2.9 million or 6.8%.
If you exclude the standalone acquisitions, that added about $588,000 of new cost, therefore, on the existing same-store offices, we had a net increase of expenses of about $2.4 million. This net increase related primarily to $1.2 million of additional insurance inspection and service fee expenses as a result of net new businesses that we wrote this year, this quarter. $900,000 of it was additional cost for data processing software licensing fees. There was $800,000 on just foreign currency exchanges from our London operation. Now, we did have other miscellaneous expenses that increased kind of across the board, those were effectively offset by a $1.4 million decline in our legal expenses as well as our claims and settlement reserve accounts. Now, since I've gone through the other operating expenses, if you look at the income statement, last year, we had total revenues of $302 million.
We had employee compensation and benefit costs of $149.6 million. We had non-cash stock grant compensation of $3.7 and other operating expenses of $43.4. When you deduct those from the total revenues, that gave us an EBITDA of about $105.7 million. Our EBITDA margin the first quarter of last year was 35%. That same comparable analysis in the first quarter of 2013, we ended up with an EBITDA margin of 37.4%. As we've talked in previous quarters, you can reconcile with the schedules that we give you, the reconciliation from the $302 million of total revenues last year to the $335 million this year, of which, if you look at the internal growth schedule, we had acquisitions revenues of $11.5 million. If you look at our standalone acquisitions, the average EBITDA impact of those acquisitions were about 33.9% margins.
Our contingencies, which went up a net of about $448,000, that came in roughly at about 83.5% EBITDA impact. Our investment and other income went down about $4.7 million, and that's at 100% EBITDA. If you look at our organic growth of $27.2 million, that came in at somewhere at 50% or maybe a little bit more, and our sold business was $1,991,000. Those all reconcile or those are reconciling differences to take the revenues to the current quarter of $335. When you determine the impact of the EBITDA on each one of those changes, you're left with about $7.4 million of increased EBITDA, which is basically showing that our EBITDA margin increased.
I mention that because when you get the Q, which will be filed in a few weeks, you'll be able to do that same analysis as we've talked about in each of the business segments. I want to highlight specifically, the retail division. Last year, in the first quarter, our EBITDA margin for the retail division was 34.8%. When you go through that same revenue recognition, or reconciliation, our EBITDA margin for the first quarter of 2013 went up to 35.9%. Our retail division's margins increased by 1.1% on simply an 80 basis points increase of operating profit. I think that's an important concept to keep in mind when you look at our internal growth there. Now, continuing on to our amortization and depreciation line item. In aggregate, it was up a little over $1 million, and that was basically due to new acquisitions.
Our interest expense decreased by $103,000, and that's because our average debt outstanding was down about $550,000 from last year this time. We kind of mentioned that our change in acquisition earnout payable was a debit this quarter of $1.5 million versus a credit last year in the first quarter of $388,000. The swing there is almost $1.9 million of GAAP expense charge. Our effective tax rate for 2013 is currently expected to run about 39.6%, and I think that's a good number to use in the future three quarters. Really to conclude, we ended up with our net income of $60.1 million, which was a nice increase to 21.6%, and it is the most net income that we've ever earned in any one quarter. We consider it a very good quarter and look forward to a good rest of the year.
With that overview, I'll throw it back to Powell.
Thanks, Cory. Great report. In our retail division, we were up 80 basis points versus 5.6 in Q4. In South Florida, property carriers are looking for 10% rate increases, but they're not getting it typically. On good accounts, they're getting 2%-5%, maybe 7% on accounts that have loss problems, it's more than that. GL rates and automobile rates in South Florida are flat to up 5%. Exposure units, both payrolls and sales in South Florida on average are flat to up 5%. In Central to North Florida, property rates can be down 2% to up 4% or 5%. In particular, RMS 11 continues to have an impact on properties on the spine, down the spine of the state of Florida, meaning more rate pressure. GL rates are 0%-5%, autos up 2%-6%. We're not seeing net new autos put onto schedules.
We're seeing new exchanged for old vehicles. Payrolls for workers' compensation are flat to up 5%. Carriers are obviously pushing much harder for profitability today. Some are re-underwriting their books. There's lots of underwriting questions, specifically in the toughest work comp classes, we're seeing more consent to rates. In the Southeastern U.S., excluding Florida, we're seeing property rates up 3%-8%. GL is flat. Auto and work comp are 0%-5%. Exposure units are flat to up 2% to 3% to 4% to 5%. We're seeing a lot more pressure on habitational accounts. That's both the property rate and GL, specifically thinking about two-story frame garden style apartments. Work comp carriers are removing discretionary credits. We're seeing pressure on wind deductibles in coastal areas. The coastal Carolinas are seeing more pressure on property rates in the standard market.
Texas and Oklahoma, the property and liability rates are generally up 5%-10%. Automobile is flat to up slightly. Work comp is flat to up 10%. Exposure units are flat to up 5%. In some payroll on workers' compensation, it might be up to 10%. Interestingly enough, there's some current legislation in Oklahoma that, if it passes through their legislature, it could change their work comp system. It would create an opt-out system similar to that in Texas. Texas is the only state in the country that has that option, which is an opt-out system, and we happen to write a lot of that business in Texas as well. In the Northeast, property rates upstate New York are up 0%-5%.
In New Jersey, around New York City and Long Island, property rates are up 5%-10%, and we'll come back to that more on that in a moment. GL rates, non-construction are flat. Auto is down slightly to up slightly. We're seeing, again, new exchanged for old. Work comp rates are 5%-10% up, and exposure units are typically flat. Carriers want a 5%-8% rate increase, but they're getting much lower than that. Carriers and capacity are tightening on wind in Long Island, New Jersey, and New York City. Coastal areas in New Jersey, those within several miles of the coast, meaning 5-8 miles, are seeing 2% wind deductibles, which is a change from flat deductibles. So maybe a $25,000 deductible now goes to a 2% wind deductible or something like that. Flood. Lots of changes in the flood space.
The deductibles that were, as an example, maybe $25,000, are doubling to $50,000. Some carriers in the standard market are just plain deciding that they're not going to renew the property, they're not renewing the property, and it's moving from the standard market into the E&S market. Construction GL rates in New York City continue to go up 10%+. In the Midwest, property rates are flat to up 5. GL, down slightly to up 5. Auto's flat to down, and work comp is up 5-7. Exposure units are flattish. They can be up in some instances. Carriers in the Midwest are typically looking for about a 10% rate, they're not getting it. Healthcare exposures are down in the healthcare space. Manufacturing exposures are up. Regional carriers, as I've talked about a number of times, continue to be the most aggressive in the Midwest.
On the West Coast, property, 0%-5% up. GL is 0%-5%. Auto is flat. Work comp continue to be a challenge. It's hardening up, not only in California, but in Oregon and in Arizona. The exposure units for workers' compensation and GL typically are flat as well. In Oregon, you are seeing quake limits that are getting lower, meaning they're reducing the quake limits offered and the rates are doubling. In our employee benefits businesses, small group rates are up 7%-15%, and large group rates are up 10%-12%. Exposure units, meaning number of insured lives or individuals, is typically flat to up slightly. In our wholesale business, we're up 8.8% versus 8.3%. In the binding authority, I would call it a mixed bag, meaning rates are up slightly in some accounts and down on others.
For example, good property in Florida is down slightly. Older construction, cat-exposed property is up 7%-10%. Casualty rates are class driven. Vanilla risks are flat to down. Conversely, habitational, which we talked about earlier, liquor liability, bars, and nightclubs, rates are going up. In the construction segment and binding authority, we're seeing some new projects come online, that's encouraging. On the brokerage component, these are property rates now. In coastal Texas, we're seeing rates flat to up 5, but inland, they're looking for more rate with higher deductibles on non-named wind and hail. In Florida, rates E&S are 0-3. Flood deductibles are going to specific wording. In the Carolinas, it's the softest, that always is because of the involvement of the standard market there.
In Long Island and New Jersey and New York City, in the wholesale space, we're calling it a brave new world. Lots of people are stepping back from habitational business. Increases in price of maybe 10%+ with changes in terms and conditions. Flood limits are being cut, potentially not offered by some carriers, and much higher prices on flood. In liability, GL rates are flat to up 5%. Exposures are up 5%-10%. Umbrellas are flat to up 10%. Products liability accounts and construction rates could be down as much as 5%-15%, meaning -5% to -15%. As I said earlier, nightclubs and liquor liability is tightening. Professional liability area, real estate E&O is up 5%-10%. Retentions are up on that business. Miscellaneous E&O rates are flat to down slightly. Lawyers' liability is flat to down.
D&O and EPLI on private companies, up 5%-10%. That increase is driven primarily because of the poor loss experience on employment practices claims. In the states of Florida, Texas, and California, those combined policies are up more like 15%-20% because of the experience. Public company D&O on financial institutions, primaries are down 5%. Excess is typically flat, on non-FI business, the rates are flat. In national programs, national programs performed very nicely in Q1. Arrowhead's operations were included in organic growth, along with the Automotive Aftermarket. As many of you saw, the announcement that we picked up a program from Everest Re, effective 4/1, which will contribute roughly $7 million of revenue in the next 12 months, starting next month. May. Someone will ask, what was the contribution of the Automotive Aftermarket? I would say that it's $7.2 million.
The same person that asked that question would say, "In actuality, are you down $600,000 in national programs?" I would say it's a matter of perspective. We have a program of which we moved from another carrier to Everest Re, which is the Wheels program. In that transition, there was a period of time in the first quarter where we could not write Wheels in certain states with that other carrier. We were actually down $2 million of revenue in that program. Once again, as you saw on 4/1, we picked up the program with Everest Re, which is the risk bearer on the Wheels program, which we're very excited about that partnership. In actuality, all of the other programs performed quite well.
The thing that makes those numbers not exactly look right at face value is we had a $2 million dip, $2.1 million to be exact, because of the change from one carrier to Everest Re in Q1. We anticipate that picking back up now that we have our partnership with Everest Re. From a services standpoint, we're up 62.8% versus 11%. Colonial Claims had a very busy quarter, and we thank everybody on the Colonial Claims team. They were up quarter-over-quarter, about $16.2 million in terms of revenues. The impact someone would ask in Q2 will be nominal. The 2012 Q2, we did $625,000. In 2013, our budget is $600,000. Is there a possibility that some claims could be finalized? Sure. The vast majority of the claims have been finalized, and we're down into wrap-up mode.
From an acquisition standpoint, the first quarter was slow from an acquisition standpoint, as we said, we believe it's a bit of a hangover from the end of 2012 and the tax changes that were implemented. We continue to look at a large number of transactions, we're ever vigilant about our cultural fit. We're talking to people all the time, as many of you have heard me say, some days it's a little bit like fishing. Some days the fish are biting, some days the fish are not biting, but we're always fishing. In conclusion, I'd like to make a couple of comments kind of around the horn. Here in Florida, Citizens is seemingly acting more rationally. There are rumors of rate increases on A-rated buildings. Those are buildings over $10 million in TIV on 61 or 71.
Around the country, the gap between new business and renewal business is 15%-20%. It's something that we've talked about, it continues to be a widening gap. There are carriers that would like to drive rate on their renewal book, but continue to be very aggressive on their new business book. Those that are seemingly the most aggressive around the horn would be regionals. As you've heard me talk about in the Midwest, there are a lot of very fine A-rated regional companies that we do business with that continue to be very aggressive, some of those operate in other areas of the country, some are based in other areas of the country. I would tell you that those regionals can be very aggressive.
As I said earlier, acquisitions were slow in Q1 across the industry, not only just at Brown & Brown, as I like to say, when asked about our inventory, it's good. I'd end by saying we are seeing some or one, in particular, large carrier that are selectively picking off and writing cat property accounts around the country, but they have to be very specific. That's kind of a potpourri of comments. Now, Celia, I'd like to turn it back to you to open it up for questions.
Yes, thank you. If you would like to ask a question, please signal by pressing star one. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one for questions. We'll go first to Michael Nannizzi with Goldman Sachs.
Thank you very much. Powell, just one question on growth. I think you mentioned kind of tough comps in the first quarter in terms of retail organic. Just trying to get an idea of what led to that, and was there anything as opposed to Q1 2012 and Q1 2013, whether it's lumpiness or anything like that caused the comps to be different? We'll start there. Thanks.
Perfect. Michael, good morning.
Good morning.
I would tell you just by background, last year, 2012, our organic growth in retail was 1.6%. We believe starting in Q3, the trend is moving up. We operate in a band kind of in all of our businesses, but we're specifically talking about retail. In the first quarter of this year, there were several non-recurring revenue items that were, I'm specifically talking about life insurance. We are not a huge life insurance writer, although we do write some chunky life insurance business on occasion around the horn, and we have several offices, three or four, that specialize in it. I'm saying, as a general statement across the system, we don't write a ton of it. We identified at least $1.1 million worth of non-recurring life revenue in Q1 this year versus last year.
I'd also say that the EBITDA margin, as Cory talked about, is up 1.1%, which we're very pleased about. Michael, what you may have heard me say in the past is that we believe the retail business is a low to mid-single-digit organic growth engine with a normal operating economy. We've always said that we are a proxy for the middle market economy, which is the distinction over the overall economy. As we continue to see that improve, we think that will improve our prospects for internal growth in retail. I would also tell you that we believe that our budget, plainly, not we believe. Our budget shows that our internal growth for retail should improve each quarter throughout the year.
Great. Thank you for that. I guess, on the margin side, just trying to understand, so if with organic, you mentioned the point that margins were higher even though, actually, margin improvement and basis points was better than top line organic growth. Just trying to understand, what are the levers that you're able to pull in order to accomplish that? How much better can margins get from here with that sort of low mid-single-digit organic increase? I'm just trying to get an understanding on the operating side. Yeah.
We understand. As you know, we have always been a relatively efficient operation as compared to our other publicly held peers. There's never been an area where there's been high amounts of efficiencies or globs of fat that you can just cut out. Our efficiency comes from the fact that each one of our offices is decentralized, and they look at what they can do better each year. In our case, with the retail specifically, the leverage, we already have an efficient operation. So when a dollar of new revenue comes in, simply because the expose units go up or the rates go up and create that new dollar, you've heard us say that we don't have to buy another piece of paper or pencil. We do have to pay 20% to our producer if it's a renewal dollar that comes in.
We may have to pay another 12% of bonuses to the profit center, and there may be $0.04 or $0.05 of extra frictional cost. So essentially, on that $1, it may be $0.40 on that first incremental dollar. Now, over the last three or four years, where we've had negative internal growth, all our offices all had to become more efficient. When somebody may have retired or left, they maybe didn't replace that person. Now, at some point in the future, when things look better, each office will decide independently whether or not they need to hire that next person. So that incremental dollar improvement, where I show you the 60%, is not going to continue on for every dollar in the future. At some point, there will be a stepped up approach.
Right now, that incremental 60% is falling to the bottom line on our retail division. I think you can see it in the numbers this quarter when we only had an 80 basis points internal growth and you had a 1.1% growth. It happens naturally, and I don't want to be cute about it, but I tell you that does show the beauty and the efficiency of a decentralized organization. The fact that the people that we have on our retail division specifically are just outstanding leaders and outstanding people. I think that's the most important concept of view when you're looking at our company, and it is a company that's built to last, and we continue to try to improve every quarter, and I think that margins are showing that this particular quarter. I hope that answers your question.
Great. Thank you. Just one. Is retention improving? Are you seeing just with the environment and kind of low mid-single digit rate increases, are you seeing your ability to hang on to accounts longer? So retention helping to support organic a bit more, is that starting to come through or are you not seeing that?
Our retention rates are historical norms. I would tell you that I had several conversations over the last week with leaders of our businesses about those that we saw for a period of time, a number of businesses go out of business. What we're seeing now, we're not seeing as many go out of business, but in certain areas of the country, those that have been weakened by the economy, we're seeing those that are, they may have more incentive to merge or be sold because they've been sort of, I hate to say this, but they've been wounded. It's been a tough go. We're seeing a little of that, but generally speaking, our retention levels are at the historical norms.
Great. Thank you very much.
We'll go next to Sarah DeWitt with Barclays.
Hi, good morning.
Good morning.
When I look at the 10% organic growth in the quarter, how much of that was from the flood-related claims related to Sandy? I think last quarter you had predicted it would be about two and a half points, and I want to see where that ultimately shook out. What about the Arrowhead acquisition as well? How much did that contribute?
Sarah, out of the total internal growth dollars that we had, we ended up at $27.3 million for the quarter. $16.2 of that came directly from Colonial Claims. Okay?
Okay.
From the national programs, we had a total internal growth dollars of $6.6 million. Of that, as Powell had mentioned to you, the Automotive Aftermarket was about $7.4. Arrowhead, we don't break out. Arrowhead is now just clumped in, so we don't talk about Arrowhead in total. The various components of Arrowhead, the vast majority of the programs had positive internal growth, but that was offset by that $2.1 million drop in the Wheels program. In addition, all the other Arrowhead programs grew nicely in their own right. We had one Arrowhead program that was off by $187,000.
The other programs within national programs that had a slight decline is that Proctor Financial was down about $636,000 over last year, and that was primarily due to the fact that the lender- place ratios are going down, because as foreclosed properties are kind of working through the system, there are less policies being put into the lender- place pot. That is the cause of most of that decline. The good thing at Proctor is that they've got a lot of very good new business activity going and, of course, they've not lost any of their clients. Over the next 12-month period, we believe that Proctor will continue to grow nicely. The other programs are all doing pretty well. It was just the Wheels program that had the only negative in national programs.
Okay. I guess what I'm trying to get at is how should we think about what normalized organic growth was this quarter?
If you look at the internal growth rate and you take out the Automotive Aftermarket, which to me is a brand new account and will continue, but if you take that out and if you take out Colonial Claims, which for the most part, unless there's another large claim, will be kind of back to flat normal, but if you exclude those two, our consolidated internal growth rate was about 1.4%.
For the total company?
For the total company.
Automotive Aftermarket is an ongoing business.
Yeah. If you leave in the Automotive Aftermarket, we basically had a 4.2% internal growth on a consolidated basis.
Okay.
You can figure the numbers out yourself by just deducting the 16.2 or the 7.4, whatever number you want to look at.
Okay, great. Thank you for the color.
Okay.
We'll go next to Greg Locraft with Morgan Stanley.
Hi, good morning. Thanks. On the claims, the $16 million you got from that, which you guys had called out last quarter, it came through even better this quarter, how should we think about the profitability of those? Did that all just fall right through?
That did have a very high profitability, I'd say it's in excess of 65% margins on that business, on that internal growth, $16.2 million growth.
Okay, great. Then you just answered the question. There's nothing recurring from that, we should be just pulling out that extra $16 with the margins just sort out of the model going forward. We're back to kind of a normal services business here.
That is true up until the next major claim, catastrophe.
Got it. Okay, great. Then back to, I think, the first question, just on the retail segment, the organic there, I think you'd mentioned it's going to sort of sequentially improve from this lower base. One thing I'm wrestling with is just the 5% bonus plan, I think, ended in the fourth quarter, is not going to recur. That obviously led to better organics in the fourth quarter and last year. I guess this is really a question, did it lead to better organics, or did they pull forward? Did your guys pull forward their books into the fourth quarter that led to this lower organic in the first? Then I'm just trying to get confidence on that sequential from this lower level for the rest of the year. Any further clarity there would be helpful because that's really what surprised us.
Yeah, there's nothing, Greg, that we're aware of that would indicate people were pulling or, in your term, pulling things through from one quarter to another. We're not aware of anything like that. I would just tell you that
I said earlier, we had a million, one of non-recurring life revenue at a minimum. This is the first quarter, as Cory said, the comp is against the better comp from last year. Like I said, we believe that the trend is moving north overall. That's the most important thing, that we're operating in a band or a range that is continuing to move up.
We think the economy is, which is in the middle market, which we're very tied to. Even though we believe the band is moving north, it's moving north at a slow but steady pace. Last year, as Powell mentioned, we had internal growth in our retail division of 1.6%. For the whole year, we see no reason why we're not going to do better than that. It's just going to be a much slower and steady process. The middle market companies, we believe, are still somewhat in a bunker mentality, but they have cut back and are operating much more efficiently. Until they see much greater signs of a significant increase in revenues, we just don't believe they're adding a lot of people confidently. That's why the exposure units are flat to up a little bit, but it's a steady, nice growth.
Over the long term, maybe that's better for the overall economy because it'll be more sustainable, as well as the rate. We're positive about it. It's improving, and we think it will continue.
Okay, great. Again, it was actually a very good quarter at the highest level, so I didn't mean to sit in the negative. Congrats on a good start to the year. Thanks.
Thanks. You.
We'll go next to Mark Hughes with SunTrust.
Thank you. Good morning.
Morning.
The Colonial business, how should we think about that in terms of capabilities? If any disasters or catastrophes happen nationally, is Colonial positioned to provide service in those instances?
Let me clarify, Mark. Think flood. Okay?
Okay.
FEMA claims. Flood claims. That could be around a wind event. It could be around a river going over the flood or the levees. It could be anything of the above. They do have certain other capabilities in specialized emergency claims, but focus on flood. It is a flood specialty adjusting business.
Now don't forget the fact that the first nine months of last year was some of the driest periods in U.S. history. Is last year the norm? I'm not sure it is. Right now, there are certain rivers that as the snow starts to melt, some rivers are starting to get up to the flood stage. Is last year a norm? I'm not sure. You just have to watch for the catastrophes. When that happens, Colonial Claims will increase their revenues.
Right. Powell, you had mentioned a brave new world in terms of the wholesale in, I think, New England. Is that fully reflected, would you say, in your wholesale organic growth numbers? They've been sustained at a pretty healthy rate here, high single digits. Should we see that hold steady, get a little better? What do you think?
I actually think first and foremost that I got to give kudos to the wholesale team. I think they're doing a great job, particularly in some difficult markets. As an example, I know of several accounts that last year were written with one carrier in the Northeast, and this year, in order to get wind or flood, they got to ride it with five or seven carriers, and there might be only five or seven carriers that are capable of doing it. I think that to answer your question succinctly, I think that it is indicative of what's going on in the Northeast. I would say that I think it's going to take a little while for it to really pan itself out because I think a lot of carriers, they were trying to figure it out in Q4.
They've started figuring it out and implementing whatever their strategy is in Q1. Then the question is, will they stick with that strategy? As we like to say, sometimes the best laid plans of mice and men are not fully executed or continued. So it might occur, and it might not continue to occur. We think it will continue to occur, though, in the Northeast, and I think they're going to operate in a similar level. I think it's indicated in those numbers, Mark.
Thank you.
We'll go next to Josh Shanker with Deutsche Bank.
Thank you, everyone. Good morning. I was wondering, if I was a customer of Arrowhead Wheel this quarter, what happened to me and what's going to happen to me next year?
Well, if you were a customer, let's say, of Arrowhead Wheels, and you happen to be located in a state called Michigan, then there was a possibility if you were renewing over the last two months or so that we might not have been able to give You, not us, because we're distributing it through retail agents. Remember, we are the provider of the product. We are not the retail agent on the Wheels program. There's a retailer that you're dealing with, let's say in Michigan, and he or she would have had to provide you with another market to get coverage for you. Having said that, now we're able to write business again in Michigan. It might be slightly differently, but that's basically where the biggest change was in this period where it went down in Q1.
Will you have any success in getting those customers back next year?
That depends. It's possible, in that space obviously people buy for price, and they buy for coverage. It depends on if our new product is competitively priced and has the appropriate coverage. We believe it is. We do believe that it's an opportunity to get it back, but it may not come all back at once.
Okay. Given the product looks a little different, would you expect any issues with growth for the remainder of the year, as in, say, negative growth associated with the program now being offered through Everest Re?
We're not aware of any.
No, we think with the new Everest program, that Wheels program will have a net growth for the rest of the year.
Okay, very good.
As opposed to the $2.8 million down.
Yeah.
Acquisition pipeline, how long do you expect the 2012 tax hike hangover to last, and do you have any thoughts on that?
Sure. Josh, as you know, different people sell their businesses for different reasons and have different timetables. Our ability to project when people want to sell their business, that's kind of a shot in the dark. I'll tell you that there were businesses that we talked to at the end of last year that decided not to sell, that we are continuing to have conversations with. Does that mean they might do something this year? It's possible, but I don't know. I would tell you there are new organizations that we weren't talking with last year, that we started talking with this year that, could we do something with? Sure. It's hard to speculate, Josh, on timing. I think the most important thing that you know is that our inventory is good, and we continue to talk with lots of people.
That's one of the hardest things, I think, for you to model, because it's not linear. Particularly as it's a larger base, it looks lumpier. Like I said, we are always talking with people. We are proactive in our approach, and we are looking to invest in high-quality people who run high-quality businesses. We will complete transactions in the future when they're ready. Fortunately for us, we have the balance sheet to invest in that.
Josh, and you've heard me say this before, from an investor standpoint, I think one of the most important things to understand is that I believe that Brown & Brown has the best infrastructure in place to where we have the most people talking to other independent agents around the country, telling the Brown & Brown story and getting them interested and attracted to our model. With that said, as Powell kind of alluded to, it does come in lumpy. If we wanted to, we could have done $100 million of additional revenues on acquisitions last year if we wanted to. We are very disciplined in who we attract, and it has to be a cultural fit, as Powell said. Again, we could add a lot more, but it's easy to make acquisitions.
For the shareholders, it's better to have the right acquisitions, and that's what we hold out for. They are lumpy. The fact that we didn't do much does not mean that the process is not working exactly the way it will. Each one of these acquisitions will ultimately sell, and it's a matter of time, and we're going to always get our fair share of them.
Well understood. Thank you very much.
We'll go next to Adam Klauber with William Blair.
Thanks. Good morning. In the Retail division, I guess, what's the trend on audit premiums and I know you don't forecast, just any thoughts throughout the rest of the year on audit premiums?
Yeah. Adam, what I would say is audit premiums seem to be turning positive. Remember, you've heard me talk about and us talk about it in two ways. One, we're starting to see more audit premiums. That's a positive. Two, we've talked about the potential for a delay in clients who are renewing their business that have come down several years in a row, three, four years in a row, might be less apt to anticipate a growth in their exposure unit, even though they have a very high likelihood of achieving those numbers.
What I mean by that is if you were a manufacturer of widgets and you were $20 million in sales three years ago, and $20 million came to $15 million, which came to $13 million, and then you did $12 million last year, and you have an order that's confirmed that would get you to at least $15 million this coming year. I think many of our clients and prospects are continuing to talk with their insurance, cover their insurance at $12 million, and then accrue for that additional expense in 14 months after the audit's done, rather than go ahead and pay for it sequentially over the next 12. We would say it's a positive, but it's a slight positive right now as opposed to in a normal operating environment.
If you look at the risk-bearing community and you ask them what is the impact in a normal operating environment of additional premiums, I've been led to believe it is 2%-4% impact on total written premium in a quarter. I don't know what it is on some of the larger carriers right now, but I think that it's turning positive, and that's reflected in what we're seeing.
Thanks. That's helpful. Also, on the benefit business, what was the organic for the quarter? Is there any more pressure on commissions for small accounts, or is that pretty much done?
Yeah. First of all, we don't break out the organic on benefits only. I would tell you that it depends on the state. As you know, many of the states in small group have gone to a per head, per month. The only way we get additional commissions would be you have to add belly buttons. That's their terminology, not mine. Insured lives on the plan to get additional commissions. There are certain states, though, that are still on commission, and those that are on commission seem to still be paying commission on the increased premiums. What I'm trying to tell you is, I think right now it's neutral. We're not aware of anything that is dramatically forcing down commissions on small group at the present time.
Obviously, we're watching and preparing and watching with great interest the introduction of exchanges, and not only how we're prepared for it and what we can offer our customers and prospects, but what the states are going to provide and how viable are those options.
Okay, one last question. You've done two pretty nice deals with Zurich and Everest Re in the last, say, six months or so. Very interesting deals where it seems like you're essentially taking over distribution from the carriers, which isn't their core business. Would you say those are more aberrations, or can you see more of those deals in the future?
Well, I would say, number 1, I wasn't really aware of a deal like that before we did the transaction with our partners at the Zurich. I want you to also know that the partnership with both of those two carriers, the partnerships are very good. I don't know if it will lead to additional opportunities. My instinct would be that we understand and have a platform. We understand how to operate distribution, and we have the platform and the technology to do it. It's an interesting alternative. I'm not saying it's the only solution, but it's an interesting alternative for some of our risk-bearing partners to potentially operate their business more efficiently. Long-winded in saying, I don't know. We're very pleased with the opportunity with Zurich and Everest.
It's not as though we won't be asking, but I would continue to operate in a mode that those were sort of one-time opportunities, and then if we see more, that's great, as opposed to thinking you can put something into a model and pop it in. I don't think that would be fair.
Okay. That's helpful. Thank you very much.
We'll go next to Ray Iardella with Macquarie.
Thanks, and good morning. I just want to maybe touch, Cory, on the number you threw out for the retail margins, 110 basis points. Can you quantify what improvement was due to the ending of the bonus program versus sort of underlying margin expansion?
Well, the amount that we accrued last year in the first quarter for the 5% bonus program was $1.3 million. Okay?
Okay.
As I explained that if you take all the bonuses, the profit center bonuses, as well as the other bonus we accrued, it only went up by $900,000 over last year. Basically, it's a little bit of a trade-off, is that, yeah, we didn't accrue for the $1.3, but because many of our offices were more profitable, the profit center bonuses went up. The net change was roughly $900,000.
Okay. That's helpful. Then maybe just sort of going back to the M&A question, and I know it's lumpy and maybe a hangover from year-end, but if you guys didn't close any more deals, how much sort of acquired revenues can we expect, I guess, for the rest of the year?
Well, remember, Ray, I appreciate your question, but we don't budget acquisitions, nor do we give guidance on acquisitions. It would be purely speculative, and we don't do that. What I would say is this, we continue to look and talk with people all the time. We feel good about our ability to finance those transactions in the future. We feel good about our balance sheet and our existing operations, and we think that's good.
Ray, though, if you're talking about the acquisitions that we already have closed on and are part from last year, what will fall through without any new acquisitions through the internal growth schedule, basically we've got about $7.1 million of acquired revenues that will come through in the second quarter. We'll have about $5.7 million that will flow through in the third quarter, and about $3.2 million that will flow through in the fourth quarter.
Got it. That's kind of the number I was looking for, so I appreciate that. The other question, I guess, in terms of the employee benefits business, Powell, I know you've talked about the state exchanges. Maybe can you quantify, A, sort of the revenue you guys have to the small life medical side, and then, B, sort of how Brown & Brown will sort of work together with the exchanges going forward or any updates you can give there?
Okay. Last year, Ray, we did $225 million worth of employee benefits revenue. Of that, one-third of that revenue was ancillary products. That would be group disability, group life, group vision, group dental. Two-thirds of that revenue is health related. Of that health related, just under half is under 50 lives. Okay, just call it less than one-third, just slightly less than one-third of the total revenue. Okay? In different states, as you know, there are several options that can occur. Number one, an exchange can be up and running in a state and backed by the state. That's option number one. Option number two is if they decide not to or they're not in compliance by 2014, then allegedly the government, U.S. government, is supposed to provide an exchange until they can get theirs up and running.
It's ultimately going to be the potato they're going to give back to the state to operate. That's number two. Number three, as it relates to us, we have a group-based customized private label exchange at Brown & Brown. In addition to any of those other state exchanges, any of that other stuff, we have our own that we can bring to our customer or our prospect. The key is there's going to be lots of calculations on should I join an exchange? Should I give health insurance? A group plan. There's lots of speculation about the cost, which is obviously something that we haven't heard a lot about in the news for these plans.
I believe you're also going to see a lot of pressure on individual health rates, of which we don't write a lot of individual health ourselves, but I'm just saying as a broad statement, which will create a fervor in Washington when it starts happening by the end of this year. Somewhere in the August, September, October time period, individuals that are insured individual health plans are going to start receiving letters, which is going to show them what their projected cost is going forward, and it's going to be a lot more than it is right now. There's going to become, I believe, there's going to be a lot of political uproar around that. I'm not saying it's changing the exchanges. That's not the implication. I'm just saying you need to be aware of that out there.
We feel good about what we can provide for our customers and our prospects, and we operate simply how do we give our customers not only the knowledge that they need to make the right decision, but to give them choices or solutions in this complex situation.
Okay. That's helpful, and thanks for the answer. One other quick one if I can squeeze it in for Cory. In terms of the contingents up year-over-year, I think you had mentioned sort of throughout last year that a couple other carriers had switched from Guaranteed Supplementals towards contingents. Did that have a positive impact on contingents in the quarter?
There was a little bit of that, but it wasn't a significant amount that made the net increase.
Okay. That's helpful. Thanks again.
We'll go next to Meyer Shields with KBW.
Pardon me. Thanks. Good morning, everyone.
Morning.
I need to clarify something because I can't read my notes. Powell, was the $1.1 million in life revenues, was that first quarter 2012 or first quarter 2013 issue?
'12.
Okay. That impeded organic growth this year.
We didn't have it recurring in 2013.
Okay, good. That's what I thought. I think you talked a little bit about how you don't see any signs of employees kind of gaining last year's 5% bonus, but is there any concern that maybe the entire program should be re-implemented, or is there any connection between the discontinuation of the program and the slowing retail growth?
Well, we don't believe so, Meyer. What we've said is we are all about driving growth and profitable growth. I've said that it's not our intent to continue that, and we're not continuing that plan. If we decide to do something in the future that would be over a number of years or period, that would reward performance, that's something that's up for discussion. No, we don't think that the perception or what you're saying is real, that since there's not this kicker, that we haven't grown as much. No, we don't believe that to be the case.
Okay. Fantastic. I'm all set. Thanks a lot.
Thanks, Meyer.
We'll go next to Brett Huff with Stephens Inc..
Good morning, Cory and Powell.
Morning, Brett.
Just a couple quick questions. Did you guys tell us how much annualized revenue you bought this quarter? Did you give us that number?
No. There were no acquisitions this quarter.
Okay. I wasn't sure if there was even a small one that we hadn't heard about. Okay. That was one question. The second is, I just want to make sure that I get how the organic growth is going to flow through the year, at least from right now. I think you said, including the auto, but X the flood, you're at 4.2% organic growth. Is that the right number?
For the first quarter, yeah.
For one Q, right?
Yeah.
Going forward, we're going to get, I think you said, $7 million for the next three quarters from Everest. Is that the right understanding?
Next year.
Next year.
12 months.
Over the next year, okay.
Everest doesn't kick in until next month.
Okay. That's helpful. We know the flood more or less goes away because it seems like basically it all happened in one quarter. We have what we think is.
Brett, on that one, it's a normal operation. It's not a one-time, it's a continuing operation. We're comparing ourselves to the first nine months of last year, which like I said, was one of the driest. To say that it's not reoccurring, granted, it's tied to catastrophes. Unfortunately, the world we live in, there's always that. I don't want you to discount Colonial Claims because they've got a great operation, and they're going to continue to contribute a lot to our organization.
Sure. Okay. I was just trying to think relative to the very large $16 million benefit this past quarter.
Right. Okay.
Okay. The last question is, the $2 million in wheels, it was a carrier transition switch problem. Do we expect that to levelize to normal levels, i.e., should the $2 million run rate be now included in 2Q?
Well, now that Everest Re will be able to start writing some of that business in some of the states that the old carrier would not write in, it will, we believe, greatly diminish. On top of that, the new policy that we will renew that came with the Everest program, which is part of that $7 million payout, that's going to overshadow it. Overall, the Wheels program, we believe, will have a net positive for the rest of the year.
Okay. On the life issue that I think Meyer just asked about, Powell, I just want to make sure I get this. Can you just explain that again? Should that $1 or $1.1 million, again, come back sequentially, in Q2, Q3, and Q4, or how should we think about the life-
When we talk about that $1.1 million, think of it this way. There were large life cases that were placed in Q1 of 2012. Those are one time only in nature.
Okay.
They did not reoccur in 2013, they will not reoccur in the future. However, we will sell life in the future.
Right.
Particularly through those entities that have specialized life departments. Specifically, we have one office as an example that had half a million dollars of that, and they write big life cases like every other year.
Right.
Not every year. They're up and they're down, and they're up and they're down. When you put it all together, it does have an impact. It did in this particular quarter.
Yeah. That's why we highlight it, because when you're dealing with just $1.1 million of net organic growth, we don't really think of life cases having a big fluctuation quarter-over-quarter. Because you take another $1 million, all of a sudden, the internal growth is more like 1.6%, 2%, had it not been just the way it fell. We're going to write more life cases, but it's going to come in at some unpredictable times.
Okay.
That's the only reason why we highlighted it.
Great. That's what I needed. Thanks, guys.
See you, Brett.
We'll go next to Al Corcino with Columbia Management.
Thanks so much for taking my question. I appreciate it. I had a general question. Powell, I'm not sure that you can look into a crystal ball and give us the answer, but I'm very curious what you're hearing from small business owners. There's that portion of the Affordable Care Act, which makes your 50th employee a very expensive employee on a marginal basis as far as healthcare benefits or a penalty goes. I'm just curious what you're hearing from small business owners people with 40 to 60 employees, what they're thinking about that in terms of their own business planning. I'm not referring to employee benefits, I'm referring to the exposure units you expect to see from your clients on a P&C basis.
Yeah. I think that right now, Al, my comment would be cautious to cautiously optimistic. I think what a lot of those people, and this is not just that group that you're talking about of clients or prospects, but I think it's a large number of people. They are trying to grow their businesses without adding new people or making major capital expenditures. The reason they are is there continues to be a bit of a hesitancy about how the economy's doing. It's one thing, as you know, to read in The Wall Street Journal that the stock market's doing well and blah, blah. If you're in Little Rock, Arkansas, or you're in Brooksville, Florida, in a smaller community, smaller than Little Rock, but someplace, and you talk to business owners, I can tell you they're still cautious.
Now, Al, there is a perception that with Obamacare, that a lot of small businesses are just going to say, "Look, I'm going to cut everybody loose and tell them to go down to the post office and get into the public exchanges and fend for yourself." Our gut reaction is, these employees and the employers, they know their employees very well. It's a close-knit family, and they're not going to have this wholesale cut-them-loose kind of theory. We believe that most of them are going to say, "Look, I know we had a plan, and Brown & Brown is our agent. They have a private exchange.
We're going to have them come, and we're going to have them talk to you and enroll you." It's going to be a much more logical progression as opposed to just this wholesale, just cut everybody loose and let them fend for themselves.
One thing also, Al, to add on that is we've always said there are three things you can say with certainty in an uncertain health environment. Number 1, health insurance is expensive. Number 2, it's utilized. Number 3, it's complex. If you add those three things together, we believe that there will be a place for a distributor or a partner like us. Whether you call us an insurance agent, broker, healthcare consultant, or something other, this is a complex issue that we're going to have to work and help walk our clients and prospects through. Where there is great uncertainty for the prepared organizations, there's great opportunity.
That's very helpful, guys. Thanks so much.
Absolutely. Have a nice day, Al.
You, too.
We'll go next to Elise Greenspan with Wells Fargo.
Taking the question. Most of my questions have been answered, but just quickly on the Automotive Aftermarket program, I know you guys had pointed out in the past that that was just a lower margin than some of the other businesses. I just wanted to find out how that's tracking versus expectations, and just in terms of trying to get a feel for the margin improvement overall going forward.
Sure. Elise, if you remember, we said that in the Automotive Aftermarket, that program would run approximately 10% margin for the first 24 months. Then we believe that it would not only improve because of the growth in the program, which Zurich has expressed wanting to double it in five years, but just lots of other things which we think are positive for that organization and that operation. I would tell you that the margin is tracking in line with expectations. We're pleased with that. We think there are some good opportunities for growth, as we've said. I would say it is performing as expected.
You would say that just both in terms of revenue and on the margin front?
That's correct.
In terms of just-
Yes.
Okay. Then also just, is there anything, I know we saw the life business in terms of impacting the organic number in the first quarter year-over-year. Is there any non-recurring revenue that we should maybe look for in the Q2 or any of the out quarters this year to kind of impact the organic real trends, maybe in the retail segment?
The short answer, Elise, is I'm not aware of it, but I don't want you to say that. That's obviously on my list after we get through Q1 and the earnings call. I don't know the answer to that, but I don't believe so.
Okay. Well, thanks for the answers.
Yeah, have a nice day.
We'll go next to Ron Bobman with Capital Returns.
Hi. Good morning, gentlemen. I had a quick question. Powell, in Florida homeowners in particular, what's the trend with respect to, there's been a fair number of takeout the last, I don't know, 12 or 24 months. I'm wondering, what's the trend with these policies making their way back into Citizens or not making their way back into Citizens? Sort of, is the normal historical flowback changed at all of late? Thanks.
Right. Ron, I think what I would tell you.
We're going with Ron today, Powell.
Sorry, Ron. Sorry. Sorry. Apologize. This number might be a little dated, but I believe there's somewhere around 62 or 63 takeout companies in the state of Florida. As you know, in order to form a takeout company in years past, all you had to do is have $5 million of surplus, and it didn't actually have to be in cash. It could be pledges from people. That was moved to $15 million. All of the takeout companies have different philosophies in purchasing reinsurance. There are certain minimum requirements in purchasing that reinsurance from the state, but different companies have different views on it. I could make the argument that in the early going in some of those companies, if they take policies out, it is on a temporary basis.
In the event there would be a storm early in their evolution, there would be probably a high likelihood that those policies would end up, or some of those policies would end up going back to Citizens. That's one side of the argument. The second side of the argument is that, here in the state, there is a feel driven, quite honestly, by our governor to try to depopulate Citizens. Stem the tide of business rolling into it, meaning specifically homeowners, but as well as commercial residential properties, and get it into the private marketplace. We're starting to see more of that in the commercial side, which I talked about the rational behavior. On the personal line side, it's an issue of cost. The answer is they are still very competitive relative to the options that individuals have.
It's not the only option, but it is an option. What I think you're going to see, Ron, I apologize on that, is, I think you're going to see over the next year or two, barring a major wind event in Florida, continued rate pressure upward on Citizens, which is going to move it closer to what you and I and others would call a market of last resort, which would push it in, push that coverage back and encourage it to stay in the private market. Long-winded answer of saying, I think it's kind of a neutral right now.
Ron-
Thanks, Paul
just to add, Ron, just to add to what Paul just said, there clearly is a focus on continuing the depopulation of Citizens. One of the bills that is currently in the legislature that people have told us that we think has a very good chance of passing this time is setting up a independent clearinghouse on a go-forward basis to where before a policy can be accepted by Citizens, it will have to go through this clearinghouse. If there is any carriers that is willing to write that risk, which includes a takeout, it has to go to those takeouts. That will again create a barrier for things just to be dropped into Citizens. I think if it does get passed, it will further the depopulation of it.
Thanks, Cory.
Cory. Cory.
That's good.
Come on, you did that just to get back at us.
That's good
didn't you?
Sorry.
We have no further questions at this time.
Okay, Celia, thank you very much, and we wish everybody a great day and look forward to talking to you next quarter. Thank you very much.
That concludes today's conference. We thank you for your participation.