Morning, welcome to the Brown & Brown, Inc. Earnings Conference Call. Today's conference 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 financial performance. 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 statement made. As a result, a number of factors, including those risks and uncertainties that have been or will be identified from time to time in the company's report 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. With that said, I will now turn the call over to Hyatt Brown.
Thank you very much, Nicole, welcome everyone to our first quarter earnings call. I'll now turn it over to Cory for the financials.
Thanks, Hyatt. Our net income for the first quarter of 2012 was $49.4 million, and that was up 6.8% over last year's first quarter. Correspondingly, our net income per share for the quarter was $0.34. That's a 6.3% increase over the $0.32 that we earned in the first quarter of 2011. From the revenue standpoint, commissions and fees for the quarter increased 13.4% to $296.5 million. That's up from the $261.5 million we were in last year's first quarter. Included in our press release is our normal table that summarizes our total growth rates and internal growth rates from our core commissions and fees, which excludes the profit-sharing contingent commissions and now excludes the guaranteed supplemental commissions, GSCs, as we'll discuss in a minute.
We received $24.2 million of profit-sharing contingent commissions, which represents a net decrease of approximately $4.7 million from the $28.9 million we received last year in the first quarter. Of this $4.7 million net decrease, roughly half of it was attributable to lower profit-sharing contingent commissions in the retail division and the other half, approximately from the program division that was really relating primarily to Proctor Financial and our public entity operation with lower profit-sharing. Our best estimates of how much profit-sharing contingent commissions we will receive for the remaining part of 2012, and this is based on just what we received this quarter plus our discussion with the various carriers, is that we think we may receive between $14 million and $17 million through the second through the fourth quarters. We think that for the second quarter, we'll receive somewhere between $2 million and $3 million.
In the third quarter, we should be around $10 million to $11 million, and the fourth quarter, we could get somewhere between $2 million and $3 million. Additionally, we did accrue $2.6 million of guaranteed supplemental commissions, GSCs, in the first quarter of 2012. That is $712,000 less than the $3.3 million that we accrued in the first quarter of 2011. This reduction is due to the fact that of the five carriers that pay us GSCs in lieu of a profit-sharing contingent commissions, two of them have reverted back to their profit-sharing contingent commission contracts beginning this year in 2012. The cash from the GSC contracts that we accrue during the year is still received at approximately the same time period that we receive the profit-sharing contingent commission, which for these commissions would be in the first half of 2013.
There is no substantial change in the timing of the actual cash flows from the two programs. As you know, Brown & Brown would much rather have the standard profit-sharing contingent commission arrangement, since we believe that it more appropriately aligns the interest of the clients, the insurance carrier, and us as the insurance agent in enhancing the safety and loss control systems. We believe the remaining carriers will eventually move back to the profit-sharing contingent commission arrangements over the next few years, we will begin to treat the GSC similar to the profit-sharing contingent commissions with respect, excluding them from our internal growth rate calculation and just including them in the reconciliation below. You'll see with complete transparency the actual numbers of both the contingents and the GSCs each quarter. Looking at the internal growth schedule, we had a positive internal growth rate of 0.9%.
For the first quarter of 2012, our core commissions and fees increased 19.3%, and that is $43.6 million of net additional core commissions and fees. Within that net number, we had $41.5 million of acquired revenues. That means that we had $2.1 million more commissions and fee revenues on a same-source sales basis. We had a positive internal growth in three of our four divisions, the wholesale brokers division, the national programs, and the services division. Our national program division had the best negative internal growth rate they've had in many, many quarters, and that was only a negative $1 million or negative 0.7%. Hyatt will talk about the activities in each of these segments in a minute. Looking at our investment income, it decreased slightly by $100,000, mainly just due to, again, the low rate environment.
The other income increased by $5.3 million, that was mainly due to aggregate gains of about $3.1 million from the sales of certain books of businesses. We also did have a $2.2 million settlement from an enforcement of our non-piracy agreements. Our pre-tax margins for the first quarter of 2012 was 27.4%, that's compared to our last year's first quarter pre-tax margins of 29.2%. That's a 1.8 percentage point differential. 1.2 of that percentage point came from employee compensation benefits, to where the compensation benefits line item as a percentage of total revenues was 49.5%. That was an increase from the 48.3% cost factor from last year. The total dollar increase on a net basis in the employee compensation benefits was approximately $23 million, that was an 18.2% increase.
Of that $23 million, $20.4 million was attributable to just new standalone acquisitions since last year. Therefore, excluding the impact of these standalone acquisitions, we had $2.6 million of additional compensation on a semi-same store of sales basis because the fold-ins are still included in that number. Breaking down where that $2.6 million was, we had essentially about $2.9 million of additional cost. The largest portion of that was $1.3 million, that was due to a special one-time program that we will pay our retail commissioned producers an extra 5% of their book production that they had at the end for the year of 2011, if they can grow that book production during 2012 by at least 5%.
If they grow it by more than 5%, then they'll get a 5% commission paid at a one-time basis in the first quarter of 2013 based on their 2011 book. For the first quarter, that amounted to an additional compensation expense of $1.3 million. Additionally, we had $600,000 of new salaries for new producers that we brought into the system. We also had about a half a million dollars of an increased cost on our group health insurance cost and another $500,000 in just related additional payroll taxes. The four of these additional compensation benefit costs added about 100 basis points to our ratio of total compensation expense as a percentage of total revenues. Another item that added an additional 30 basis points to our ratio of compensation benefits to total revenues was our November 2011 acquisition of ICG.
ICG is a property tax payment tracking and processing company that we acquired in order to assist Proctor Financial in handling the larger banks and mortgage servicers relating to lender-placed insurance marketplace. The accounting treatment required by the SEC generates kind of a unique GAAP, which is generally accepted accounting principle, results on this operation. For the first quarter, ICG had recorded revenues of $811,000. The compensation benefit cost of $1.3 million and $500,000 of other expenses for a net operating loss of $1.7 million. The cost of this operation are accounted for just as a normal accounting basis, and as payroll is paid, everything is expensed as incurred. However, the revenue recognition is much different than the actual cash that we receive on this operation.
To explain that is when one of ICG's customers wants us to track and process the property tax payments of one of their loans, we will generally charge an all upfront fee of somewhere between $80 and $100. Let's just say for this example that it's $84, and we get that all upfront, $84, to track this loan for the entire life of its loan. We currently think the average life of all the loans in ICG's portfolio is roughly seven years. Even though the vast majority of the cost that ICG has is in the providing of the initial tax payment research and the computer setup cost of this particular tracking for this tax payment, the ongoing annual charge to manage that account on an ongoing basis is generally only about $2 to $3 per year on an ongoing basis.
Because of the SEC rules with revenue recognition on this line of business, we have to recognize that $84 over the entire life of the loan on a straight line basis. Basically, we only get revenues at $1 per month in that example. That's $84 divided by seven years, divided by 12 months. For this month, in this example, we basically only got $3 of revenues, but the full cost. It's going to take a couple of years under this very conservative GAAP revenue recognition policy to kind of build the normalized profit margin in this particular case. In the meantime, this one operation accounts for about 30 basis points of that increase compensation and benefit as a percentage of total revenue line.
If you exclude those two items that we just talked about from 2012, the employee compensation and benefit as a percentage of total revenue was really about 48.1% in 2012, and that's compared to the 48.3% first quarter of last year. With that, let me keep going on to our non-cash stock-based compensation, and that cost went up on a net basis of about $1 million, and that's really just due to the new stock grants, stock incentive plans grants that we gave during the first part of 2012, of which the majority of them went to the Arrowhead employees and management team. In the current quarter, our other operating expenses increased as a percentage of total revenue by 50 basis points to 14.3% of total revenues from 13.8% in the first quarter last year.
Other operating expenses from a dollar standpoint increased to $7.3 million, and that's a 20.2% increase over 2011 quarter. However, if you take the new standalone acquisitions, they amounted to $8.1 million of all those new costs during the quarter. Therefore, if you just take the kind of a semi same store sales basis approach, those existing offices really had a net decrease of their expenses by about $800,000. There were some items that were up and down, but the biggest single change was, again, we get a continuing cost savings in our rent occupancy cost office space, and that by itself was just a $800,000 reduction in the current quarter. If you exclude the operations from the standalone acquisitions, our other operating expenses as a percentage of total revenues decreased to 13.5% from the prior year factor of 13.8.
Our amortization depreciation in aggregate was up $2.6 million from last year. That's obviously just due to the newer acquisitions. Our interest expense was up $500,000 over prior year. That's primarily as a result of borrowing the additional $200 million that we borrowed on the Arrowhead acquisition. Of course, our line item, that change in acquisition earnout payable, first quarter this year was a credit of $388 versus a credit last year of $99,000. Our effective tax rate for 2012 is currently expected to run at approximately 40.3%. That's primarily due to the higher state income tax rate because of the large California exposure from our new Arrowhead acquisition. Really just to conclude, it was a very good quarter, very happy with the positive internal growth, and our net income was $49.4 million, was a nice increase of 6.8%.
With that, I'll turn it over to Hyatt.
Very good, Cory. Thank you. Good report. Getting into what's happening in terms of pricing and et cetera. First of all, a general statement relative to personal lines across the U.S. Homeowners, which have been unprofitable for several years, are moving up 2%-5%. In some places, it's a little more, in some places a little less. If you're getting into coastal areas, it's more. If you sort of average it across the U.S., 2%-5%. Personal auto, however, is flat to down, and in some places down as much as 10%. That's kind of what we see on personal lines across the U.S., and personal lines is somewhere around $70 million, $65 million-$70 million of our total revenues. Looking at Florida, first of all, let's split Florida into three layers.
First of all, south. Then I-4, which would be Daytona to St. Petersburg. Then the northern tier, which would be Jacksonville west. First of all, in the south, the economy is starting to move up. Foreign capital coming into Dade, Broward. Things are coming along, except for an outlier, and that's Naples. Naples is still questionable, flat to down in terms of the economy. Property rates are up 2%-5+%. Condos are up 10%. There are lots of gaming. There is a lot of gaming going on in condos relative to appraisal value. If the rate goes up 10%, if you can get the appraised value of the condo down 5%, it's only a 5% increase. Lots of pushback from the risk bearers and et cetera, including Citizens. GL in auto is flat. Umbrellas are flat to up 2%. Then workers' compensation.
Now, a general statement. Workers' compensation across the entire states, all the states in which we're doing business, is going up any place from 2% to 3% to 4% to 5% to 6% to 7%, except for Nevada, where it's going down 0% to -5%. One of the reasons there is because apparently the law is very favorable to employers, and the other state where it may be flat, workers' comp, would be Oregon. Not exactly sure whether that's more of the economy or whether it's more of what's going on in terms of pricing. Workers' compensation across the United States, it's under the most pressure, and it is also moving up 2% to 4%, 5%, 6%, 7%. Now, the question then is what about payrolls? Payrolls vary, and we'll talk about that a little bit as we get into more of the other parts of the United States.
Payrolls in South Florida are up slightly, except for contractors. Now, again, underwriting across the United States is starting to play a part. That means that underwriters are looking at loss ratios, and if it's a bad loss ratio, then the numbers that I've been talking about, they're way too low. We have actually seen, in the case of some workers' comp accounts where existing companies simply wouldn't renew, haven't seen that in six or seven years. Now, able to get other carriers on, but sometimes at a consent to rate, which is substantially higher. Employee benefits. Now, employee benefits in the southern part of Florida is up 5%-7%, but we're starting to see some accounts coming in at flat. If you move into the I-4 corridor, workers' comp, again, is up 5%-7% to 3%, 4%, 5%, 6%, 7%.
Property up 2%-4% or more. Condos up 10% or more. GL and auto is flat to a -2%. Now, in the property markets, and this is true throughout Florida, and it's also true throughout all the cat areas that I'm familiar, from Texas all the way around Florida, all the way up to probably Virginia, et cetera, there's always an outlier property market. Just at the moment you think that there is a 10% rate increase or a 5% or a 12% rate increase, someone will come in at flat, sort of out of the blue. However, that is getting to be less and less and less. Again, underwriting is sort of taking over. The economy in Central Florida is flat to slightly up except Orange County, and Orange County is up nicely.
RMS 11, I'm sure you all have heard about that, and that is having a substantial impact in Central Florida because RMS 11 is focused on individual risks and then what is the PML on those individual risks. In some cases, the PML has doubled over what last year was considered to be the PML. That's having an impact also on capacity and pricing, particularly for some of the both admitted and non-admitted companies. Employee benefits, in South Florida, up five to seven, Central Florida, up two to three, and a large risk bearer has told us that probably starting July 1, there are going to be accounts that will be renewed at credits, meaning down. Haven't seen that in, gosh, I don't know when.
If you go to the northern tier of Florida, employee benefits, this varies, larger accounts which are loss rated, and have good or bad loss ratios will vary, but talking about those that are any place from 25 to maybe 250 employees, those in the northern tier would be flat to sometimes down 4% or 5%. Looking also at the northern tier, property, habitational, condominiums, et cetera, et cetera, is up 5%-10%. Citizens in Florida is pretty much up 10%, except for those condos that are $10 million or more in a tower. Those are up more. In the northern tier of Florida, unlike elsewhere, admitted markets are still writing risks. Occasionally in Central Florida, an admitted market will write a property risk, but it's pretty scarce.
Auto and GL in the northern tier is up Well, actually, GL is up 2%, 3%, but auto is really flat to down. Workers' comp, I've talked about that. There's some higher mods coming on also, umbrellas are flat. Generally speaking, D&O is flat. EPLI is up, employment practices, et cetera, is up 2% to 5%. When you get out into the West, particularly California, it's 10%-15%. The surprise in Florida is the employee benefits, which seems to be trending to the positive side, meaning that instead of large rate increases, they're much smaller, there are a few at zero and a few at credit. That's kind of interesting. Finally, in Georgia and South Carolina, again, workers' comp firming, payroll stabilizing, GL and auto flat, property 2%-3% except coastal 5%-15%.
Inland condos up 5%, much tougher underwriting. Again, talked about personal lines. Generally, exposures are flattish to up a little bit. The economy seems to be getting a little better. Generally speaking, when I'm talking about the economy, I'm talking about general business, excluding contractors. There are certain classes of contractors who are starting to do some business, the refurbishment contractors, et cetera. Other than that, really not much. Employee benefits in Georgia, South Carolina is up +6 to +8, still having reductions in coverage. Virginia, Delaware, again, workers' comp, as we've talked about. Property is up 3%-5% non-coastal. Get into the coastal areas and it's a different ball game, 10%-15%. GL is up a little bit, 2%. Autos are flat. Autos are kind of flat really to down throughout the U.S. The economy is getting a little better.
Marine is flat to down 5%. Employee benefits, flat, flattish, maybe down just a little bit. Wonder why all that's happening. In New Jersey, New York, Pennsylvania, again employee benefits there is up 3%-5% if it's over 50. If it's under 50, seems to be kind of flat, if under 50 employees. Property in those areas is up 3%-5%. Everything is kind of tightening in terms of underwriting. Payrolls seem to be moving up. The Northeast, the economy seems to be doing better. That's very positive. There is one little difference in workers' comp in Pennsylvania. The state really has decreased the rates, but the credits are going away. Rates going down, but the loss cost modifiers are changing so that the price to the consumer is actually going up.
Condos in New Jersey and some areas of Pennsylvania, these are smaller and middle-sized condos now, many were on a 3-year rate guarantee, so those are coming off, and those condos are going up in the neighborhood of 15%. The payrolls are starting to move up just a little bit as reflective of the economy. If you go into the Northeast, which is Connecticut and Massachusetts, the economy's getting a little better. Property 2%-3%. It seems that any place along the East Coast and all the way down and over to Texas, there is this constant push on property except right on the coast, which is more than the 2%-3%. Once you get interior, once you get into Middle America, the property is flat, in some places down.
In other words, the push seems to be more along the East Coast because of the catastrophe exposure and the fact that modeling now seems to suggest that there is a greater potential for loss farther inland than was considered in the past. Looking into the Midwest, which would be Michigan, Indiana, Illinois, workers' comp, all areas it's moving up. The payroll in these areas is kind of flattish. In some of the areas, the economy is not doing as well either. GL and auto is flat. Med Mal is flat to a -5%. Property in those areas is going down flat to -5%. Underwriting getting tighter. Looking into Texas and Louisiana, the oil patch. The oil patch, economy is there. It's doing well. Property, and this is in, I'm thinking now of the Houston area.
Property in Houston, part of Houston is considered to be tier 1, which is coastal, and part is tier 2. The windstorm pool in Texas is only available in tier 1. In tier 2, it's not available. The situation is that in Houston actually, property is going up 10%-20% in the city, whether it's in tier 1 or tier 2. Also, payrolls are going up. Payrolls are up 5, 10, some cases 15%. Of course, and it's kind of interesting again, but workers' comp rates are flat, but credits are disappearing. Even though the rates either are flat or down, the credits are disappearing, which means that the price is going up. GL and auto, it's varied. In some cases it's flat, and in some cases it may be up as much as 10%. Employee benefits is 3%-5% up.
We're not seeing flat there at the moment. Looking into the West, California, Nevada, Arizona, Oregon, Washington, Colorado. I mentioned that workers' compensation is up in all those states. California is probably maybe the one that's being under the most stress. Except, of course, I mentioned Nevada is down probably as much as a -5%. Of course, there's no workers' comp in Washington. EPLI in Southern California and really middle California is up 5%-15%. Umbrellas are down 5%. Exposures seem to be stable. Property is flat there, too, down. The economy is getting a little better in most areas in the West, except Nevada and maybe in Oregon. If you look at Arizona, the property there is GL, property, auto, everything is slanted down.
It's still very competitive. The property rates are $0.02 and $0.03, and $0.04 is kind of unusual in Arizona, the Phoenix area. Arrowhead, as you know, is one of our most recent large acquisitions. They're doing very well. Last year, they grew 5% to 6% to 7% organically. This year they're continuing on that same rate. Of course, that's not included in our organic growth schedule because they haven't been with us a year. Some of their programs are growing a little more than others, workers' comp being one. They're looking also at several areas. One thing is some new programs and expansion of existing programs, potentially quake in California. We're also looking at the fact that their IT platform may be something that we want to adopt in our wholesale area. They're pretty doggone good in that area.
We're very pleased with what's going on there. Looking at the wholesale. Wholesale is reflective of what's going on in retail. Really, when we think of wholesale, we think of transactional, and we think of binding authority. Let's talk about binding authority first because it's a little easier. Binding authority is primarily smaller property and casualty accounts. These would be $500 and $1,000 of premium to maybe $10,000-$15,000 in premium. Those property rates and prices are going up pretty much 5%-15%. One of the reasons is this is gray or not eligible standard companies or standard companies are moving out of this area, particularly if it's gray, and therefore, this 5%-15% is sticking. Casualty, however, is pretty flattish to maybe up a little bit, and professional liability, again, is +5% to +15%.
That's moving up in binding authority. Let's get into the transactional. Of course, that's where there is some variation. Anything that is coastal, which has a cat exposure, and that's Texas all the way around Florida to New Jersey, property is moving up 5%-20%. There are some changes in coverages, and sometimes that affects the actual total premium paid by the insured. However, on very large accounts, big schedules of apartments and et cetera, large condominiums that are not necessarily good construction, those can be up as much as 10%-40%. It depends on the model. RMS having a big impact there. Casualty, of course, in the transactional is pretty flat, not much there. Exposure units are slightly up. If you look at non-cat property in transactional, that's flat, maybe a little up, but really not much at all.
There is a lot of pressure in wholesale. I would say the pricing pressure in wholesale is greater than the pricing pressure is in the admitted market. Looking at programs. FIU, those are our condominiums on the sand in South Florida and elsewhere. It's pretty much kind of a 10% increase, and that's kind of the way it is. In the case of Proctor, a comment on that, I think as people know, Fannie Mae is now coming forward with some recommended changes that they want to have instituted for anybody, any bank or servicing company that's handling Fannie accounts. There are several things, of course, we're very much involved in discussions with Fannie and right on the cutting edge of what their requirements appear to be.
They're talking about policy forms, which is coverage, and the coverages they're talking about pretty much are in line with what we're doing today in Proctor. Rates probably down some, but well within our comfort zone. There's several kinds of things that are being discussed relative to how the coverage is placed. The three letters to the borrowers and then all of that sort of thing. They're talking about maybe seeing if the private insurer would want to continue the coverage even though it's under foreclosure or it's not occupied. They're talking about requiring admitted paper versus surplus lines. In some cases, we find surplus lines pricing is lower than admitted, not exactly sure how that will work.
The companies that we have that are currently writing both admitted and non-admitted, some are going to make filings are in the process of making filings in order to comply with what Fannie is going to require. Those companies would be Markel, Lexington. Lloyd's is looking at a fronting arrangement. There will be changes, I think about half of our business has some Fannie exposure, and there will be some changes, and we think that that will all end up being for the best interest of the consumers. We're all for that. Looking into public entity, I'm thinking now more of public entity in Florida than I am in the Midwest and in the Northeast or in the far West, like out in Washington. Those renewals, property renewals I'm thinking about now, which come up July 1st.
June 30th, July 1st, and October 1st, there's going to be some fairly chunky increases on those. We're still not really sure exactly what they're going to be, but somewhere in the neighborhood of maybe 15%-20%, maybe a little more on property. In USIS, payrolls, those are starting to move up a little bit, like 2%. That's the first time we've seen that in about four years. Things are coming along not bad. If I was going to give you a broad general synopsis, I'd say that for the first time, there is constant and consistent pressure in many areas of the U.S. to increase property rates. Some other rates, in like EPLI, et cetera, some in D&O, but also consistently, workers' comp going up consistently. That's different.
On the good news side, Powell will be coming back to the office on Wednesday, that's tomorrow. We're very pleased about that. Been talking to him on a daily basis for the last 60, 90 days. A couple three weeks ago, he started talking to Cory and getting information and hooked into our email system, he's been talking to the senior leaders. He'll be back, we expect him to be at the retreat, the annual board retreat, which starts Monday, and at the annual shareholders meeting Wednesday. We would expect that the board would reinstate him as the CEO, he'll move forward, just as before. I'm kind of pleased about that because I can go back to being non-executive chairman. That's good news. Having said all that, Nicole will now open up the phone to any questions.
Certainly. Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for any questions. Our first question will come from Adam Klauber with William Blair.
Thanks. Good morning, Hyatt. How are you?
I'm fine, Adam. How are you?
Great. Thank you. Great to see the wholesale business is turning around. Of the growth, how much of that is driven by higher rates versus more submissions with the standard carriers being pulled back?
It'd be kind of an educated guess. I would say about two-thirds is higher rates or maybe 75% higher rates and 25% movement. We think there's going to be more movement because underwriting is continuing to get front and center.
Okay. Thank you. Also in retail, obviously, we're seeing good movement, and you talked about a lot of the different factors helping that segment out. How about net new business trends? Are those improving also?
Yes, they are, Adam. One thing, I've been to this picture show before about five times, there is something different about this time. What it is this. The risk bearers have a lot more capital, therefore dry powder, this time than in the past. Number 2, there are fewer risk bearers. I'm talking about standard risk bearers now. Therefore, there is a lot more pressure to get the returns on capital up, which is pushing them. So whereas in the past, when you have a market change
All of a sudden it's 20% and 30% or more, which is just awful. This time it's not happening that way, is it going to continue? Is this the two, the three, the four? It seems like it is, if it does, this is really a much better thing for the industry because people are able to accept small rate increases because lots of things are going up. Particularly when we show them how they, five, six, seven years ago, they paid X, and last year they paid 55% of X, and now you're paying 60% of X. That's very acceptable. We are, in both wholesale and retail, but really more in retail because that's where the rubber really meets the road.
We're being very careful about making sure that our customers and clients remember five years ago when it was maybe almost twice as much as the price was last year. All of that is kind of positive. Great. Thank you very much.
Our next question will come from Keith Walsh with Citi.
Keith, are you there? Hello?
Hearing no response from Mr. Walsh, we'll move to Mark Hughes with SunTrust.
Okay.
Yeah. Thank you. Good morning.
Hey, Mark.
Hey. The margin outlook, when you take all those factors you discussed, Cory, and given the fact that contingents look like they'll be steady to probably up in Q3, what do you think the year-over-year margins are going to look like next couple of quarters? Any initial thoughts?
Well, my gut reaction is the margins, in general, will improve. The two things that we tried to highlight on this call does skew the absolute numbers a little bit, and that's the ICG operation has an unusual item. Since we bought in November, basically it'll be three quarters of that. Then, like I said, that special program that we developed this year for retail commission producers is going to add some extra compensation expense for this year because this year it's going to be a challenging year for them, and we wanted to incentivize them for this year to really grow the business. Remember third quarter, we talked about the fact that Pal had mentioned that we were planning to give up margins on a temporary basis to have growth, and that was kind of the program that we were thinking of.
When you extract, when you take those two things into consideration, I believe the margins will continue to improve for the rest of the year with those two exceptions.
Right. Is the $1.3 million, is that on a run rate to assume that everyone hits their 5% target?
No, I tell you, that's actually a little bit lower than kind of the average. We probably have about, say, $220 million-$230 million of business that's tied to a commissioned retail producer. Theoretically, you could have, if everybody exceeded that 5% growth, you could have $10 million-$12 million worth of total cost. If you take half of that, we're probably run rate of more like $6 million maybe, give or take. That's probably what I'd plan on at this stage.
Okay. Final question. Share buybacks, any updated thoughts there?
You're probably focusing that on me, the answer is no. We've got a share buyback program. We have not bought any shares yet because as we had mentioned before, we primarily will buy shares back only at opportunistic prices.
Thank you.
Our next question will come from Ray Iardella with Macquarie.
Thanks good morning.
Ray.
Can you guys maybe talk about, I know you guys talked about property rates being up pretty nice, particularly on the coastal side, how much of your business, I guess, in the first quarter, how much revenue do you get from property maybe versus casualty relative to the rest of the year?
Well, that's a good question, it doesn't vary by quarter particularly. Property, in the past, has been about, if I remember correctly, about 20% of our total. It's probably moving up a little now. Florida, of course, the property rates are higher than they are elsewhere. I'd use maybe 20%-22% or 23% would be about what our property premiums are now.
Okay. I would think second quarter might be a big quarter in terms of, I guess, property exposure. Is that the right way to think about it? Am I reading too much into that?
No, I don't think that the amount of property insurance in terms of total insured values is going to change other than new business that we're writing. There is that constant and consistent push
Pricing. The question is: Is 2% or 3% or 4% going to go into 4% or 5% or 6%? I don't know the answer to that.
Okay. That's helpful. I guess a lot of insurance carriers have been reporting perhaps some decline in retention. Is that something that your clients are talking about and pushing for, given, I guess, some of the rate pressure you're talking about?
Well, first of all, an insurance carrier feels that if they're in the 80%-85% renewal retention percentage, that they're about in the right place. In terms of us, we want at least 95%, and hopefully more. It's kind of hard to talk about that retention thing. One of the things that will occur, particularly in the coastal areas, and assuming that banks will allow this, there may be a buying down of the wind coverage. If someone had $500 million of property values and the cover other than wind was $500 million, maybe they'd buy $100 million in wind, as opposed to last year having, let's say, the total $500 million. It's very difficult to make those kinds of assessments.
Okay. One follow-up, and I'll re-queue. In terms of M&A, I guess, how many transactions did you guys close in the first quarter? Did the Arrowhead transaction kind of slow down that a little bit, or is it just sort of lumpy as you get through the year?
It's kind of lumpy. We had five transactions we closed and a total of, how much was it, Cory?
Right at $113 million in annualized revenues, and $108 million of that, obviously, is Arrowhead.
Okay.
Okay, go ahead.
No, sorry, go ahead.
Well, what I was going to say is that we're seeing some additional interest. Again, inventory is about what it has been in the past, maybe a little better. We're seeing some additional discussions, and it might have something to do with the fact that people are looking at what's the tax rate going to be next year, and maybe I'll do something this year. How much of that is out there, I don't know. It just seems like there might be some of that thinking starting to accumulate.
Okay. Thanks for the color.
Our next question will come from Sarah DeWitt with Barclays Capital.
Hi, good morning.
Good morning.
On last quarter's call, you thought the first half 2012 organic growth would be choppy. What's changed since then, and to what extent do you think the positive organic growth is sustainable?
Well, we have a tendency to be pretty conservative, and we'd much rather over-perform and underpromise. We weren't really too sure that the underwriting regimen was going to continue to be front and center. It seems to be that the risk bearers are saying, "No, this is what it's going to be." The other thing that has been interesting is the impact of RMS 11. RMS 11 is impacting all coastal areas. We were surprised that risk bearers are following that as assiduously as they seem to be, that is, most of them. In some cases, on some risks, RMS 11 would suggest a PML double what the risk bearers had in their files for last year. All of that kind of, we're thinking maybe a little better in terms of pricing. That's about as good an answer as I can give you.
Sarah, from our perspective when we were on the call, really the only thing that we really had to go on at the time is basically our detailed budgets by office. At that time, the first quarter was the more difficult quarter to get over, and our budget basically had us at a negative internal growth. As Hyatt had mentioned, the pricing, we were pretty surprised at how the pricing did kind of hold up during the quarter, and that's what really kind of helped us. The economy we thought was going to be flatter, which it did, therefore, we didn't have the down swoop that we've had historically, and therefore, the pricing of the new business was able to grow it.
Basically, from a budget standpoint, the first quarter was the hurdle, and as Hyatt said, there's this gradual build that is at least going ahead. Nothing to where it's a huge wave, but at least it's a slow build, and we think that each quarter will incrementally, hopefully be a little bit better.
Great. That's great. If the organic growth stays at these levels, where do you see the margin heading longer term? I know historically you had that 40% goal. Is that something that's achievable again?
Absolutely, it's achievable. We think the cost structure and the leverage is still there, with the exception of those two highlights that I tried to explain in terms of the employee benefit and compensation on the short-term basis here.
Great. Thanks for the answers.
Okay.
Our next question will come from Brett Huff with Stephens.
Good morning, Hyatt. Good morning, Cory.
Good morning.
One question. Hyatt, thanks for going through the detail, as usual, on the sort of by geo and business line detail. If we could step back, what I recall is that you all would say that about 25%-30% of the organic growth headwind you were facing was rate, and the rest was exposure units. A, is that still true? B, similar to one of the last question, where did the improvement come, rate or exposure units or both? Can you give us some color on that?
Yep. Came both, it varies with geographic area. I believe that if you looked at Florida, it's probably half and half. Elsewhere, it's probably maybe a little more, and I'm thinking of the Northeast now, a little more of the economy. Economy's better up there than it is elsewhere. At least that's what our people are telling us. They are moving in tandem generally, except for contractors. The contracting business now, some particular kinds of contractors are doing okay, but most of them, particularly home building, it's just not there. Going forward, once we get beyond the doggone election, I think people are going to feel a lot better about the economy. Generally speaking, there is a little more uptick there, and payrolls seem to be flattened up a little bit. There is this constant push to get a little more rate.
As businesses are feeling better about the fact that they can see a little growth themselves, then the pricing is a little more acceptable. There is a lot of pushback. I don't want to give you a feeling that it's not tough out there.
Sure. The second question, Cory, you had mentioned last quarter that you thought about 60%-70% incremental margins as you guys start growing again. Given the two sort of highlights that you talked about, the comp structure at least for this year, which sounds like it's limited to this year, and then the ICG sort of longer rev rec accounting, is that 60%, 70% number still something you feel is the right way to think about it?
You need to probably back off 5% on that one commission, and the ICG will be back on a normal flat level by the fourth quarter.
Really this is this year kind of thing
I back it off a little bit. I back it off a little bit, but the basic structure is still there.
It's mostly a this year thing, not a next year thing.
Absolutely.
Okay. That's what I needed. Thanks for your help, guys.
Our next question will come from Meyer Shields with Stifel Nicolaus.
Thanks. Good morning, everyone.
Hey, Meyer. How are you?
I am well. Yourself?
Good. Go ahead.
One quick modeling question for, I guess, either Hyatt or Cory. When we talk about the supplementals gravitating towards profit-based contingents, do we have any idea what the revenue numbers were in the last 3 quarters of 2011 so that we can forecast that split?
Yeah. Let me just give you the numbers for the first quarter amounts. If we had left out GSCs in the first quarter of 2011, we reported a negative 2.3% negative internal growth. Without GSCs, it would've been negative 2.4%. If you go back to the first quarter of 2010, we reported a negative 8.6%. Without the GSCs, it would've been lower at 8.2%. The numbers that you saw for the first quarter on the GSCs, the GSCs are accrued on an actual basis. Those numbers that I gave you are relatively consistent for each quarter. It's not a huge differential. You can kind of figure it out. I did not do it yet for the second, third, and fourth quarters, but it's a relatively minor change. The first quarter would be representative of it.
Okay. No, that's helpful. I think we can work with that. Second, in the internal growth table, you show divestitures or I guess the amount of business from offices or books of business that were sold over the past 12 months. That's been going up, over the past couple of quarters. I was wondering if you could talk about whether there's anything unusual going on there.
No. We typically don't like to sell a book of business, but if a producer leaves and it makes economic sense, we will. In this particular quarter and the second half of last year, we did have a couple of larger book sales that generates it and it kind of goes up and down. It is a bit higher than it normally is. It normally is probably in the million-dollar mark. That's just the nature of what's happened in the last couple of quarters.
Okay. When you talk about a producer leaving, is that producer the one buying the book of business?
Typically, yes. Whatever new agency he's going with.
Right. Okay, perfect. Thanks very much.
Our next question will come from Matthew Heimermann with JP Morgan.
Hi. Good morning, everybody.
Hey, Matthew.
Hi. Couple questions. One is just wanted to make sure there's no one-time first quarter expenses associated with Arrowhead as we look at the G&A.
No, there's not. Arrowhead is pretty much a standalone organization. There was no office combinations. Most everything that changed was really just as part of the original purchase price allocation.
Okay. Oh, sorry.
Also, one thing, we actually didn't effectuate that acquisition until the 9th of January. Right. Technically there's nine days of revenues of January that are not included in our number, obviously.
Okay. I was also just curious, if you expand their platform to your wholesale division broadly, are there any incremental technology costs that would be associated with it, or is it as simple as kind of turnkey to just start putting your own information through it?
There will be incremental cost and there's no huge game plan on the table that will have any huge cost on it, but it will just be a gradual change as it makes sense for various offices and wholesale programs.
Okay. Then with the ICG, and what Fannie Mae is proposing in terms of changes to the force-placed lender's business broadly, how do you think that positions you strategically versus some of the other brokers that participate in this business? What do you think some of the changes Fannie Mae has put forth might mean for some of the other competition in the market?
Well, we really don't know about the other competition. We really only know about us from our standpoint. We're looking at it as just another change, and about half our business has some exposure to that and half doesn't. Probably the largest single change would be having admitted paper versus non-admitted paper. The form. Go ahead.
I was thinking more on the technology service side with that. It seems like that element and what Fannie Mae is asking people to do is going up, and so I just was curious whether or not you thought you were kind of ahead of the curve in putting that service technology in place in your business relative to the rest of the industry.
I don't know that we're ahead of the curve or behind the curve. I think we're about in the middle of the curve as far as we can tell. The requirements that they're talking about, we already do for the most part. The tweaks that they're talking about, they don't seem to be a great deal of difficulty.
Okay.
One of the items that ICG did make sense for us is that that is now a true partner. In certain competitive situations previously, there have been other companies that provide that service. Because some of our competitors may have written more business with certain ones, we were explicitly excluded from having them give us a quote to do it as an outside service. With a partner inside, it does give us the ability to provide that service and be able to control it. From that standpoint, it is a positive.
Okay. Just with respect to programs overall, I think the last half of 2011, it was really the special programs that were kind of driving improved growth. I'm just curious if the Excuse me. It was special while professional was still lagging a little bit, and you had some constructive comments, it sound like from a pricing standpoint in parts of the professional lines market, some of which might flow through to that. Can you just talk about maybe on the old reporting way, just kind of what the mix of growth looks like between professional and special?
Well, they both grew, from an ongoing standpoint, there's overall less offices that had negative growth than there were before. In both sides, they did have slight positive growth. Now, from a standpoint of overall, we had talked about Proctor starting with the fourth quarter of last year, we now were comparing them to apples to apples. They've written a lot of new business. From an incremental growth standpoint, Proctor was for the next really four quarters, was going to add a positive growth. For this quarter alone they actually grew in excess of $800,000 of that total. That will continue, as they kind of work through the whole Fannie Mae issue. It's a good group of people, good business, and they do it the right way.
Okay, perfect. Thanks much.
Our final question in queue is a follow-up question from Ray Iardella.
Thanks for taking the follow-up. One quick numbers question, then one, I guess, broader question. First, in the numbers one, on continuing commissions, did Arrowhead receive any continuing commissions in the quarter? I think in the past, you guys had talked about Arrowhead moving towards more of a fixed sort of commission structure going forward.
I'm not sure about that last statement.
Okay
Arrowhead did have some very minor, it was $300,000. We do expect them to have contingent commissions continue to be earned during, accrued during the year, or be earned during the year. Any contingencies that they may qualify for would primarily come in the third quarter, and that's part of that number. They historically have had somewhere in the $4 million-$4.5 million per year come in. Could that come in the third quarter? That was part of the number we gave you, and we'll just have to wait to see if it comes true.
Okay. The last question I have. As far as, I think you had talked about some incremental compensation costs for some new hires. Is that something you guys plan on continuing to look for new producers throughout 2012? Is there any particular target you guys have, or is it just finding good producers and trying to hire them when you can?
Well, actually, we really started about two years ago, expanding our recruitment program array, and it's not just for the retail, it's the wholesale, and it's in programs, it's across our whole system. There are great opportunities out there from people who have been working three, four, five, six years in another business, and that business is not doing well or it's not there. We've been interviewing lots and lots of people, and when they meet our profile, then we try and bring them on board. We probably will continue to increase the number of people that we are bringing on. I know one of the things that Powell has been pushing very aggressively is recruitment. In order to grow and to replace people who are going to be retiring and that sort of thing, we have to have new folks coming in.
There's lots of opportunities for us, and we're very pleased with our new people that are coming on. They're doing very well for us. Ray, let me just add on to that is, as you know, even during, like Hyatt said, the last couple of years, but even before that, where we've had negative internal growth, that was, as I had mentioned a couple of times on a conference call, that was the one line item which never did decrease year-over-year. We continue, as Hyatt says, we're always looking for good, high-quality people, and we pretty much hire our producers and train them ourselves. When I mentioned that there's $600,000 again this quarter in excess, it was just to highlight the increase on that. We do expect that to continue.
Okay, thanks for answering the follow-up, and best of luck, Hyatt.
Thank you.
At this time, we have no further questions, so I'd like to turn the call back over to our speakers for any additional or closing remarks.
Okay. Well, that sounds good, Nicole, and thank you all, and we'll look forward to having another quarter. We're in adjournment. Thank you very much.
Thank you. With that, we will conclude today's call. Thank you all for your participation. You may now disconnect.