Brown & Brown Inc (BRO) 2016 Q3 法說會逐字稿

Good morning and welcome to the Brown & Brown Incorporated 2016 third-quarter earnings call. Today's call is being recorded. Please note that certain information discussed during the call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward-looking in nature.

Such statements reflect our current view with respect to the future events, including those related to the Company's anticipated financial results for the third quarter of 2016 and are intended to fall within the Safe Harbor provisions of security laws. Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward-looking statements made as a result of a number of factors.

Such factors include the Company's determination as it finalizes its financial results for the third quarter of 2016, 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.

Additionally, discussions of this and other factors affecting the Company's business and prospects as well as additional information regarding forward-looking statements is contained in the slide presentation posted in connection with this call and the Company's filings with the Securities and Exchange Commission. We disclaim any intention and obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

And with that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. Please go ahead.

Thank you, Ron, and good morning, everybody, and thanks for joining us for our third-quarter 2016 earnings call.

For the quarter we delivered $462.3 million of revenue growing 7% in total and 4.3% organically. Once again, we realized organic growth in each of our four divisions with improvements seen in most of the divisions compared to the first half of the year. We will discuss the drivers of this improvement in detail later in the presentation.

For the quarter, we experienced a slight decrease in our EBITDAC margin compared to the prior year which was primarily driven by lower contingents and GSCs along with our continued investment in technology.

Our earnings per share for the quarter increased 6.4% over the third quarter of 2015 to $0.50 a share. Excluding the change in estimated acquisition earnout payables, earnings per share increased 10.6% to $0.52 on an adjusted basis. Andy will provide more detail about our financial performance in a few moments.

Overall, we are very pleased with the top and bottom line results for the quarter and the incremental improvement that we have seen over the last few quarters. We would like to thank all of our teammates for their contributions to these positive results.

During the quarter we saw modest growth in exposure units as a result of continued improvement in the economy and even though this trend was not seen across all geographies or industries. Catastrophic property rates for the quarter were down 5% to 20%. We think coastal property rates will not change in a material way as a result of Hurricane Matthew. Buyers of insurance will look very closely at hurricane deductibles, flood coverage and excess flood coverage in the future.

We are also seeing non-admitted carriers offering admitted paper options in certain coastal areas. The admitted market rates generally remain consistent with previous quarters as they are flat to down 5%. The exception to this is commercial auto where rates are flat to up 5%.

Professional liability rates are flat with the exception of some lines which are up slightly. While the continued increase in overall exposure units has helped offset some of the rate decreases, we do expect rate pressure to continue for the remainder of the year and into 2017.

From a Retail perspective, we had another good quarter and delivered 2.8% organic growth. We continue to see a positive trend in the last several quarters. Many of you might be wondering what the impact will be of the recent approval by the Florida Department of Insurance regarding Workers? Compensation rates. The approved increase of 14.5% is effective December 1 of this year for all new policies and upon renewal for all existing policies. The impact will be immaterial this year and we estimate for [2007] to be in the range of $1.5 million to $2 million.

We are pleased with our performance within National Programs that delivered organic growth of 7%. During the quarter, we had continued growth and forward momentum across many programs, specifically our lender place coverage program and the Wright Flood business. In regard to Wright Flood, as of now, it is too early to quantify what the claims revenue we may recognize from Hurricane Matthew will be in Q4.

While we have a number of programs performing well, we have a number of programs that continue to face material headwinds such as our property and auto programs that are being impacted by declines in pricing or changes in risk bearer appetite or a combination of both, as we discussed last quarter.

We expect these headwinds to have an impact on our growth rate for National Programs in the fourth quarter of this year.

Our Wholesale business also had a good quarter delivering organic growth of 6.7% driven by new business which was tempered by the continued rate pressure in catastrophic property rates. As we mentioned before, cat property rates are down 5% to 20% and we expect rate pressure to continue for the remainder of the year.

For our services division, one of our claims PPA businesses and our Social Security advocacy claims business performed well during the quarter. In summary, we are pleased with the performance of our businesses and view the third quarter as a good quarter, both financially and operationally.

Now let me turn it over to Andy who will discuss our financial performance in more detail.

Thank you, Powell. Good morning, everybody. I am over on slide six which presents our GAAP reported results.

For the third quarter, we delivered 7% revenue growth and an organic growth rate of 4.3%. Our pretax income grew by 3.5%. As a percentage of revenues, our pretax income decreased by 80 basis points, primarily due to a change in estimated acquisition earnouts. I will talk more about this in a few minutes.

From an EBITDAC performance perspective, which we define as income before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnouts, our EBITDAC margin decreased 90 basis points to 34% when compared to the prior year. Our EBITDAC margin was impacted by lower contingent commissions and GSCs recognized this quarter versus the prior year which had about a 40 basis point impact.

Also during the quarter we realized about a 30 basis point impact associated with our technology investment programs. As a result, we are projecting the impact from our technology investments for the fourth quarter to be in the range of 30 to 40 basis points. We estimate the impact for 2017 to be in the range of 35 to 50 basis points.

Our net income improved by 5.8% as compared to the prior year and is slightly higher than pretax growth due to a modest decrease in our effective tax rate to 38.8% this quarter versus 40.2% last year. The decrease to our effective tax rate is primarily being driven by several permanent tax differences and the apportionment of taxable income into the states in which we operate. As of now we see 39.2% to 39.4% as a good estimate for the full-year effective tax rate.

Our earnings per share for the quarter increased over the prior year by 6.4%. This increase is slightly less than the revenue growth of 7% and the difference was primarily driven by the change in estimated acquisition earnouts.

Moving over to slide seven, this presents a reconciliation of our GAAP reported results to our adjusted results which exclude the impact of acquisition earnout payables. For the quarter we recognized an incremental $3.1 million of expense versus the prior year. On this adjusted basis, our pretax income grew 6.2%, net income grew by 8.6%, and our earnings per share grew 10.6% to $0.52 per share, partially driven by our share repurchases during the last year and our slightly lower effective tax rate.

Moving over to slide eight, we are going to walk through the key components of our revenue performance for the quarter. Our contingent commissions and GSCs are down about $3.3 million as compared to the third quarter of the prior year. The decrease in contingents is primarily in our Wholesale brokerage segment and is driven by increased loss ratios. We continue to expect contingent commissions to decrease in the fourth quarter as they will be impacted by lower written premium by our coastal property programs.

We also disposed of businesses or books of business in the past 12 months which represented $2.1 million of revenue in the third quarter of last year. Please ensure that you make these reductions in your updated models.

For the third quarter, we also recognized $17.3 million in revenue associated with acquisitions completed over the last 12 months. By removing these four categories, our organic revenue growth was 4.3% for the quarter.

If we move over to slide number nine, we are going to look at our performance in each of the divisions in a bit more detail and we are going to go ahead and start with Retail.

For the quarter, our Retail division delivered 5.7% revenue growth with organic revenue growth of 2.8%. During the quarter, approximately 80 basis points of the 280 basis points of organic growth was driven by timing items related to revenue from previous quarters. Again, please keep this in mind when updating your models. For the quarter, Retail's margins increased by 30 basis points, primarily driven by an increase in contingents and GSCs.

Moving over to slide number 10, for the quarter, total revenues for our National Programs division increased by 5.6% in total and 7% on an organic basis. During the quarter, Wright Flood realized approximately $4 million of incremental revenue versus the prior year associated with weather-related events. As a reminder, when we acquired Wright, we said that the 10-year average for claims revenue from weather-related events was approximately $7.5 million. In 2014 and 2015, we recognized significantly less than the average but it appears in 2016 we will be closer to that average.

For the quarter, income before income taxes as a percentage of revenue increased by 450 basis points and our EBITDAC margin increased by 140 basis points. Our income before income taxes was driven by lower inter-Company interest expense charges. Both income before income taxes and EBITDAC benefited from the increased claims processing revenue from weather-related events, performance of certain of our programs and was partially offset by lower contingents and GSCs.

On slide 11, the Wholesale division had another good quarter reporting total revenue growth of 14.3% driven by the Morstan acquisition and delivered organic revenue growth of 6.7%. Our EBITDAC margins were 36.8%, which is a decline of 470 basis points from the prior year which was driven primarily by lower contingents and GSCs, the margins related to Morstan, and then higher continued transaction volumes that we discussed in the previous quarter. These latter two items will more than likely impact our margins during the next few quarters. The reduction in contingents and GSCs from the prior year was approximately $3.6 million.

Over to slide number 12, our Services Division delivered total revenue growth of 4.2% and organic revenue growth of 1.6% for the quarter with the difference driven by the SSAD acquisition that we completed in the first quarter of this year. For the quarter, our EBITDAC margin decreased by 120 basis points, primarily related to the revenue mix within the division. As we have seen and commented in previous quarters, the quarter-over-quarter margin can be a bit choppy based upon the growth in specific businesses.

With that, let me turn it back over to Powell for closing comments.

Thanks, Andy, and great report. I would like to take a couple of minutes to discuss Hurricane Matthew and its effects on Florida and specifically our area here in Volusia County. First and foremost, none of our teammates at Brown & Brown or their family members were injured. Those are in offices from West Palm Beach, Florida, all the way up into the Carolinas, number one.

Two, there is lots of homeowner's claims and some of those will not meet their deductibles, i.e., a hurricane deductible might be higher than a flat deductible and it is usually a percentage of the coverage A. Here in Volusia County, we had 90-mile-an-hour winds and the eye of the storm passed 30 miles east of us. And with that little wiggle, or whatever you want to call it, to the right, it made a big difference in potential damages here in the Daytona Beach area.

What you would see, if you were here, we have lots of dock damage, pool enclosures, roofs, particularly roofs on condominiums, and there has been lots of water damage particularly north of us. That is Flagler Beach, St. Augustine, Jacksonville, up into Georgia, South Carolina, and North Carolina.

I drove last night up into Flagler and there are still two areas of A1A which are closed due to the erosion. The ocean washed under A1A and took out parts of the road and many of you may have seen that on the television.

1947 was the last time something like this occurred here in Volusia County and I get that information from a source that was here. That was my father; he was 10 years old at the time. The bottom line on the storm is it is the worst in the history of Volusia County, but not nearly as bad as it could have been if the eye had come onshore. In addition, in areas north of here, as I referenced, the damage was much worse and our thoughts and prayers go out to those affected citizens in those affected areas.

On a lighter note, and in closing, we are pleased with the quarter and the outlook for the near to intermediate term is good. We believe Hurricane Matthew will have limited impact on rates, if any. There will be more discussions around flood and wind deductibles. Rate for cat property continued downward affecting Retail, Wholesale, and National Programs and that will continue into Q4 and into 2017.

We continue to look for acquisitions and the state of the market is similar to last quarter, what we would call fully priced.

With that, Ron, I will turn it back over to you to open it up for questions.

(Operator Instructions). Kai Pan, Morgan Stanley.

Good morning and thank you. Glad to hear everything is okay with you guys. So just following on Hurricane Matthew, you said it will not impact pricing going forward, but we do see like your estimates of pricing impact have been sort of slowing down a little bit because a couple of quarters ago it was down 15% to 25% -- like last quarter down 10% to 25%. Now it is 5% to 20%. I just wonder after multi-years of significant decline even without a storm like this, is the pricing reaching a floor? And I just wonder how would that impact or less tailwinds -- less headwinds for you guys going forward?

Good morning and I think that is a good pickup on your part. Number one, I would tell you that moderate reduction in downward pricing was occurring, obviously, pre-storm because it was Q3 and the storm was October 7. That is number one.

Number two, it is difficult to have four and five years of downward pressure going down 15% to 25% every quarter. So I would tell you I don't think that it is something that I would -- I would not react overly to that pickup on your part yet. And the reason I say that is because there is still a lot of interest in the coastal property marketplace and there is lots of capital out there wanting to get in or being put into play. And so I still think there is going to be plenty of downward pressure on rates. Don't have to like it, but I am just saying I think that it is going to continue. Will it moderate a little bit? Yes. It may but it is still going to be downward pressure.

Just on that, can you quantify the 15% to 25% pricing, how much that is a drag on your organic growth in the past?

We haven't said what that relates to in aggregate, meaning this coastal property rate decreases relates to this amount. What we have said, and we are consistent by saying, it is rates overall impact our business and organic growth somewhere between one-quarter and one-third and the remainder of the impact is exposure unit driven.

Okay; that is good. Then switching to on the margin side, it looks like the margin is mainly dragged by low contingents and also the technology investment in the quarter. Because in normal situation, if you have like 4% organic growth, we would expect some margin expansion. I just wonder how those sort of lower contingent or technology investments in the near-term would sort of muted that potential margin expansion?

So remember, in the contingents and specifically Wholesale, we were down $3.6 million and so that, in and of itself, is, like I said, that is profitable to our bottom line. And then I will let Andy talk about the technology investment but I think that your assessment is correct, all things considered, but, once again, contingents are variable based upon the performance of the business and our business didn't perform as well for the insurance company so, therefore, we were paid slightly lower.

Kai, we wouldn't get into kind of all of the individual moving parts inside of there, but you also probably want to keep in mind why we called out the contingents and technology but we've also got impact of flood, we've got Morstan; we've got a bunch of moving parts back and forth. But underlying business did really well on margins for the quarter so we are pleased with where we turned out.

How many more quarters like those could drag on in terms of -- you mentioned these new acquisitions as well as the recent hiring to deal with the higher volume in the Wholesale?

So what we said in our comments is, we think it is going to at least be for the next few quarters. Not sure on the transactions. That really depends upon what happens with continued new business flow as well as pricing. That one we will have to just monitor as we go forward. Then as we commented back at the second quarter after we completed the acquisition of Morstan in the second quarter, we said that we would over time get that margin up. That will probably take a number of quarters, if not maybe a few years, to get there so that will be a drag. But the business itself is performing really well top and bottom line so we are pleased with it.

Thank you very much for all of the answers.

Elyse Greenspan, Wells Fargo.

First, on the tech spend, so it seems like this year most of the quarters the investment and the hit to margins has been coming lower than how you set out at the start of the year. Just any changes on the spending that you are seeing or it is just the impact that flowing through into your margins? And then, is the 35 to 50 basis point impact for 2017 unchanged?

Correct. So let me go back, just make sure we reset on everything. So when we started the year, we said about 40 to 50 basis points was our estimate. Then we updated kind of midyear and said 30 to 40 and then -- so this quarter we were about 30 basis points. Fourth quarter, we think we will be around 30 to 40 probably on the lower end of the range. The underlying programs themselves are, in fact, picking up momentum. We went live with our new financial management reporting system in the third quarter and then full live with all of the offices in the fourth quarter so, again, that is kind if kicking up the expenses on there.

Then as it relates to 2017, the 35 to 50 would be off of 2016. Okay, Elyse?

Okay.

So our original estimate of 35 to 60 reverses -- our starting point in 2015 does not change. We are still holding on that.

Okay; great. Then in terms of just some of the margin commentary, putting it all together, so if we exclude the tech spend from the Q3, your margins would have contracted by about 60 basis points. So if you assume in the fourth quarter that the tech spend comes in at that low end, so another 30 basis points, let's say, would you expect putting everything together that your margins would contract by most likely the same level that we saw in the third quarter, about 60 basis points ex the tech spend?

We don't know the answer to that because of the contingents.

Right; that will be the wildcard. We are expecting that contingents will be down in the fourth quarter, based upon at least the indications that we are getting from some of the carriers. And as I think we have mentioned a couple of times, they are at least signaling that they think they can be down materially. We don't know exactly what material means so that will be ultimately kind of the driver of the margin in the fourth quarter depending on how much they move.

And then, I guess, another potential would be how much business you would get from the NFP following on Matthew that could benefit Q4?

Correct.

Okay. And then in terms of -- I know you, Powell, pointed to the market being fully priced in terms of acquisitions. We have seen you guys share repurchase activity pretty light for the past few quarters. I know you guys have historically used ASRs in terms of share repurchase. But any views in terms of getting back into the market to buy back more of your stock considering if there is kind of no change in pricing outlook on the deal front and we continue to see light acquisition activity?

Well, the answer is similar, Elyse, to how we have commented in the past. We talk to our Board pretty much every Board meeting about how we view stock price and should we consider buying stock or not. We look at it as an investment option. But I think the underlying question that you are asking is if, in fact, you don't do as many acquisitions in the near-term, are you going to go buy stock back as the option? And the answer is not necessarily.

So my answer to the group is, we don't have a problem and if somebody is going to be critical they can be critical of me, which is fine, for stockpiling cash on the balance sheet. That is not the intent but I am saying if we have to do that, we will do that so we can invest it at the right time on the right businesses to grow our business going forward.

So I know you want to be able to figure out, yes, we are going to buy back X amount and we are not going to do that, Elyse. I know that is frustrating for you but we are not going to do that. We are going to evaluate it and when we think the stock price makes sense to buy it back, we will buy some of it back.

Okay; thank you very much.

Quentin McMillan, KBW.

Good morning, Powell, Andy. Thanks very much. Just touching back on the margins one more time, the 35 to 50 basis points in 2017 seems obviously like it is a little bit better from the 35 to 60 that you had had previously. I know that you guys have said that longer-term you are expecting to return to that 33% to 35% long-term margin and you don't want to give a timeframe.

But my question is just the longer-term. In 2018, is the expectation that the IT spend will be done in 2017 and that we should see some sort of a margin inflection just from the IT spending rolling off in 2018 so margins should get better even if they don't get to that 33% to 35% level? Is that the expectation now?

Let me see if I can clarify the first piece on it. So you had said 35% to 50%. Hey, that is better than your original range. What I said earlier was 35% to 50% was off of the 2016 margins. We are holding with our original range of 35% to 60% versus our starting point off of 2015. So the range is still right in there. When we said this would be a two- to three-year program, so no, it would not be completed in 2017, it will definitely go into 2018.

And as we talked about during our year-end results last year, is, we said when we get to the back end of the program that we will be able to recover any diminution in our margins, whatever that is, that is inside of that 35% to 60% and then we will get a slight uptick on the back end.

Okay; great. Thank you for the clarification there. And then, secondly, on Wright Flood, we talked about Matthew, but could you talk about any impact that you might have seen in claims handling activity or just otherwise from the Louisiana floods in the third quarter?

And then, secondly, with Wright Flood, I think there is a little bit of confusion still within the market. Obviously, you guys sold Colonial Claims but how much benefit that you guys get in particular from claims handling from Wright Flood as opposed to the uptake from the National Flood Insurance Program and how that business flows through, would be really helpful.

Okay. In our comments, we mentioned that we picked up about $4 million of claims processing revenue year-over-year within Wright Flood. The majority of that was associated with the storms down in Louisiana -- not exclusively, but the majority was from there. What I can tell you is, it was less than 6000 claims that we got in Louisiana. For a reference point, when we went through Hurricane Sandy back in 2012, that was over 20,000. So again, we are just trying to give you guys an idea of the volume of what is out there. A lot of this is covered in the press but that doesn't always mean, one, how it is being covered represents who has policies. And I think that was indicative when we had the storms last year up in the Carolinas.

So we just will always try to manage our way through on the messaging. And that is what, really, Powell was saying earlier as it relates to the fourth quarter; it really depends upon who has coverage and exactly what claims are going to be.

Quentin, I want to add one thing. Remember, we haven't seen or given any guidance and we won't relative to potential uptake, if you want to call it that. So remember, the thing that is a challenge -- and I believe this is the case in some areas in the Carolinas -- there is damage in areas that are not flood zones and so those people may or may not own flood coverage. The vast majority probably don't. So when you hear losses or projected losses on a national news station, those may be losses but they may not be insured losses.

Okay; great. Sorry, just to follow up quickly on that, the 6000 claims from Louisiana floods, Hurricane Sandy 20,000 claims. Just to put some perspective on it for the organic growth, in National Programs you did a 7 this quarter. What would that have been without that increase in claims activity or how much of that was attributable to the 4 million in Louisiana claims?

It is not. I mean, you can do the quick estimate on the top end, the 4 million. You can do that calculation. It would represent probably about 40% of the gross. So the actual underlying business still did well.

Perfect. Thank you, guys.

(Operator Instructions). Josh Shanker, Deutsche Bank.

Good morning, everyone. So I just want to follow up a little bit on Elyse's question about buybacks versus we are not afraid to hold cash on the balance sheet. Can you give us an idea of what is the value of holding cash on the balance sheet? And how uncomfortable are you trusting the market that if you really found a great deal out there and you didn't have the cash that the market would not let the financing be available for you to do it?

Let me take the second part first. We, number one, have worked, as you know, really hard to build a balance sheet that we are very proud of and we believe that that balance sheet allows us optimal flexibility and optionality in making investments in businesses. So in our opinion, we think we could do whatever acquisition it is that we want to do with the balance sheet that we currently have. That is the first thing.

The second thing is, I don't want you to think, Josh, that that is our desire to have cash buildup on the balance sheet, but what I am saying is, we look at all of our investment options as we have talked about. That's hiring new teammates; that is acquiring businesses or returning it to shareholders of which we do through share repurchases periodically, or dividend increases. And we have just increased our dividend for the 23rd year in a row, Andy?

So when I say that, I'm not trying to make you nervous, per se, but I do want everybody to understand that we don't have a feeling that we have to go -- the money that is on our balance sheet is burning a hole in our pocket and we need to go out and do something that -- on the short-term basis that would not be best long-term. That is the way that we look at it.

I would probably add to that, Josh, is, when we put together our new Series A and the accordion underneath of there, that gave us access to $800 million and our goal when we put that together was to give capital to our organization that we can access when and if we need it at the right time.

So combination of the cash that we generate each year, what is on our balance sheet, and that revolver that is out there, we've got a lot of flexibility at this stage when and if it ever comes to us as an opportunity. Everything that we see in the market right now and all trends don't give any indications that there is going to be any lockdown on availability of capital to a Company with our balance sheet capabilities, but you never know. But we think we've got plenty of flexibility.

I think that is right and so I know it is my job to determine whether your stock is cheap or not, but when you say that we don't think our stock is attractive for returning capital to shareholders right now, attractive versus the alternative of maintaining flexibility -- I mean, I'm trying to figure out what the other side of the balance is that how deeply you are weighing that.

So the way we look at it is, we evaluate what we think the intrinsic value of the stock is; we then talk to the Board and we figure out if we think it is the right investment at the time. I mean, I am not trying to oversimplify it but that is how we do it.

And so you are going to make your own determinations based on the statements you just made about us buying stock or not buying stock or wanting to buy it or not buy it in the future. We are not going to comment on that. What we are basically saying is that is how we analyze that as an option and we talk to our Board on a quarterly basis about it.

Understood. Then, on Wholesale, obviously, so there is a little drag maybe two quarters going out on less contingents, less GSCs that is going to hurt margins on the Wholesale. Has something structural changed in your Wholesale business that the commissions you are earning on that business are less capable of being supplemented by contingents and GSCs?

No. But here is the way I think it is important. I'm going to give you a visual which is a non-insurance visual. If you worked at a burger joint and you are cooking burgers on a grill and you are flipping burgers, envision in order to get back to flat, meaning the same revenue that you had last night tonight, you've got to put an extra 15 burgers on the grill and cook them. So you are flipping more burgers for the same amount of revenue when the rates are going down like they have in coastal property. And that is seen both in brokerage and binding authority.

So fundamentally, you could look at it several ways. You could say losses, number one, are random, but in a large subset of numbers there is some predictability in numbers. The flip side of that is you could say as rates continue to go down, then the traditional losses that occur in a large book will actually be a higher loss ratio because your premium volume comes down and it could be a combination thereof. But just think about it as you've got to flip more burgers. And when Andy talks about having more transactions, that is the burger concept. We are doing more transactions to stay flat and then to grow forward, you've got to do even more.

So that is not new. I don't want to give you the impression like this is an epiphany and we are just coming to this. It happens in every market cycle like this. We understand that, but we just want you to know we are flipping a lot of burgers.

Josh, which we view as a really good thing. That tells us, we've got a lot of business coming into the organization. We can't control pricing but we can control, hopefully, the amount of business that we get in and that we retain.

So would I think that contingents will be depressed until rates improve? Is that a takeaway?

I don't think I wouldn't necessarily say that. You could come to that conclusion but I would not actually encourage you to think that way. I think that there is a component. You've got to remember, when a building burns, a building burns. And then you have a storm which is unpredictable and, let's say, you have lots of roof damage -- million-dollar roof claims like we see in some of the places here and up the coast. That is unpredictable. But you are going to have a certain amount of property damage in a year where, inevitably, there is going to be a fire in somebody's apartment complex. There is going to be a couple of things. And so I don't know if I would go that far but I think you could.

And with our comments we have been making, Josh, about continued downward pressure on contingents, we would expect that to happen. We don't know definitively because, if you step back and, say, if rates have been down for a number of renewal cycles, then the overall returns for the risk bearer have absolutely contracted. The contingents are driven off of profitability and so -- as well as obviously loss experience inside of there. So that is why we are seeing them shrink down and it is a cycle that we go through.

That makes sense and I realize I've asked a bunch of questions but we still have 20 minutes left. There might not be too many questioners. Can you just talk about deal pipeline versus prices in the markets and whether or not, A, there's a lot of deals, but, B, they are not attractive at these prices and what is the relationship between the two?

I think that when you talk about it, I think that there is a normal amount of deals that are occurring out there and in terms of in a pipeline because we are talking to people all the time. I do think that even the business brokers themselves, the people trying to sell these agencies recognize that this pricing level is not in perpetuity. They acknowledge that it is at a high and is not sustainable over a long period of time.

And so like I said, we are looking for businesses that fit culturally that make sense financially. And we have done $52 million of annualized acquisition revenue this year. Last year, as you know, we did about $56 million, and then the three years prior to that it was north of $100 million. Each of those three years we had one larger transaction in each of those years.

And so we continue to look and talk with lots of people and I have no doubt that there will continue to be opportunities that come along. And, as Andy said earlier, we have worked hard to put our balance sheet in a position where we want to be able to have the option to look at those that come along because we think there will be a lot in the next several years and we are looking forward to it.

Thank you for giving me so much time on the phone and good luck.

Ken Billingsley, Compass Point.

Thanks for taking my question. Just want to follow in on a couple of questions that have already been asked. One, just on the earnout expectations and the impact this quarter and last quarter, which were fairly similar, can you just kind of how that relates to your commentary regarding exposure to units, improvements, the pricing in the market outside of coastal being flat and the contingent pressures? How do those things relate to what you are seeing with changes regarding earnout payables?

I think the way I would look at it is, think of it, these are all different types of businesses and those businesses in their general market area are performing really well. That means they are renewing a lot of their existing clients, high retention factors, and they are writing a lot of new business. So although you could have one of those things that you just described, i.e., rate pressure if they wrote coastal property or you could have lower contingents, the core business, meaning the client first comment that we talk about, continues to expand. They are writing more clients and retaining their existing clients and, as a result of that, they are doing better on their earnouts.

It is funny when you have a change in acquisition earnout payable and we look at it as a positive because when it goes up that means the underlying business is doing better and, as you know, from a GAAP standpoint, you cannot book -- and we wouldn't, but you can't book the maximum because you don't know if they are going to hit the maximum. And so we have to book to what we think is the best estimate at the time and then if they do better we adjust it up. We view that as a positive.

I agree and that gets to my next question, when you talk about M&A and being competitive. I'm seeing that, at least -- and I know two quarters doesn't make a trend, but does this allow for you guys a little bit more flexibility when you are looking at some M&A and trying to compete with others that are willing to open up the pocketbook a little bit more for these transactions because you are able to help them drive better margins, better revenues, better retentions?

I think the answer to the question is, simply put, I know we say it has to fit culturally and make sense financially and the comments that you have made would fit into the second bucket. There are things that sometimes when people join us that we can do to help them, enable them to get on their way to achieving whatever their earnout is and hopefully they get to their maximum. So we want that and they want that.

But I don't want to give you the impression that there is something that is so-called changing in the last quarter or the last two quarters that would make us think differently about our acquisitions. We think the same way today as we did six and nine months ago. The most important thing is we are looking for good leaders that run good businesses. And when you get the head and the heart of the leader, they deliver their team. That is what we have always talked about. If you get one or the other -- if you get the head and not the heart or the heart and not the head, then it still is not going to necessarily be a bad acquisition but if you get neither, it is not going to be a good acquisition.

Great. I want to move on to a different question on coastal property and I know this is only one piece of everything you are doing. But, in the past, competition has tended to generate higher broker commissions and incentives as they attempt to get market share. Is there anything different this time around? And I'm just looking at your commentary through your PowerPoint that discuss coastal property, specifically, your commentary about contingents being down. Are people trying to be more competitive to grab market share with commissions or is that unchanged?

Yes, I would say that the commission environment is pretty much unchanged. What is unlike -- I mean, not unlike the last couple of years, but what is unlike cycles in the past is, remember, you had a more traditional, finite marketplace so let's just call that the non-admitted carriers for a moment. Now you have side cars and more alternative capital that is either coming into the marketplace or actually waiting on the sidelines which is another alternative. So you have additional alternatives in the marketplace which continues to put rate pressure down on those properties. So I think that the commissions are generally the same. I don't think -- I wouldn't say that has changed.

And last question I have is just on the technology, and I believe you mentioned this before and I just wanted to clarify. The spend on technology in the fourth quarter, is that expected to ramp up to get to your margin expectations for the year or has it naturally -- the pathway natural for it to hit the targets?

No, just a natural pathway on it, Ken. We were, again, 30 basis points or so in the third quarter. We think we will be somewhere in that 30 to 40 in the fourth quarter. That will continue to build as we go forward into 2017 but nothing unusual on a trend.

And maybe I'm just recalling incorrectly but I thought the first part of this year the margins were much lower and so I just want to clarify it is 30 or 40 for the quarter, not 30 or 40 for the year?

We would probably be on the lower end of that for a full year. So again, our commentary is, we didn't have much impact in Q1; we had about a 25 basis point impact in Q2, kind of that 30 in Q3 so it is building.

Okay; great. Thank you very much.

(Operator Instructions). Adam Klauber, William Blair.

Thanks; good morning. Did I hear in the remarks on retail organic, did you say that the quarter organic was helped by business that was pulled from the quarter before?

No. We didn't say it was pulled from the quarter before, is that we had a number of items that we didn't recognize in previous quarters, either deals that weren't finalized or incentives that we hadn't received back at that stage. So we were just able to catch all those up in the third quarter.

Okay, okay. That is what I thought. Then, could you talk about the benefits business, how is that doing compared to the overall Retail business? In general, how is commission pressure on that small -- I know you don't have a huge book, but in the 100 live and under book?

So I would tell you, Adam, that we are very pleased with our benefits book of business and how it is growing. I would tell you and we have said this before, we have experienced more organic growth in the over 100 than in the under 100, but they are both growing, which is good. And I would tell you that we have seen in our book -- in the under 100 there was a lot of change over the last couple of years where you had carriers going from a commission level to a per head per month or how they are looking at exchanges/other alternatives and all these other things.

What we are seeing now is sort of a leveling of commission dollars as it relates to those accounts. That does not mean that it is not under pressure on one-off accounts; that is not what I am saying. But I am saying, generally speaking, I think that it is kind of leveling out and the under 100, as I said, both of them are growing and we are very pleased with our benefits business.

Okay; thanks. Staying with the Retail, I think you mentioned that exposures are doing okay. Would you say, compared to, say, six, nine months ago, are they doing moderately better? And, particularly, is the West Coast doing better than it has been?

So are you talking about the West Coast, geographically?

Yes.

So what I would tell you is, I have been -- I was in 23 offices last quarter and a number of them were on the West Coast and I would tell you that, from an economic standpoint, they seem to be doing better. So I can't say six or nine months ago that I wasn't in those offices six or nine months ago but I would tell you that moderately better overall in certain areas. You go into places like Miami and Orlando and cities like that, there is a lot of construction. You go into Vegas, you go into Orange County, you go into Seattle, even Portland, things are doing better. So once again, I would tell you that I ask our teammates -- I want to know about construction, new construction and/or renovation work. We ask them about general exposure units in terms of sales and payrolls on their insureds -- other insureds, not just contractors. Things like that that kind of give you a general sense of what the economy is doing in that local market.

Okay; thanks. Then, as far as Florida Workers' Comp, you mentioned that will probably add a little to the revenue line next year. There has been a number of headlines. Is it more headline activity or on the ground are you seeing a lot of lawsuits with those issues in Florida Workers' Comp?

No, what I would say is that the go forward, from our standpoint, is the potential from a go forward standpoint. Remember, we -- the way the plaintiff's bar was involved before was mitigated by the current statute as it is currently written and now it is changing back to where they can be more active going forward. So remember, this is a prospective thing, Adam, as opposed to a current thing. That is how I would want you to think about that (multiple speakers).

Okay; that is helpful. And then, in general, across your book of business, you have seen a little bit more property losses this year compared to light last year. How about in, really, non-property losses? Are you seeing any pressure even if it is subtle pressure compared to the last two years because losses have just been very benign? So are you seeing any more pickup across your book ex-property?

Yes, well, I would kind of say two things. One, automobile -- and I'm not specifically just talking only about our book of business, but commercial auto continues to be a challenge for our carrier partners. So even on a broader level, and I know you already know that.

The second thing that I would tell you is, I think that casualty pricing in general is problematic for some of our carrier partners because what I mean by that is they feel like it has gotten to a level in some instances where they can't make money and there are certain carriers that are saying, look, I don't want to write anymore if it goes that much lower.

So that is not a lot of carriers but I'm saying there are people out there that are really digging deep into their books and they are saying -- look, casualty is always a challenge for carriers, in my opinion. But I would think about those two areas. But I don't think that our book has had something abnormal relative to other than property losses in the last two years. I think it is kind of normal.

Okay; thank you. And then, finally, in Wholesale, obviously a good quarter and we've been hearing the Wholesale business has been holding up. Would you say you are growing better than the market? And then, in general, why are Wholesale flows remaining strong despite a fair amount of pressure on the market?

Well, the answer to the question is, I don't know about all the other wholesale businesses out there. I would tend to say that we are performing probably in the top half or top third of that, I believe, but I don't really know. The reason that we do well, in my opinion, is we have really good leaders and really good brokers and teammates. And what Andy referred to earlier is, there is a lot of activity. And so it is a current and consistent action and so we are trying to get more swings at the plate, more opportunities.

And so I think in, sort of, markets where there is disruption or potential disruption, that creates more opportunity. So as an example, if you have a storm coming, there are going to be some markets that close and some markets that don't close for maybe another day so that might present an opportunity to a wholesale broker to try to get something done. Having said that, any time -- the wholesale business makes money, in my opinion, on the downside and the upside. The thing that is not good for wholesale is a flat market.

Okay; thank you. Thank you very much.

We are going to take one last question. Okay, Ron?

It appears that we have no further questions at this time.

Perfect. That actually works out well, then. Thank you all very much and have a wonderful day and we look forward to talking to you next quarter. Thank you very much.

That will conclude today's conference. We appreciate your participation. You may now disconnect.