Brown & Brown Inc (BRO) 2014 Q2 法說會逐字稿

Good morning and welcome to the Brown & Brown 2014 second quarter earnings call. Today's call is being recorded.

Please note that certain information discussed during today's 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 views with respect to future events, including those related to the Company's anticipated financial results for the second quarter of 2014, and are intended to fall within the Safe Harbor provisions of the 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 Company's determination as it finalizes our financial results for the second quarter of 2014, 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 are those risks and uncertainties identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the Company's business and prospects, 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 or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I would like to now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Tina. Good morning, everybody, and thanks for joining us for our Q2 earnings release call. We're very pleased with our results this quarter, both top line and bottom line. So let's get straight into the highlights of the quarter.

We delivered $397.8 million of revenue for the quarter and growth of 22.1%. Our organic revenue grew 3.8% after backing out prior-year impact of Hurricane Sandy claims within the Colonial claims business. We're proud of this performance and are seeing pockets of modest growth. However, rates continue to be under pressure; and in spite of this we continue to deliver growth in every one of our divisions.

We grew our earnings per share by 16.7% versus the prior year. As we noted previously, there is seasonal nature to Beecher Carlson large account business. As such, we adjusted for this business in our Q1 earnings release to provide a more meaningful comparison to prior year. To be consistent, we've adjusted for this impact on the Q2 results, even though this business did generate significant profit this quarter.

Due to the materiality, we're also adjusting for the impact of Wright Insurance Group acquisition, which we completed in May, in order to arrive at a more comparative EPS growth. With these two -- these three adjustments, our adjusted EPS is $0.38 versus $0.35, for an 8.6% increase. This compares nicely to the adjusted total revenue increase of 9.1%, which you'll see when Andy goes deeper into our financials.

In addition to Wright, we completed four acquisitions during the quarter, with combined annual revenue from these acquisitions being approximately $157 million. We're impressed with the early results from all of the acquisitions and we're excited about the opportunities that these acquisitions bring to Brown & Brown and our new teammates.

To conclude on the acquisition front, Beecher Carlson has completed their first 12 months as part of our team. This acquisition has delivered on their first year revenue and earnings-per-share targets, even after a slower than expected Q3 of last year. We want to thank each Beecher Carlson teammate for everything they did to accomplish this goal. The results of Beecher Carlson will be included in the Retail results going forward, starting with Q3.

From a cash flow perspective, our EBITDAC margins improved to 34.2% versus 33.8% in the prior year, when adjusting for Hurricane Sandy, Beecher large accounts and Wright. We also delivered another quarter of strong cash conversion. We continue to lead the industry in both EBITDAC and free cash versus our publicly traded competitors. We're very proud of these metrics, as they speak to the power of our business model.

We completed the $25 million stock buyback in Q2, which was previously announced in Q1. This buyback was to help manage the creep related to our stock incentive plans. We're also pleased to announce that our Board has approved a purchase of up to an additional $200 million worth of outstanding shares. Andy will talk more about this later in the presentation.

And lastly, we're continuing to target 4% organic growth for the year, excluding the impact of Hurricane Sandy revenues within our Colonial Claims business. We delivered on our target Q1 and Q2, and we're reaffirming this projection for the remainder of 2014. This will not be easy if the market doesn't continue its forward momentum or rates drop precipitously. We have a great team that's focused on executing and growing, so we know we'll do our best.

If you go to slide 5, I'd like to talk a little bit about the diversification of our Company now. On an annualized basis, Retail represents 51% of our revenue, Programs represents 24% of our revenue, Wholesale represents 15% of our revenue and Services, 10%. That's with the new acquisitions, including Wright, in Q2.

So now let's dig a little deeper into the results for the quarter by saying how pleased we are with the organic revenue growth and margin expansion in each division. Let's start with our Retail division.

We grew 2% organically and we're seeing standard property renewal rates down 5%, largely due to the excess capacity. Large Group Benefits, over 50 lives, continue to see increases of 5% to 10% or more. Work Comp rates continue to climb, as the industry experiences consolidation and divestitures; and we're seeing Payroll flat to up slightly. We're not seeing consistent hiring across our client base, which is comprised of over 300,000 customers.

Lastly, Commercial Auto accounts with good claims history are seeing 5% to 15% decreases. Other classes could be flat to up slightly, depending on loss experience.

Moving on to National Programs, which is our second largest division, after the acquisition of Wright, we're glad to announce that Chris Walker has taken the divisional President role effective July 1. And since joining the team in January of 2012, as part of the Aero Light acquisition, Chris has continued to demonstrate his leadership skills and abilities to grow the program's business. We know he'll do a wonderful job leading all of our programs.

We're experiencing growth in Personal Lines, Auto, Property, and Residential Earthquake at Personal Property, which all had strong quarters. We continue to experience good retention rates across most of our programs.

Now, Wholesale, which also had another great quarter. Binding Authority business, that provides multi line coverage, is growing nicely. The team is very focused on new sales and retention. We're seeing Professional Liability and General Liability product lines growing, with rates flat to up 5%.

We are continuing to see decreases in Cat Property rates, in the range of down 15% to 20%. I would note, if we don't have a large storm in the second half of the year, we expect to see rates continue to decrease, as there is such a large amount of capital chasing returns. That said, we are very pleased with the 8.1% internal growth in Q2 for Wholesale.

And lastly, in the Services division, this division also had a great quarter, with organic growth of almost 10%. We realized solid growth from new workers comp claims clients. During the quarter, we continued to see and experience backlogs and decreased revenue slightly within our Social Security Disability Advocacy business, as the Social Security Administration has not hired back everyone after the sequestration last year. However, with this strong organic growth, we delivered good margins.

Now I'd like to turn it over to Andy for the financial report.

Great. Thank you, Powell. Good morning, everyone. Let me now discuss our financial highlights and talk about some of the key metrics for the quarter.

Our total revenues grew 22.1%. However, when you remove the $2.1 million of revenue last year related to Hurricane Sandy within our Colonial claims business, the Beecher Carlson large account business, and Wright, we grew the top line 9.1%. We believe the removal of these three large items gives a more clear picture of our comparative financial performance.

When we remove the Hurricane Sandy impact, our organic revenues increase by 3.8% year-over-year. We continue to have a disciplined approach to profitable revenue growth; and so from an EBITDAC perspective, we delivered strong flow-through, with an increase of 10.3% versus a 9.1% revenue increase.

As we've said previously, not every quarter will show margin expansion, as there will be certain step investments that we're required to make in order to help grow the organization. We're focused on growing revenues and ensuring our margins increase modestly over time. On an as reported basis, our earnings per share increased 16.7%; and excluding Hurricane Sandy, Beecher Carlson, Wright, it increased by 8.6%.

Moving to slide number 7. I'd like to highlight the key components of our revenue performance for the quarter. Our total revenue increased by $72.1 million year-over-year, or 22.1%. A large portion of this growth came from our net acquisitions and dispositions. The largest components were the Beecher Carlson acquisition and Wright.

We also realized a $4.8 million decrease related to contingents and guaranteed supplemental commissions. $5 million of this was related to our FIU business. As you will remember from our Q1 call, that we recognized this amount in Q1 of this year, versus in the second quarter last year.

I want to note that during the past four years, we've realized these contingents in three different quarters. So there is some variability of when we actually know the amount. In summary, when we remove the $2.1 million of Colonial claims, we delivered another solid organic revenue growth in the quarter of 3.8%.

Our as reported EBITDAC margin decreased to 33.9% versus 34.2% in 2013. However, we believe it is important to present the underlying performance, so you have a feel for how the business is performing. So similar to the organic revenue analysis, we adjusted the same items in order to arrive at comparative numbers.

On an as adjusted basis, our EBITDAC margin improved 40 basis points, from 33.8% in 2013 to 34.2% in 2014. Considering the $2.4 million year-over-year increase in our non-cash stock compensation, and the movement of the FIU contingent, this margin improvement is even more impressive. As a reminder, we'll be on a comparative basis for stock-based incentive compensation and Beecher Carlson starting in the third quarter.

Moving to slide number 8. Now let's talk a little bit about each of our divisions in a bit more detail.

Starting with our Retail division, as Powell mentioned, represents just a little over 50% of the total business now. It had a really good quarter. We posted 22.8% growth, primarily driven by the addition of Beecher Carlson. And our underlying organic growth was 2%. We think this is a very good performance in this current market.

When we exclude the Beecher Carlson large account business, our margins improved by 130 basis points. So we're very pleased that we're getting good margin expansion, as the revenues are growing. Next quarter, Beecher Carlson will be in our organic numbers. So please ensure you capture this in your models.

Moving to slide 9, our National Programs division. We had another great quarter, with revenues growing 32.9%, mainly due to the acquisition of Wright, and we grew 2.2% organically. We're continuing to see improvements in the marketplace, and more carriers are interested in our niche programs as an alternative approach to addressing market needs.

We realized good margin expansion on an as reported basis, with 150 basis point increase, mainly related to Wright. When we adjust for the effect of Wright, the adjusted EBITDAC margin decreased by 160 basis points, primarily related to the recognition of FIU contingents in Q2 of last year. If this was normalized, we would have recognized very good margin expansion.

Next is our Wholesale division, which had an outstanding quarter, reporting revenue growth of just shy of 10% and organic growth of 8.1%. This is a very impressive performance, as this division is being faced with downward pressure on rates for Cat Property placements primarily related to coastal properties somewhere in the range of 15% to 20% down. This is being offset partially by some recovery within Construction.

With the revenue growth, we also delivered strong EBITDAC margins of 35.9% versus 36.3% in the prior year. The slight margin decrease is a great example of how certain step investments we make to add new teammates in support of new customers can have a flattening or negative impact in one quarter and then will show margin expansion in the future. Our long-term objective is revenue growth with slight margin expansion.

Lastly is the Services division. When you adjust for Colonial claims, the division delivered strong organic growth of 9.9%. This was primarily delivered through our USIS and NewQuest businesses. Both businesses have added new customers over the past year.

This division delivered great adjusted EBITDAC margin improvement of 50 basis points. Overall, we think the second quarter was a very good performance and it was right in line with our expectations.

Moving to slide number 12. Let me now provide an update on our new credit facility and give some guidance on projected interest expense.

The structure of the facility gives us good flexibility, with a term A loan of $550 million and a revolver of $800 million. This revolver gives us access to liquidity as we need funds for acquisitions, or it will be paid down as we generate cash from operations.

We drew $375 million on the revolver in conjunction with the Wright closing and to pay off existing higher interest rate debt of $230 million. Also, we'd like to note, in July, we drew down $100 million on the revolver for payment of existing Series B notes that matured.

The pricing for the facility is LIBOR plus 137.5 basis points. We previously said we're comfortable with a debt-to-EBITDA ratio of 1.5 to 2.5. With our current outstanding debt at the end of the quarter, we're right in that range. We're very pleased with our new favorable coverence and interest rates. We've lowered our average cost of debt from about 3.5% to 2.4%; and our go forward interest expense should be about 6.5 to 7.5 -- excuse me, $6.5 million to $7 million on a quarterly basis.

Moving to slide 13. Let me now talk about our share repurchases. In the second quarter, we purchased $25 million of outstanding shares, which equates to approximately 845,000 shares. This was in order to help us reduce the impact of share creep related to our stock incentive plans.

We are also pleased to announce that our Board of Directors has approved the repurchase of up to $200 million of outstanding shares. This repurchase is the next phase of our capital maturation and is a component of our disciplined approach to capital allocation.

We have mentioned to you previously that we distribute our capital in three ways. One, is to internal investments; two, for external acquisitions; and three is to our shareholders. Historically, we've been doing all three of these, with the third coming in the form of dividends.

When evaluating our current -- the current value, our current value, along with the current multiples being paid for larger M&A deals, we believe the timing is appropriate to allocate some of our capital to share buybacks. This purchasing could begin in the third quarter of 2014. Please note that the purchases will be funded entirely from cash from operations.

Moving to slide 14. In the first quarter, we committed to providing you with a readout on the total Beecher Carlson business we purchased in July of last year. This should provide you with a more fulsome understanding of the seasonality of the business and should help you with your models. As a reminder, we previously communicated that this business was projected to deliver about $115 million of revenue and $0.05 to $0.07 of EPS improvement.

We're very pleased with the performance of the Beecher Carlson business during their first 12 months. They've delivered on their top line and EPS targets, growing the business just over 5.5% for the year. The future looks good for the business, with growth continued to be forecasted. We'd like to thank all of the Beecher Carlson team members for their dedication over the first year and are very proud to have them on their team.

Next, moving to slide 15. In the first quarter, we also said that we'd provide you with the initial targets for the Wright acquisition, but we mentioned that we needed to get into more details in order to better understand the margins by quarter. Due to the large size of Wright and the seasonal nature of the business, we've provided in here the summary quarterly estimates for revenues, margins and earnings per share.

Please note that this business can be influenced by large cat activities. Included in these numbers are a projection of $7.5 million of revenues associated with processing cat claims. This amount represents the 10-year average, excluding Hurricane Katrina and Superstorm Sandy.

So depending upon the year, we could see revenues materially fluctuate above or below this average. We phased these revenues, for the cat revenues, based upon when they are normally recognized.

We also want to note that in order to have Wright in compliance with our accounting policy, we are showing insurance premium taxes on a gross basis. Previously, Wright recognized these on a net basis. As a result, this represents about a $12 million increase in revenues and expenses and has a corresponding impact on margins. For clarity, there is no impact on cash flow.

As we previously communicated, we expected this business to deliver about $121 million of revenue and $0.09 to $0.10 improvement on EPS. When you add the $12 million for the premium taxes, that would put us at about $133 million, which is right in the range that we provided on the following schedule.

With that, let me turn it back over to Powell, who will give closing comments.

Thank you, Andy. Great report.

We're well positioned for continued organic growth, even though the market does remain a little inconsistent. The pipeline for acquisition candidates remains good. Each division is well positioned for organic growth and incremental margin expansion.

We had a great quarter of acquisitions and are very pleased with each of these. We are pleased with the strong performance of Beecher and Wright; and we reaffirm our target of 4% organic growth for the year, excluding the impact of Hurricane Sandy.

So Tina, I'd like to open it -- turn it back over to you to open it up for questions.

Thank you.

(Operator Instructions)

Sarah DeWitt, Barclays.

First, on the Beecher Carlson acquisition, how would you say the large account business is performing versus your expectations? Because it looks like it was dilutive to earnings by $0.01 year to date. And I'm just trying to reconcile that versus your comments that the overall business hit your 5% to 7% accretion estimate for the past 12 months.

Well, the answer is, Sarah, it performed really well in Q4, Q1 and Q2. And so as you remember, we talked about in Q3 of last year, that as the senior management team of Beecher was focused on culminating a transaction with us, they weren't able to basically put as much time into new business, and so they were a little short in Q3.

So we're very pleased with the results.

And Sarah, this is Andy.

I'd probably also clarify when you talk about the margins, similar to what you probably saw in the Wholesale business where we're making investments, we are investing in the large business right now. You may have seen back in May, we did a press release on a number of areas where we're trying to grow the business around our mergers and acquisitions, our new Zoom offering that we have, cyber liability, property risk control. So there's a number of areas we're investing that we will know that will continue to grow in the future.

Okay. Great. Thanks.

And then, how much excess cash do you have available for buybacks and M&A? And how should we think about the timing of the $200 million share buyback authorization?

So we finished the quarter just a little over $300 million of cash. And for the back end of the year, if we were to execute the program -- I say if we were to execute the program -- we would be able to fund substantially every bit of that from operations in the back year, if we complete it by the end of the year.

So it's reasonable to assume you could do $200 million in the second half?

From a cash flow perspective, yes, that is reasonable. That's not to say that we would do it, though.

Okay. Great. Thanks for the answers.

Elyse Greenspan, Wells Fargo.

I was hoping to first of all spend a little bit more time talking about what you're seeing just in terms of the economy. I know when you look, the 4% organic growth that you guys are looking for the full year, it assumes maybe consistent/a little bit of a pickup.

And then in particular, when we look at the Retail segment, as we bring Beecher online into the growth numbers, how would you expect the growth to go from where it's trending from here on a quarterly basis forward for the back half of the year?

Okay. To your first comment, we're seeing -- and we see this through a number of our divisions, but most notably through Retail and Wholesale. So in certain pockets of the country, there are areas where the economy is zooming. And let me give you an example.

Miami is booming right now. There's all kinds of construction. There's no glut of condos anymore. All of that has been absorbed, and there's 50 condo towers being built in Miami alone.

That said, that's not indicative of every place. So you could go to Naples, Florida, and it would be much slower 90 miles across the Everglades. Or you could go to a place like San Antonio, Texas, where the economy has been somewhat stable throughout the economic downturn because of healthcare in that community and government spending.

So having said that, it really depends on where you are in the country. I would tell you that in the Retail standpoint, we are continuing to see more additional premiums on audits than return premiums. So that's a positive indication. That's anecdotal evidence, but I'm just telling you, that's one of the things that we're seeing on a broad basis.

The second thing is in Wholesale, Andy referred to the pickup in construction activity. So we're seeing lots of builders' Risk policies on new projects and Liability on smaller or new contractors, in terms of Liability, to work on these projects. That said, it goes up and down in different areas around the country.

As it relates to the second half of the year, included in Beecher and all around, we reiterate what we have said before, which is Retail is a low to mid-single digit organic growth business. That has not changed.

So some quarters, it will be up a little bit. Some quarters, it will be down a little bit. But the margin continues to be very good, and we're very pleased with all of our teammates in Retail, which is now 51% of the Company, and more diversified company in regards to the actual businesses that we have, all in the United States and one business in London.

Okay. Perfect.

And then just a little bit more in terms of you guys have started mentioning some of the investments that you've been making in the organization and how that's going to offset some of the margin improvement. Just any more commentary you want to provide about that, the magnitude or the growth we might see in your expenses, maybe on an organic basis going forward?

And then just in terms of margins, as Wright comes on, even with these investments, do you still think that overall we'll still see margin improvement on a consolidated basis?

Well, Elyse, what we're doing right now is -- the short answer is we're working and thinking around how we want to talk about our internal investments to you and everybody else. The idea, though, is you know and we know that in order to grow our business organically, we have to make organic investments selectively along -- or internal investments along the way, which we have done historically. But we are going to do some additional internal investments that we're excited about. Andy alluded to several of those within the Beecher operation.

But as we've said, we are very pleased with the margin where we are. We do believe that there are incremental improvement possibilities. Some of that will be offset in our step up in internal investment, which we anticipate will yield more internal growth. We'll probably provide more information going forward in the future. But at this time, that's all we're going to be saying.

Okay. Thank you so much.

Ken Billingsley, Compass Point.

On slide 15 -- just want to clarify this -- you say that it is adjusted for corporate overhead. And I believe, on slide 15 -- I'm just verifying -- for the adjusted EBITDA, is that corporate overhead, is that an allocation of existing costs already at the firm, or were these new corporate overhead costs that are being excluded from that margin?

Good morning, Ken. It's Andy here.

It's a combination. So we did have some incremental overhead. And then some of it is existing allocated down to the business. As you probably remember off of previous calls, we allocate all of our overhead down to all of our businesses. So we try to understand a fully loaded basis.

And can you give a dollar amount on what the adjustment is?

No. We wouldn't go into that level of granularity on it, Ken.

Okay.

And I believe, Andy, it might've been you, when you're talking about the stock buyback plan, about being opportunistic with the $200 million that's been put in place, one of the reasons is that M&A deals are getting too expensive.

Could you expand on what you're seeing there and what's going on from an M&A perspective? You talk about a strong pipeline, but what does that mean from a purchase standpoint?

Okay. Ken, it's Powell.

What I would tell you is the evolution -- and I think I've said this before -- of the acquisition space has been interesting in the sense that, prior to 2000, the big acquirers were really publicly traded brokers, typically. From 2000 to 2007, it was banks. And now many of those banks are reevaluating their position and/or figuring out if they want to continue to hold that asset.

The final, in 2007 forward, is a result of the very low interest rates. You have the significant participation of private equity, which is the 3 to 7 year typically participation in that space.

And so there is lots of activities -- a lot of activity around acquisitions. And so we look at the share repurchase as another potential investment opportunity of our capital, as Andy talked about.

There continues to be a slight upward pressure on prices. Those prices typically are defined at certain breakpoints. Breakpoints would be maybe under $20 million in revenue, and $20 million to $50 million or $75 million, and then above that. And so, as I said, we have a disciplined model, as you know.

And ultimately, what we are interested in is, first and foremost, the cultural fit. If the fit is not there for our culture, we don't do the deal.

The second thing is, is there a way to make a mutually agreeable -- come to a mutually agreeable price, in terms of the purchase, that works? And so we do that on all of our acquisitions and look at that very closely.

And so, like I said, we continue to evaluate all kinds of interesting opportunities out there and are excited to continue to do so. But if, in fact, rates either -- purchase price multiples go up further, that's if -- or if on an individual deal that we think fits culturally, that someone else puts a number out there that doesn't seem to make sense financially to us, we're not going to do it.

And Ken, I'd probably add too, that what we're trying to make sure that we can do with all of this is when we look at our capital, it's not endless in nature. We have to allocate it around, and we're trying to make sure we optimize the returns on it. And we're going to be looking at all of our items, as we have historically, and make sure that we get, hopefully, the best returns that we can.

And with the current multiples that we're trading at, and if you look at some of the larger acquisitions that are out there, when they start pushing on these multiples north of 10, the IRR starts to point towards direction of a share purchase, because you can eliminate all of the integration risks around all of it.

So there's a lot of rigor that we put into every one of these deals, in addition to what Powell said, to make sure that financially we're doing the right thing for the organization and for our shareholders.

Very good.

Another question I had is on your organic growth estimate of 4% for the year, I believe slide 6 and the last slide, I'm assuming that's an adjusted organic growth number?

That does not include Colonial claims impact in Q1 and Q2, that's correct.

But would it include assumptions -- I'm assuming it wouldn't include Wright, either?

Remember, any acquisition is not included in organic growth until having been on the team for 12 months. So it includes Beecher and includes any acquisition that rolls on that was acquired in the prior 12 months, once they pass the 12-month anniversary.

Okay.

And Ken, for clarity, it's only going to include Beecher for the six-month time frame, for the second half of the year, not for the first half, okay?

For the second half of the year. So looking from an adjusted standpoint, will there have to be some accelerated growth in certain segments, or are you pretty much on target, I think it was 3.8% now adjusted, but once you add Beecher in there, are you expecting some larger organic growth in one segment versus another to get the number back up?

Remember, we said -- as I said earlier, in Retail, we think that's a low to mid-single digit organic growth business. And we believe that that's a broad statement applies also to the Company as a whole.

At the present time, Wholesale has been enjoying significant organic growth, as you've seen last year and the first part of this year. But I think that each one of those divisions will continue to make up a part of us achieving that goal going forward.

And as you know, we've talked about that was a one-year only indication. So going forward, we will not be giving organic growth guidance. We've been saying that from the beginning, but I just wanted to clarify that.

Very good.

Last question is, so our acquisition growth was higher than we had estimated. Was there better revenue growth coming from acquisitions that you expected, or could it possibly be a timing issue of when we put those revenues in our model versus maybe we thought it was coming third quarter and it came in the second quarter? Can you talk about some expectations from maybe where revenues came from acquisitions?

Ken, probably two good points there is when we look through everybody's models, most everyone was a little light on our acquired revenue. Most of that were the other acquisitions that we did during the quarter, and I think just not getting that estimate correct. So that would be one.

From the businesses that we acquired, all of them are performing right in line with our expectations, so we're very pleased with each of those. So I don't think anything, you shouldn't read anything into that from an unusual perspective that you guys -- or we were higher than everybody out there, and therefore change anything for the third quarter.

Great. Thank you very much.

Thanks, Ken.

Josh Shanker, Deutsche Bank.

I feel like I'm getting a little bit of mixed signals from you on the buyback. When I think about Brown & Brown, you like to buy businesses ideally maybe at 6 to 8 times EBITDA, when they work for you. You're also an age when you're doing large transactions of big companies, where you're paying more for that.

Why be cagey about a $200 million buyback of your own stock when you're trading at 8 times EBITDA? Or at least, how are you thinking about it?

Good morning, Josh.

I wouldn't say we're cagey about it. The reason why we're just cautious as to committing to a time is we haven't agreed upon when we're actually going to enter into the market or how we're going to go about it, either in an open market purchase or an accelerated share repurchase on the timing. So that's the only reason why we're being cagey about it. From a financial perspective, we're definitely not.

Okay. That makes sense.

And additionally, when you talk about these step investments, I realize there was a question asked about it before, but I think that there's some concern that you guys are reaching a critical mass where you might need to reorganize the business in some way. These investments -- is there any potential for a significant investment to improve technology or infrastructure, or how do we have to think about this, concerns about spend going forward?

Josh, one of the things that I think we said the last time -- I know that we said it when we were out at a couple investor conferences -- is with Andy being the new CFO, some people get nervous that Andy's going to want to spend $50 million or $100 million on a technology investment, which we talked about when we were seeing if there was a cultural fit of Andy joining the team, which there is a cultural fit.

And so Andy is not keen on going and spending that kind of money on technology. However, technology is something that we continue to look at and how we as an organization use it more effectively to the benefit of, not only our teammates, but specifically, our clients.

So what I think you should read into that is the following. Internal investments, prior to this call, have been just not talked about that much, and assumed. And we, Andy and I, are now going to talk a little bit more about them, because it's an integral part of our strategy to grow the business.

And that growth is both internal and external. And so we will make investments, at times, where we believe that there are great -- good opportunities to grow organically and expand businesses that are already having success.

So I don't want you to go read too much into that. I'm just making a comment that, historically, there's been a lot of discussion about around acquisitions. And it's something that, after we've thought a little bit more about it and what we're doing, we're going to talk a little about that, too, not an extreme amount, but we're going to talk about that, too, because it's an important part of how we maintain our culture and grow our business organically.

Josh, I would probably add to that. On the technology front, is we will make some investments there over time. If you look historically, we spend somewhere around $20 million to $25 million on capital. We have a conservative approach to many things that we do.

That would also be as to how we make our investments in technology. When we do these, it's going to be in a very prudent fashion across the organization. There will probably be some uptick in that number over the coming years.

But don't think that it means we're going to go spend $50 million or $100 million all at one shot. That's just not our approach, nor is that my personal approach on things. I don't like to do it that way.

Thank you very much and good luck.

Mark Hughes, SunTrust.

Any reason to think those investments will accelerate in the third quarter?

Don't know. We've made some investments already in Beecher Carlson. And so we know about those that were made in Q2. But we continually evaluate internal investment opportunities throughout the quarter.

But at this point, you have no specific plans to accelerate those investments?

Nothing that we're aware of at the present time, other than normal investments.

And does this math work? I think in the third quarter call last year, you had talked about a hole at Beecher Carlson of about $3.9 million related to the distraction from getting the deal done?

Is that hole -- can we assume that hole will be filled in this quarter, which would presumably have a nice impact on the Retail organic growth?

The answer to the question is, Q3 of last year was a tough quarter for the Beecher team. Some of that revenue may have been one-time in nature. So the number might be slightly different than what you're referring to. But we anticipate Beecher having what we think would be a fine quarter.

I don't want you to -- you can see what the organic growth was for the year, and I wouldn't want you to get ahead of yourself. So that's what I would say relative to that comment.

And then finally, on the Group Benefits business, you talked about, I think, rates perhaps being up 5% to 10%. How much of that is translating into your revenue? What's the Group Benefits organic growth overall, roughly?

Right. We don't break that out, Mark. I appreciate the question.

I would tell you that, as you know, last year, we did about $225 million of total revenue in Employee Benefits. We then completed a transaction in Q2 of Pacific Resources, Paul Barton and Paul Rodgers' team, and we're really pleased with them joining. So we have now over $250 million of Employee Benefits revenue in aggregate.

The large account revenue of that is about $70 million, plus or minus a little bit, in terms of the Health, I should say. And it depends on the account. Many of those accounts in that segment are on commission, so there would be some flow through.

But there are some that are on fees or flat amounts defined by the client. So it just depends.

Thank you.

Kai Pan, Morgan Stanley.

Thank you so much for the additional disclosure on the seasonality on Beecher Carlson and Wright. So my first question as your debt level. Now your currently, your debt to EBITDA ratio probably to the higher end of your range. I just wondering, does that limited your ability to raise additional debt in case there's larger acquisition come your way?

So good morning, Kai.

As you probably see, right now, we're running at about 2.3 times debt to EBITDA. We don't believe that, with our current financial position, that we would have any issues with raising additional capital.

We still have plenty of room on the revolver, if the right strategic deal came along -- and I say if it came along. So we don't have any concerns on that front. We want to operate within that 1.5 to 2.5 range. That's where we're comfortable. But again, we do have the ability to jump above that, if the right deal came along. But we're not expecting anything on that front.

Good. So going forward, would you let these debt levels maintain or you would pay down?

Over time, we would look to pay it down. It will fluctuate back and forth. If we have a smaller deal that we need to buy during the quarter, it may go up a little bit and then go back down. And that's really the benefit of having the revolver out there, so it can spring up and down with us.

Okay. Thank you.

And then on the integration, the acquisitions, historically, like at Brown culture has been let the quiet company run relatively autonomously to preserve entrepreneurial culture. So now, as yourself getting bigger and the acquisition you're doing is getting bigger, do you see, is there any change of philosophy that you're probably more involved, in terms of integration of the company you're acquiring?

I'll take that.

What I would say is no. And remember, the initial basis of that is cultural fit up front. And so it's not a one-time discussion about culture and how we do things and how they do things. It's an ongoing discussion with the new teammates that join our team.

And so if you look at Wright, as an example, we have a number of teammates, new teammates that are coming to our Leadership Council meeting that's being held over the next couple days in Orlando. And they continue to hear about how we do things and we hear about things that they may be doing that we can implement some of their best practices in some of their segments, if it would help improve our business. So it's a two-way street.

Remember, it's very important, when we have an acquisition, that there is a person in the organization who is responsible for ushering them into the system. And so you could use the term sponsor, you could use whatever term you want to use, but that person helps share additional parts of our culture, and talking with people internally and getting people, encouraging them to come to the Wright events, where they would be exposed to other people's like mind to share ideas and learn additional things.

So at the present time, no, we don't believe so. But as we continue to get larger, we're going to continue to evolve. But we want to maintain the culture that we have, which, as you referred to, is a decentralized, entrepreneurial culture which puts a premium on performance.

Thank you so much for the answers.

Thank you.

Dan Farrell, Sterne Agee.

Andy, I apologize if I may have missed this in your comments, but did you mention why non-cash stock expense declined from 7.5 level that it had been running at, and can you give us a sense of what a reasonable run rate would be?

Sure. Good morning, Dan.

During the quarter, one of the things that we were looking at is we went back over the last five years on all of the tranches that we had given out for all of the SIP's. We've refined our estimate on forfeitures underneath of there. And again, just takes a lot of data to get through. And so that's allowed us to hone in on that a little bit tighter than where we were in the past.

On a go forward run rate, we would anticipate somewhere in the range of $6 million to $7 million on a quarterly basis, but it's really dependent upon the number of participants that we have in the plan.

Okay. That's helpful. And then just a couple balance sheet questions. Unrestricted cash, the $309 million, how much would you say of that would actually be through usable cash?

And then just another question on your debt leverage comments. When you're looking at your debt to EBITDA range that you feel comfortable with, do you look at gross or net of unrestricted cash? Because it would seem net of the unrestricted cash, you're actually pretty close to the lower end. Thank you.

Sure. So as I mentioned, we're a little over $300 million of total cash. And it would be just a bit under $200 million in that range would be, let's call it unrestricted, which is really Brown & Brown cash.

As you probably know, we've got -- cash falls in two categories for us, which is traditional GAAP and then we've got what sits in the premium trust accounts. So the latter is not part of the numbers I was talking about in there. And remind me, Dan, on your --

Net or gross?

Oh, net or gross.

Yes.

Yes. The 2.3 is on a gross basis. If you bring it all the way down to a net basis, yes, we would be materially lower on there. So again, we generally take a bit of a conservative approach on how we look at things, give ourselves some room.

Fair enough. Okay. Thank you very much.

No problem. Thank you.

Ryan Byrnes, Janney Capital.

The Beecher organic growth has out paced the core retail Brown book. I'm just trying to figure out why they've been able to achieve 5.5% organic versus, let's say, 2% for the BRO book. And I guess, is that Beecher organic sustainable going forward?

Okay. So good morning, Ryan.

The first thing is Beecher Carlson's business has been primarily built through internal investments in either existing offices or opening an office with a shared service platform, number one. And so they are leveraging capabilities in that area across the country, which they've done a very good job and we anticipate them to continue to do a very good job. That's number one.

Number two, we do think that they have the ability to grow nicely in the future. And from a standpoint of we have not done any additional acquisitions there yet -- that doesn't mean we wouldn't -- but as opposed to the acquisitions, we've done internal investments, as Andy alluded to, going forward, or more recently.

I think that those organic growth numbers are reasonable, plus or minus slightly, going forward on their large accounts, on their business, yes.

And it sounds like you guys are applying that Beecher model down to the rest of your book a little bit, by spending money internally to spur organic growth. Is that the correct way to think about it?

I don't want you to think that we didn't do that before. So it's sort of like this is not an epiphany as a result of Steve Denton and his team joining, although they've done some great stuff and helped us think around some things differently.

I would say this, we have always invested in our business, and you may have heard us talk about an allocation of our revenues each year towards a people fund. And so we have continued to do that, even through the economic downturn. But we continue to look at that even more closely. And there will be times where we will exceed the allocated amount. And that's what we're really referring to.

So once again, I think that there will be more color in the future on that, as we figure out exactly how we want to present the information to you and all the others. But just suffice it to say that we are looking to allocate our capital, as Andy said, in one of three buckets, external acquisitions, internal investments, and/or to our shareholders through one of the two mechanisms, either share repurchase or dividends, or both.

And so the internal investment is something that we think that we can continue to generate and help grow our business organically, which we're interested in doing.

And then, Ryan, I'd probably -- it would be worth clarifying on there is the Beecher large business is about $75 million on an annualized basis. So when we compare the growth on the total business of just over 5%, just keep in mind, you're comparing that with a business that's $700 million. So it's a little bit like apples and oranges, from a growth perspective.

We'd love to see the other $700 million growing 5%, but that needs a lot of tailwind from a market, so --

Got you. Appreciate all the color there.

And then just my last one is the organic growth, obviously, in the Wholesale unit has been very strong. A little surprised by its continued strength, obviously, with a good percentage of the book coming from property cat stuff. Are you guys fully seeing that headwind of rates down 15% to 20% in your organic numbers? I just wanted to see why that's not more of a headwind for you guys.

Well, I think Ryan, what it does is it speaks to the talent inside of our Wholesale business and businesses. Tony Strianese and Kathy Collage and Neil Abernathy and the rest of the team have done a great job.

And so we may see a bigger impact in Q3, but we're in hurricane season. And I think that, as I alluded to, if there is not a big wind event somewhere in the coastal area this year, there's going to be continued pressure on that. Now, do we know if it's going to be more than that? I don't know.

It would be purely speculative, but it sure isn't going to go up, if there's not an event. So we watch it closely, but we think that there's an opportunity for it to continue to grow organically. But we are mindful of exactly what you're saying.

And so if I think about that book, I would think that the prop cat organic is probably very low mid-single digits, and then the rest of the group book is growing double digits, or hitting on all cylinders. Is that the way to think about it?

I think it depends on the office, and there are still scenarios where you could have offices that focus on large cat business, even though the rates are going down, they're writing a lot of new business and retaining their business. So I don't think your assumption, your first part of the assumption, is fair. Depends on an office by office and a mix basis. But it really depends on their ability to retain their existing business and write a lot of new business.

Okay. Great. Thanks for the answers, guys.

John Campbell, Stephens Incorporated.

Just digging in a little bit more on the National Programs side, can you guys give us just a brief update on Proctor and maybe how the claims have trended lately and any update on the Proctor contingent commissions?

Yes. As you know, that space has continued to be sort of bumping all around. We are very pleased with our capabilities and what we're doing from a new business standpoint there. I would tell you that the interesting thing about that space, as you know, is you have some clients which are not, they're financial owners of large mortgage portfolios that may trim the portfolio or sell part of it or.

We are not giving any guidance on -- to your second point -- on the contingencies. But I would tell you that we've invested in that business from a technology standpoint and continue to look, and brought some additional good people onto the team, which has even further enhanced our capabilities to handle upper middle market and larger accounts, of which we're competing and can be successful against the two big 800-pound gorillas in that space.

So Proctor is doing well, and we think it can continue to do even better in the future.

Got it. And so I guess you guys are not going to provide guidance on the contingent commission side, but can you tell us maybe how that trended year over year, just looking at Q2 2013?

You're talking about just on the Proctor?

Are you talking about Proctor, or overall?

Proctor.

Yes. Do you have the Proctor contingencies?

We don't have it right here, John. We'd have to get it for you.

Okay. We can follow-up off-line.

And then just second question here, you guys have talked at length about some of the internal investments, and it does sound like we'll get additional color on that in the future. But just curious over, just call it the last half year, could you guys give us an idea of headcount trends, where you're adding additional heads by segment, and then if it's net new heads, if it's to fill in holes from attrition, or if it's because you guys see good market opportunities? Just looking for any additional color there.

Sure. The answer is yes.

I'm not trying to be funny, John. Like I said, we are doing, I would say, all of the above. There are investments in people that are occurring in every single one of our divisions, number one. There are opportunistic investments occurring in every single one of our divisions over and above the normal hiring that we're doing.

That could be attributable to a retirement. It could be a result of a departure. It could be as a result of adding to a very successful team and trying to supercharge an area to grow. Or it can be in an area where we actually are expanding our capabilities.

And so as an example, Andy made reference, inside of Beecher, we've made several recent investments, one of which is in a capability that we didn't otherwise have in Brown & Brown in an M&A experience standpoint. And so we're very pleased that we have four new people that have joined the team in New York City, relative to that.

And so, like I said, I don't want you to read too much into it, John. Here is the deal. As you know, we have tried, and we'll continue to try, to invest in our business in the most beneficial manner.

We have not historically talked about internal investment, because we thought it was sort of understood. And as we make some of these larger investments, we will probably need to give some color around that. But it is all under the guise and the understanding that we're trying to grow our business more organically.

Sure. That sounds good. Thanks for taking our questions, guys.

(Operator Instructions)

Mark Hughes, SunTrust.

Andy, did you give guidance for the contingent commissions for the third quarter?

I did not. Very good listening, Mark. So no, I didn't.

We figured that question might come up. Rather than giving it specific for the third quarter, let us just give you an idea of the full-year outlook, is last year, we were right about $51 million. Based upon what we're seeing right now, we would probably be probably in that range or slightly below, is kind of an estimate. So therefore, you can figure out what Q3 and Q4 would look like.

Would the distribution be similar, you think, in Q3 and Q4?

Yes. We're not expecting anything really unusual by those quarters. Obviously, there could be some movement back and forth, so we were looking at it on a full-year basis.

Okay. Thank you.

We have no further questions in the queue at this time.

Okay. Thank you very much. And you all have a nice day. We look forward to talking to you next quarter. Good day.

Thank you.

This does conclude today's conference. Thank you for your participation.