Brown & Brown Inc (BRO) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Brown & Brown Incorporated second-quarter 2015 earnings call. Today's call is being recorded.

Please note that certain information discussed during this 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 relating to the Company's anticipated financial results for the second quarter of 2015, and are intended to fall within the Safe Harbor provisions of the Securities Laws.

Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired, or referenced in any forward-looking statements made as a result of a number of factors. Such factors include: the Company's determination as it finalizes its financial results for the second quarter of 2015; that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday; other factors that the Company may not have currently identified or quantified; and those risks and uncertainties identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

Additional discussion of these and other factors affecting the Company's business and prospects 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 will now turn the conference over to Powell Brown, President and Chief Executive Officer. You may begin.

Thank you, Tracy. And good morning everyone, and thanks for joining us for our second quarter earnings call. I am on Slide 4.

We delivered $419.4 million of revenue for the quarter, growing 5.4% in total and 1.9% organically. Each of our four divisions delivered organic growth again this quarter. We continue to see overall economic conditions improve slowly, which is good. However, we, like the entire industry, continue to experience headwinds related to rate declines. The downward pressure on rates continues to be driven by good overall loss experience, minimal weather-related events and a significant amount of excess capital in the market chasing returns. We expect this trend to continue, unless there is a material change in one or all of these factors.

As we've discussed on our previous calls, teammates are our most important asset. And we are continuing to make incremental investments in new revenue-producing teammates. This is mainly for producers in retail, but also includes brokers and wholesale. These investments impacted our margin this quarter, as compared to the second quarter of 2014. We are making these incremental investments as we see the economy continuing to improve, so we can build our team to capitalize on new opportunities. We recognize this approach has some short-term margin compression, but we expect these investments in new revenue-producing teammates will deliver additional organic growth and margin expansion in the future.

Our GAAP earnings per share were $0.43, growing 2.4% for the quarter. We are pleased to report that our Board of Directors has approved the purchasing of up to another 400 million of outstanding shares, which is part of our continued discipline to our capital allocation plan. We now have authorization to purchase up to 450 million of our shares, with the remaining amount on the previous authorization. As I know everyone will ask, timing of any future share repurchases will be evaluated consistent with our approach to allocating capital to internal investments, acquisitions, or returning it to shareholders. Also, we have announced our quarterly dividend payment of $0.11 a share.

Lastly, during the second quarter of 2015, we acquired four agencies with annual revenues of approximately $19 million. And for the year, we've acquired seven agencies with annualized revenues of approximately $31 million. While there are plenty of deals out there, we continue to see aggressive pricing for acquisitions. And we remain disciplined in what we pay. We believe we can continue to acquire good businesses if they fit culturally, and make sense financially.

Slide 5 provides additional detail on some noteworthy items impacting the market. We continue to see slow economic improvement in some markets in certain areas in the country, but this is not consistent. We see exposure of unit growth in certain regions, but don't see consistent hiring across the board in the middle market. We believe this is partially driven by possibly of lack of qualified candidates, but more specifically, the implications of ACA adoption that many employers are facing. We are experiencing further uptake on our private exchange offering during the quarter. And now have over 4,000 covered lives, but adoption continues to be slow. We continue to see small and medium sized employers evaluating public exchanges, technology, and planned design alternatives in order to manage their healthcare and ancillary costs. Those may include partial self insurance. And continuing to move to a per employee per month payment model in order to manage costs as they implement the Affordable Care Act.

Similar to what we have been seeing for a number of quarters, the favorable loss experience, the excess capital in the market, and the prolonged period of limited weather events is driving most rates down. We continue to see declining rates for coastal properties, and also seeing admitted property rates trending flat to down 5% in some cases. However, we are seeing commercial auto rates generally trending up, but it really depends on the specific loss experience and professional liability rates are flat to up 5%. Overall, weather events and the associated claims processing revenue to those events remain at very low levels, and well below the 10-year average. Now with that, let me turn it over to Andy, who will discuss our financial performance in more detail.

Thank you, Powell, and good morning, everyone. Let me first discuss our overall financial results and talk about some of the key metrics for the quarter. On slide 6, it shows our consolidated results for the quarter. We delivered 5.4% revenue growth, and grew organically in all four divisions, with a total organic rate of 1.9%. We will discuss the drivers of this growth by division later in the presentation.

Our pre-tax income declined year-over-year by 90 basis points, driven by incremental investments in teammates, and the additional interest expense associated with our credit facility and bonds. We will be on a more comparative basis in the third quarter of this year, as it pertains to year-on-year interest costs. We believe EBITDAC is the most appropriate measure for comparing our performance across periods. EBITDAC for the second quarter was $137.8 million, compared to $134 million last year, an increase of 2.2%. Our EBITDAC margin decreased by 100 basis points. Primarily as a result of our incremental investments in new teammates, which Powell described earlier.

We expect margins to experience slight downward pressure year-over-year for the next few quarters due to these incremental investments. Then, as the new teammates begin to produce revenues, profitability will rise. We continue to seek EBITDAC margins in the range of 33% to 35% range over the long term. As we have mentioned before, at times we might be below this range on a quarterly basis. As a result of incremental investments. However, we do not believe a variance outside of this range for a few quarters will impact our margins expectations, as we have built a very robust operating model.

Our net income decreased by 1.3% in the quarter, which is slightly larger than that of the pre-tax income. This was a result of our effective tax rate increasing at 39.6% for the quarter, versus 39.3% in the second quarter of last year. The increase in our effective tax rate this year was primarily driven by the state of New York's new consolidated return approach, and lower tax credits. At the mid year point of the year, we are now expecting our overall effective tax rate to be in the range of 39.5% to 39.7% range for the full year.

Our earnings per share grew 2.4%, and our weighted average number of shares outstanding decreased by 2.2% year-over-year driven by $175 million of share purchases over the last 12 months. As a reminder, we initiated a $100 million accelerated share repurchase program during the first quarter of this year. And it is now projected to be completed early in the third quarter. In the current environment, we continue to evaluate share purchases as a good use of our cash to drive shareholder returns.

Moving to slide 7, I would like to highlight the key components of our revenue performance for the quarter. Other revenues were down about $1 million year-over-year, driven by a gain on the sale of a book of business last year. This line item will fluctuate each quarter, as it is not one that we can project. We did recognize just under a $1 million increase in continuance and guaranteed supplemental commissions, primarily from our Programs division. Both of these basically offset each other from a profitability standpoint. The largest driver of year-on-year growth (technical difficulty) and fees was from our net acquisitions, delivering $19.2 million of growth, followed by organic growth of $7.4 million.

Moving to slide 8, and transitioning from our global view of the Company, we would like to discuss each of our divisions in more detail. We will start by looking at the Retail division. Over the last three months, our Retail division has delivered 4% growth, primarily driven by acquisitions during the last 12 months. The organic revenue growth for the quarter is 70 basis points, with a year-over-year EBITDAC margin decline of 110 basis points. Similar to the first quarter of this year, there are a number of key items impacting overall growth and profitability, which have continued into the second quarter. First, as we noted in our Q1 call, there has been a change in the state of Washington's regulation related to bona fide associations that resulted in several of our association health plans terminating as they were determined to be non-qualified. The change is continuing to impact our overall revenue growth by 60 basis points in the quarter, and margins by 30 basis points with a revenue loss of $1.2 million in the second quarter. As mentioned previously, we expect there to be about another $1 million revenue impact for each of the remaining quarters of the year and also to have an impact on our margins.

Next, our small employee benefit space, which we define as employers with less than 100 employees. We continue to see these companies be very focused on managing their costs, and trying to understand the implementation complexities of ACA. These factors have and are expected to continue to put downward pressure on our employee benefit revenues. For sizing, our small employee benefits business represents about $90 million of total annualized revenues of our total employee benefits business of $250 million. For the quarter, our large employee benefits business grew nicely on an organic basis, while our small group declined.

To address this downward pressure, over the past few quarters, we have been analyzing all of the complexities of ACA and what our customers need. As a result, in addition to acquiring new employee benefit capabilities through our recent acquisition of strategic benefit advisors, we are also adding employee benefit resources to support our offices, and continue to keep our teammates current on the ever-changing landscape related to regulation, compliance, and technology. We are planning some modest investment in incremental resources in the second half of this year. That will then help facilitate growth and margin expansion on our employee benefit business in 2016.

Shifting to property rates. Coastal, or as we call them CAT property renewal rates, are continuing to decline 10% to 25%, as compared to the second quarter of last year. Last year, we noted that they were down 15% to 20% as compared to 2013. We are seeing consistency with what we experienced in the first quarter of this year. Property renewal rates continue downward for admitted markets, and are generally plus to minus 5% versus the prior year. And lastly, we are seeing worker's compensation renewal rates varying from plus to minus 5%, depending upon claims history.

Let me move to slide 9. Our national programs revenues grew 10.3%, mainly due to the acquisition of Wright. We continue to see interest from carriers and capital allocators to leverage our underwriting capabilities, technology, and broad distribution platform. We believe our expertise and capabilities will enable us to create new programs, and help drive additional growth as we are an ideal partner for a carrier that wants to deploy capital, but does not want to build the infrastructure. We continue to experience good growth in Arrowhead after market, our lender placed business, and our personal lines businesses. A lot of this growth was offset by our coastal property facilities, which are experiencing intense downward rate pressure of 10% to 25%. And our California worker's compensation program is being impacted by a change in the risk appetite with our carrier partner. These two programs or businesses had slightly less than a 200 basis points impact on organic revenue growth for programs in the quarter.

Lastly, the Programs division EBITDAC margins benefited from the disposal of ICG in the fourth quarter of last year, continued cost discipline management, and scaling our platform.

Onto slide 10. Our Wholesale division had another really good quarter, reporting revenue growth of 2%, and organic growth of 5.1%. This differential is related to the sale of Axiom Re that we completed in the fourth quarter of last year. The binding authority and brokerage businesses both contributed to the positive results for the quarter, and we continue to see growth across most business lines. We are seeing more net new business, and we are leveraging our deep carrier relationships to help provide innovative solutions for our customers.

Even while facing major downward pressure on coastal property rates in the range of negative 10% to 25%, our brokerage business still grew nicely for the second quarter. This is a really impressive performance, as it shows the amount of new business the team is writing and retaining each and every month. The Wholesale division delivered EBITDAC margin improvement of 40 basis points. The primary driver of this expansion is due to the sale of Axiom Re, in the fourth quarter of last year.

Onto slide 11, and our Services division. We delivered impressive organic growth of 7.8% for the quarter. This growth is driven primarily by our Social Security Advocacy Claims Processing business that added new clients and our Medicare Set-Aside processing business that expanded customer relationships. While we realize some revenue is related to the recent flooding in the second quarter in Texas, the incremental claims processing revenue versus the prior year was immaterial for the quarter. Our EBITDAC margin declined by 190 basis points for the quarter. The main driver of this decline is some initial onboarding costs we have experienced associated with new client additions for our Social Security Advocacy business. We expect margins to increase back to historical levels over the next few quarters.

Onto slide 12. In the second quarter of 2014, we provided ranges of where we expect expected Wright to perform in its first fiscal year, which is Q3 of 2014 through the second quarter of 2015. We are pleased with the year one performance of Wright. We delivered revenues very close to our estimates, and earnings per share in line with our estimates, even without material weather-related events to drive incremental revenues. As we mentioned in 2014, the original forecast included $7.5 million of revenues from weather events. For reference, this was based upon the 10-year average, but excluded Hurricane Katrina, and Superstorm Sandy. In the first year, we only realized about $1 million of CAT revenue for Wright. While the CAT revenues were down from projections, the team has done an excellent job of managing their costs. We are also pleased with the performance of our National Schools Program, our new National Municipal Program, and our Food Program. In summary, we are very pleased with the financial and operational performance and trajectory of the business.

We would like to thank the entire Wright team for their efforts over the last year in producing solid results. With that, let me turn it back over to Powell for closing comments.

Thank you, Andy, for a great report.

In summary, two of our divisions had a good quarter, and the other two divisions were below our expectations. However, we can see they are driving the right activities to deliver long-term organic growth and profitability.

We remain actively engaged in discussions with many acquisition candidates. And as I've mentioned before, closing an acquisition depends on when the seller is ready and if we can come to an appropriate financial transaction. I can tell you that we continue to be active in this space, but are being prudent and disciplined as pricing and terms continue to be aggressive.

Lastly, our disciplined capital deployment strategy across internal investments, acquisitions and returns to shareholders remains a key focus to help us drive long-term shareholder value. In closing, we have some challenges and some opportunities, and we are going to meet and seize them. We are energized about the trajectory of where we see growth in our incremental investments, and new teammates will position us well for revenue growth and margin expansion in the future.

Now, I would like to turn it back to Tracy for the Q&A section, if you could just explain the process to everyone on the call.

Thank you.

(Operator Instructions)

We will go first to Kai Pan from Morgan Stanley.

Good morning. The first question is about your employee benefit business. It looks like you are under a little bit of pressure from the ACA implementation.

I just wonder, what is your view about the process of implementing ACA for your small accounts? And do you expect move more towards the pop exchange? And also related, your comments on the recent proposed merger between Willis and Towers and what would that impact your liaison relationship? Thanks.

The first question relative to ACA, is I believe that many small employers are all over the board in terms of their preparation. Some are behind in getting ready for next year. Some are on their way, and some are already there.

I do not think that ACA in and of itself is going to expedite more public exchanges as much. That will be part of it. But I do think that private exchanges will be another alternative.

The reason I say that about public exchanges is as you have read in the paper, a number of those exchanges are experiencing rate increases. And they will continue to experience rate increases, we believe, because of the unfavorable loss experience many of them have had over the last year due to the number of people in those pools.

Having said that, I would reiterate that the private exchange is an option, not the option. And so we believe that it is, one, a technology play, two, a coverage play, three, a compliance play, and you wrap all that up, and that is appealing to some smaller businesses. But we are watching very closely as that continues to develop, and deploy the appropriate resources to service our clients in that under 100 space.

To your second question about Willis and Towers, that is an interesting question. One, the more things change, the more they stay the same. We are constantly in a state of flux in our industry, as you know.

Number two, there has been no information that I am aware of put out on it. But I would assume, and we don't assume anything, that they will try to keep that separate. And we would obviously be looking for indications and assurances of which to make sure that we have that in our ongoing relationship.

We also think that it is going to create some opportunities, because there will be disruption in the marketplace. So we continue to keep our eyes open for new opportunities. And I think that will be one of the many things that will create opportunities in the coming months ahead.

That's great.

Kai, it is Andy here. Let me also add to that. One of the things that our employee benefits group does is they are always looking at technology that is out there. So they are going to constantly be evaluating other options, if we ever had something like that occur.

Okay. That's great. And then follow up on the buybacks.

So just wanted to see if a little bit more detail about it, what's the Board's deliberation on the buyback program? Because you just initiated the first buyback programs not long ago, and now run double that buyback in a month.

Is that is signal that you don't see a lot of acquisition opportunity to grow the business? That buyback is not the most attractive way to return to shareholders? And also regarding to the $400 million authorization, how is that related to your free cash flow and to your debt levels, the debt to EBITDA levels?

Okay. Relative to the first question, I would tell you that you are correct in saying we got our first authorization last year, which was $200 million. And in our discussions with the Board, we, as have you heard us talk about before, like to have options. And you've heard me and Andy speak about before the three areas we try to invest our free cash.

One, internally, in investment -- in teammates, to grow the business organically. Two, external investments. And three, return to shareholders.

So in our discussions with the Board, the idea was that this is an unlimited authorization. So it does not mean that it has to occur in a set period of time. And so it will allow us to evaluate share repurchases periodically in the future, and we are going to do it just like we have done it in the past.

As you heard me say earlier, we have done $31 million of acquisitions annually, year to date. Which is on the lower end of what we have done in the past, and acquisition terms and conditions are aggressive. That does not mean that we are not going to do acquisitions, it means that we are going to be very selective.

We also -- that means that we are going to seriously consider, and we have the authorization to do it, additional repurchases, when we think it seems to make sense. Now, Andy, would you like to respond to the second part about the 400 million?

Yes, Kai. So I think your question was how does the $400 million correlate to our cash flows for the year? As you guys probably have in most of your models, we generate somewhere in the range of about $350 million a year in free cash flow prior to dividends and interest. That just gives you an idea where it is.

I think the other one was around our debt to EBITDA levels. Right now, we are just a little over 2 times debt to EBITDA. But I think as Powell and I have mentioned in the past, we are not one that is going to go out there and do a leverage buyback.

That's just not our approach on things. This is just one of the options that we want to have as an organization for flexibility, when and if we need to deploy our capital in the right way. With the goal of trying to make sure that we can drive shareholder returns.

Thank you very much for all the answers.

We take our next question from Michael Nannizzi from Goldman Sachs.

Thanks. Just to follow up, just one follow-up on Kai's question. Is there an expiration on the authorization?

There is no expiration -- there's no authorization on the $400 million. There is an expiration or there is an expiration on the original $200 million, which we have $50 million left, which is the end of this year.

Got it. And then I thought I remembered you guys had an ASR that you announced in March, and that it was expected to settle in the second quarter. It doesn't look like that came through. So is that, Andy, maybe what were you insinuating that that is going to come through in the third quarter?

So that was the, Michael, that was the $100 million ASR that we did just at the beginning of March in the first quarter. We did it based upon volume in the marketplace, and the purchasing that was being -- that would be done by the end of June. It looks like right now, somewhere around the end of July, maybe the middle of August, all really depends on volatility that is out there.

Got it. Okay. And then, is it -- I would guess then just given those parameters or volume, et cetera, that you would be unlikely to do more than that in the third quarter? Or is there still the ability just given that it is a prearranged transaction that you could also be in the market next to that transaction?

It would -- let me see. Would we do an overlapping transaction? That would be highly, highly unlikely.

Okay.

The 10B18 rules that are out there.

Got it. Great, thanks.

And then just maybe, Andy, in Retail, can you quantify -- is it possible to just get some notion in terms of how much the investments that you made in teammates impacted margins in the second quarter? Just to try to get an idea of what that headwind was in the second quarter.

If you look back, our margins were down 110 basis points for the quarter. We mentioned in there that the association health plans out in the state of Washington had an impact of 30 basis points, leaving us with about 80. A large percentage of that was our incremental teammates.

Got it. And then when I look back at the second quarter of last year, my number was a little different on the actual. It looks like you did some reclassification.

So I'm guessing that that had some negative impact on last year's margin number. Is there a way to get an idea of what this quarter's margin would have been in the old segmentation, only so that we can think about apples-to-apples relative to our models?

No, I think if you remember back in the first quarter, we had mentioned that we had moved around some business units for reporting purposes and we restated. So, yes, we don't have the ability to go back now and tell you what it was on the previous, because everyone is in the new framework.

Any of those expected to happen or anticipated from this point forward this year, or is that mostly done?

Not that we know of. We would only do mid-year restatements if something was -- or reclassifications, if something was really material. And most of those were driven, if you remember, with the Acumen and Axiom disposals last year, it allowed for some alignment of some businesses tighter across some of the divisions. But no, don't see anything for the back end of the year.

Got it. Okay. And then just in terms of, you mentioned some expenses on the benefit side that you expect as you anticipate -- make more investments for hopefully for growth and margin expansion that is coming. And I also I remember you guys had talked about at some point some potential expenses or investments on the system side.

Is there a way for us to quantify just during this investment phase, A, how long do we expect the investments part to overcome the revenue piece? And to be able to quantify what that might be in terms of a headwind to margins?

So Michael, this is Powell. A couple of things, number one, good morning.

Good morning.

Let me hit the second question first, and add it in to the first response. Number one, we continue to evaluate the technology investments. And I believe that in the near to intermediate term, probably in the next six to nine months, that we will be able to give better clarity about how that is going to play out.

So we are not there yet on that. But we are getting close. That is number one.

As it relates to the level of investment, what I want to say, and this is not going to answer your question exactly. But we always are doing a certain level of investment, as you know. We talked about that in the past.

We allocate a portion of our revenues each year to support the recruiting of people that aren't already in our budgets at a local level. That is number one.

And what we have done and tried to articulate to everyone in the last couple quarters, is there have been some opportunities for us to invest in people. Some of them are already in the business that have revenue-producing capabilities right out of the box. And some who are just very talented from other industries that we have to teach insurance to.

So you've got the revenue production investment, and then you've got the additional resource investment as it relates to employee benefits. We are very keenly focused on trying to grow, as you know, each and every segment of our business. And you heard Andy say that the under 100 declined in Q2.

And so we are trying to, number one, keep ahead of and provide the right solutions for our customers for that segment, all the benefits for that matter. But it will have some modest investment expenses. But we are not going to talk specifics about that in the next couple of quarters.

So just if you would, Michael, our comment inside there about the next few quarters. So we are not saying couple, and we are not saying years. So just to give you some parameters around there.

And the reason why we think it is going to put a little bit of pressure or at least some downward pressure on margins in the back end of the year. And I think as we've mentioned during some of our meetings, it generally takes two to three and sometimes four years to get some of the newer producers up and on a positive basis with their book and everything. So that is just kind of normal run rate.

But don't take any of this, and we mentioned this in the comments, that we are backing off on the range that we set on our long-term margins. We said we are very comfortable at 33% to 35%. We mentioned this last year on the second quarter.

We are going to bump around by quarters every now and then. It is okay. It is nothing that we are getting all anxious about.

We think 33% and 35% is really good margins for the Company. We are very comfortable at that range.

Great. Thank you.

We will take our next question from Elyse Greenspan from Wells Fargo.

Yes, just a few questions. But first, I wanted to spend a little bit more time on the organic growth within the Retail segment in the quarter. I know you guys pointed out the change and more discretion in Washington, and then also some of the downward trends within the employee benefit book, especially with the small businesses.

It seems like some of that was also creeping up in the first quarter as well. So I just -- any more information you can give us on what kind of [jewel], the sequential downward trend within that Retail organic growth.

And then just thinking out I guess for the balance of this year, just directionally I guess. Do you expect, where we are sitting today, would you expect the Retail organic growth to improve from what we saw in the second quarter?

So, Elise, the first thing about the impact of Washington, I think we laid out pretty clearly. It was a $1 million impact in Q1, it was a $1.2 million in Q2, and we believe that it will be a $1 million impact in Q3 and Q4.

As it relates to, other than what is generally occurring in retail, I would tell you the two things that were a draw or a negative draw on Retail this particular quarter. One, as you heard us say, CAT property rates are down 10% to 25%. That's a small portion of it, and we had some lost business.

And so you heard me talk about a couple offices in the first quarter that were under performing, and we continue to work on those underperforming offices. One quarter does not fix something. This is a multi-quarter strategy.

So I have said and we have said that we believe that our business and Retail is a low to mid single digit organic growth business. And so that is something that we are working very actively on growing more than it was this quarter, and more than it was in the first quarter.

Okay. Great. And then back to just some comments that you guys had made on the margins in terms of also you pointed to investments. And I guess the overall in terms of seeing potential margin deterioration, it seems like the next few quarters.

So it assumes that that's a comment specifically to the overall Company, and then also within the Retail segment. So you are thinking as we are thinking of our models, that we will probably see your margins deteriorate until Q1 of 2016? Just any more info in terms of directional there on the margin front.

No, no other direction, probably, Elise, other than your comment that you made there with it. We are very, very positive about everything that is going on inside of the business. We see great activity in all of the core areas of what we know that is going to drive long-term growth and profitability for us.

Sometimes it doesn't happen in the immediate quarter. We would all like to have that one that we could put over the top. It doesn't work that way.

But everything is looking positive on the activities. And that's why we feel really good about the business. And it will come back in the appropriate time frame.

Okay. And then in terms of continued commissions, those were a bit higher this quarter. But I know you had pointed to seeing the contingent slow down in the back half of year. Has anything changed on that front?

No, nothing from our previous comments. Like I said, we picked up a little bit in Programs in the second quarter. We do expect the fourth quarter to be down.

So again, just make sure everyone has captured that in their models, and that will primarily be in Programs related to our forced place business. Again, we've got advanced notice from Lloyd's that we will be down year-over-year, so -- and their ranges are still what we previously communicated.

Okay. And then lastly, do you have the share count on the diluted share count at the end of the quarter?

Yes, hold on one second. We will give you -- it is just a little over 143 million. Remember, we have the two-step methodology, Elise.

So if you look on our face, it is going to show the 139 million in there. But if you had to go back, as we've got to allocate revenue or income to the participating shares. So just a little over 143 million.

Okay. Perfect. Thank you very much.

We will take our next question from Charles Sebaski from BMO Capital Markets.

Good morning.

Morning.

A couple of questions. First, I would like to hopefully to better understand the investments in people. And I guess one, how many people you are talking about? And two, I guess my understanding of how the business works is that there is continual churn in the business, producers come and go, and you are hiring, people leave, et cetera.

What is different now that we are getting a itemized, hey, there is a margin impact due to hiring? Is this seasoned veterans, is this an increase in the development of young talent? What has changed where we are seeing this in the margin where we might not have seen this in the margin in years past?

So as you know, we have historically and continue to hire people from other industries that we believe can be successful in our business and we teach them insurance. So in your vernacular, I think that development of new talent is the predominant investments that we are talking about. And so we do that all the time, but we are doing more of it right now.

You made a comment about the number of seasoned people. And we do do that on a sporadic or limited basis when we find some very talented people that we think can fit culturally in our system. So we have made some of those investments as well.

You have heard me make that comment in quarters past, specifically around Beecher Carlson. But it is not exclusive to Beecher Carlson, it is across the entire platform.

And so we have been signaling this over the last several quarters that we are continuing to invest in our platform. And when I say invest, you might say we are over-investing now relative to historic levels.

And so that is out of need. That is out of opportunity. That is out of -- we think there are some people that are and will become available that will be potential good additions to our team.

So I don't think, Charles, this is new, but it is new in the sense that we are saying that we are investing more in people. We are actually doing both steps, which is new talent, new to the industry, and existing talent that fits culturally. And there are some opportunistic investments that we have made and will continue to make in people or groups of people in the near to intermediate term.

Okay.

Charles, to make mention of it, if you go back to where we were standing a year ago, we had almost this exact conversation when we talked about some of our investments. And one of the things that we communicated and committed to a year ago is that we would help provide you guys with more insight.

That's what we are doing right now. So again, this is just a building story along through all of it in order to get there.

I guess what I am curious about is, Powell, the opportunistic side versus the run rate. Because I guess what is going on, and you talk about the acceleration in investment and people through need of the business, I guess the question is, why is this going to cease?

So why are we going to go two quarters down, and in the first half of 2016, the need to invest in the business and development of talent is going to somehow come back into line with where it was before? And margins -- I guess in the continuation, a continual flow of new investment as the business grows, it would seem that you are talking about it getting back to what it was.

And that would mean a slowdown in the investment come next year. And I guess why is that versus today? That's what I guess I am somewhat challenged with.

Okay, so like I said, we have a system that we don't talk a lot about relative to the people, because everybody does their investments differently. And we think we are different.

But we have ramped up our intern program. We are hiring more people off college campuses today, and there are a component of opportunistic investments. So you were correct in saying that a certain level of this will always go on, that is correct, you are right.

But I will tell you that today and in the future, if the right opportunities present themselves, we will make opportunistic investments in our business. So what you might be thinking is this. Let's call it what it is.

There are a lot of acquirers out there. Some of whom are paying what we might consider ridiculous prices in certain transactions. We are considering making investments in people where there isn't any so-called acquisition, but bringing those capabilities and talents on to our team.

That is a short-term margin hit, until the revenue comes with them. And so you are correct in saying that there will continue to be an ongoing expense.

But I can assure you that there are components to these investments which are opportunistic. And we will continue to explore those when we are in an environment where acquisition pricing is up, and we want to get more talent on our team in certain areas to serve our client base.

And finally, can I just ask about the size of the buyback authorization? I guess relative to the $200 million one you did last year with the ASR still going on. And as you said, there's limitations on, due to volume or volatility on how that can be executed. But if I think of the AFR that started in March and it is going to go through August, so you are talking about a six, five, six, seven month time frame, why $400 million?

I guess if I look at the $200 million and the timeline it took, it seems to be, if I look at that, just trajectory, pretty long into the future. And just I guess any additional thoughts on the concept of where that number came to, relative to cash flow or market cap or float?

So as you know, we have $50 million of the authorization outstanding, which actually expires on 12/31 of this year. And the $400 million does not have an expiration date.

And so when I spoke to the Board about what we want to do, I asked for a larger authorization. Which would give us more of a window to invest over time, and to consider -- continue to look at it on a case-by-case basis as we make investments. Whether we do acquisitions, whether we invest internally, or whether we buy it back.

There was not a -- there was discussion around free cash and market cap and all that. But basically what it was is we bought 100 -- out of that particular authorization, [$150 million] in a year. And if we got $400 million, we believe that it gave us a multi-year potentially ability to buy our stock back, if we think it is the right time to do it. And, Charles, just again, maybe keep in mind, the $200 million that was approved last year, it was the only buyback in our history. It is the first time that the Company had approved and it was executed on one. So it was an initial step, and that's why there were some parameters put around that one.

And now as Powell mentioned, we want to have the flexibility as an organization not to be constrained on a specific time period, and to be able to utilize this as part of our capital allocation. Not uncommon for most companies to have an authorization at that percentage of market cap.

You can go out and look at some of our peers that are out there, they are not far off on the numbers, as well as other companies. So pretty common what we have done.

Okay. I appreciate all of the color. Thanks, guys.

Thanks, Charles.

We will take our next question from Josh Shanker from Deutsche Bank.

Good morning, everyone. My first question is I was wondering if we could talk about growth as it relates to retention by segment? This is a very competitive market always. Have the competitive dynamics changed?

Are you retaining more business than have you in the past in each of the segments? Are you writing more gross new business, and retaining? What is the math behind the retention versus churn dynamics that is putting together these numbers right now?

So what I would on a macro level say, that there are some businesses that are impacting or drawing down on that for several reasons. Depending on the actual segment itself. So let's talk about Retail for a moment.

We continue to write a lot of new business. But as I referenced last quarter, and this quarter as well, there are several offices that have under performed. And in those under performance, typically what you find is there is a higher loss business in those offices than elsewhere.

So an example that we have talked specifically about would be in the state of Washington with the health plans. Now, that was an action in the state, but still, that is an inordinately high amount of lost business in that particular business unit this year.

Is there an opportunity to get some of that back in the future? Maybe. But that was a decision made at a local or statewide basis.

If you think inside of Wholesale for a moment, you have the biggest impact in Wholesale is the downward pressure on catastrophic property rates. And so Wholesale has performed very well, not only this quarter, but this year and last year. And grown, even in the face of some of that early downward pressure.

But as that pressure mounts, it is harder to grow that large property business. The impact on binding authority is slightly less, but there is still downward rate pressure on binding authority business. They have done a really good job of their retention of their accounts, and writing a lot of new business.

Inside of Programs, you are going to have certain businesses that are involved with catastrophic property. That have had a negative impact right out of the box. So remember, you have one carrier partner we are working with we are trying to underwrite over a long period of time to a profitable loss ratio.

And you have a number of other standalone or E&S markets come in and undercut that pricing. Which if we keep it, it is down dramatically. Or if we don't, it is -- we lose the entire account.

Also, Andy referenced the worker's compensation change in appetite. So it is not uncommon in certain instances in some of our programs, where if they have had the carrier partners had a little bit of a hiccup or doesn't like to see the development that they are seeing, they may change the underwriting guidelines slightly. And that would impact our ability to renew some of the existing business and write new business in that segment, whatever that is.

It is not necessarily worker's compensation. It could be any class of business that we write on a Programs basis.

So what I would tell you is, it is a combination of, one, rate pressure in some instances. Two, lost business in a couple of businesses. Some of that is not as much as Retail, but in Programs and in Wholesale.

And three, the general state of the environment. Which is in the middle market it is all right, and it is bumping along, but we are not seeing a lot of people adding a lot of lives or the exposure unit growth is not significant across the country, across all segments. So that is how I would answer your question.

Okay. And in the other income segment on the P&L, it is small. But in the past, we have spoken about it and it was going to get much smaller, and then there was a little surprise.

It looks like it did in previous quarters this quarter. Is that an anomaly now? Or should we expect other income to be smaller in the future?

I think, Josh, we talked about this on previous calls. And starting this year, what we -- or excuse me, starting in the fourth quarter of last year, we started reporting the gains/losses on sales of businesses down in the expense section to get rid of that noise out of revenue. All that should sit up inside of other income now going forward is if we have legal settlements or some sort of judgments, the number should be pretty small in nature.

We had a settlement this quarter. So again, that would probably would not be an area that you want to -- I think, and everybody seems to do this, they put $1 million, $1.5 million, $2 million in there. That one going to float up and down, it could be zero sometimes.

Okay. And do you feel that this quarter is higher than average? I'm going to put an average number in there, because it's all I can do. Is do you think this quarter -- I think $1 million is an average, or do you have any thoughts on that?

This quarter would be probably higher than normal because of the judgment that we had.

Okay. Thank you very much.

We will take our next question from Meyer Shields from KBW.

Thanks, good morning.

Morning.

Can you talk a little bit about how when you've got -- looking at the National Programs segment, and you talk about the change in carrier appetite for California worker's compensation. What is your process here for responding to that, finding another carrier or whatever?

Well, we have multiple carriers that we work with. And so some carriers -- what I am referring to specifically is one of the larger carriers, and some of the other carriers may be able to pick up some of that. And we are constantly talking with our carrier partners to make sure that we have, to the extent possible, some overlap in some of the programs that have multiple carrier partners.

So as I said, this is -- we just use that as an example, which is true. Is that it was impacted in worker's compensation, but it could be the same in another program as well.

So we are always trying to work with our carrier partners to, one, make sure that it can be a profitable program for them over the long term. And that we can continue to write the amount of new business that we want, and retain the business we want to grow our business organically in line with what we want and what they want.

Should we expect the shortfall in the quarter to then be made up when you find another carrier that is willing to write this business?

Well, once again, I would tell you that that is assuming everything else is in sort of a steady state environment. And so as I've said, in other programs, other than that worker's compensation, we have significant downward pressure on coastal properties, for example. And so if in fact you had the uptick in worker's comp, which you could have, but you could have more pressure on coastal property, which means there would not be an offset.

It depends on the aggregate. So if you isolate it in one program, which we have, as you know, over 35 programs, that I think -- that could be correct. But I think that it is not a correct statement when you have multiple programs like we do, and so you could have other things happening in other programs simultaneously.

Meyer, we kind of -- because of the -- we can have these ups and downs by the quarters. We also look, where are we at the half here, where are we on a trailing 12 months for programs.

And that gives us a better feel for trend on the business, and we don't see the second quarter as actual the trend. So look back over history, that gives a better perspective of at least our outlook on things.

And to that point, Meyer, there is, Andy called out in the deck, that the impact of a couple of those programs this quarter was just under 200 basis points. Some of that could change in Q3. But I would tell you that the coastal property pressure, we believe, is going to continue at least for the foreseeable future.

Okay, great. Thank you very much.

(Operator Instructions)

We will go next to Ryan Burns from Janney.

Thanks, good morning, guys. I just wanted to ask a question on Wright. Obviously as we get to wind season here, I just wanted -- I know you guys have given the average revenue associated to catastrophes the last 10 years, but that excludes two big years.

I wanted to get an idea as to how big Wright's revenues were with Katrina and Sandy. Just to get just an idea of what could happen there.

Yes, maybe probably, Ryan, the way to think about that one, is think about the $7.5 million incremental. That's off of those storms. Because again, those two storms were historic in nature, right? And so if you go back, and again, this gives a perspective, and a lot of people said, wow, boy there should be a lot of revenue coming out of Texas, we made the comment that it was immaterial for us for the quarter.

We ended up with a few, probably in Wright, it was just a little over 3,000 claims in total for all of the storms. So it wasn't much. If you go back and you look at Sandy, we had over 20,000 claims.

So these are -- we are at very, very low levels right now. So unless there was major storm or storms come through at that level, we continue to expect very low revenues in this arena.

And to specifically address your question, Ryan, we don't have that right here in front of us. We could get it. But we don't have it right in front of us relative to the -- but it is substantially higher than that.

So it would be a 2X of the average? Or I'm just trying to get a ballpark. I realize it is (inaudible), but would that be the right way to think about it, would be a multiple of --?

I don't think it is a multiple of, but I don't think you can just say 2X. Because every event is different, obviously, so I think that is a you're walking a tight rope on that one. But I would say it is materially more, and could it be 1X, 2X, 3X, it could, depending on the size and complexity and the devastation of the storm.

Ryan, I'm not trying to be cagey on this. But I don't think we'd want to go back though and give you guys projections on previous storms for going forward just because of all of the variables inside of them.

Yes, sure. Just help to see how much they could grow.

And then my second question or my last question is, can you guys maybe just walk me through the thought process that you guys go through when you think about doing a buyback, versus doing a deal? Let's say you have the opportunity to do a deal.

Let's say again, they're getting more expensive now to say anywhere from 10 to 11 times EV to EBITDA. And then compare that to buying your stock at 9.5 times. How do you guys, if you have those two options, can you maybe just walk us through how you evaluate that?

Okay, so obviously, there is a financial consideration of which you did some very basic math right there, that would be part of it, number one. Number two, it would be -- the second thing would be the capabilities and the talent of the team. So you have seen us make larger acquisitions, announce that 10 times EBITDA that was slightly more than what we were trading at at the time.

And we believe -- and so we felt at the time that the capabilities that the group presented made sense for us to make that acquisition. And so we weigh the talent, the capabilities, the specialization, if there is a segment that we are trying to expand or get into, if it is a capability that we are trying to enhance, that we have but make better, or we don't have on the team. All of those are put in our considerations.

We look at a number of financial metrics back in part one. And that could be anything from return on invested capital to internal rates of return, to margins, growth, et cetera, organic growth on their part, all kinds of things, profitability over a period of time. And so we continue to do that.

And so we think that, as I've said, in the current marketplace for acquisitions, it is competitive. And as you say, the multiples are up. And so at face value, if you were just doing a financial calculation, based on what you just said, then you might say, well, you might buy some stock.

And that is part of the evaluation. But you have to look real closely at each one of those acquisitions and see how they would help us, not only now, but in the future.

Ryan, and if you look at this year and a great example of, we are doing both. And Powell mentioned in his comments, is we can still acquire good businesses if we've got the cultural fit in place and we can come up with the right financial transaction. We have acquired seven businesses, over $30 million this year.

We've also bought back some shares. So this is -- when we talk about our capital allocation methodology and the disciplined nature to it, this is where we try to balance across all of these. And sometimes we will be doing more of one or less, sometimes we will do both at the same time, but our goal is we are trying to drive shareholder returns.

And we want the option to do all three.

Exactly.

So that is -- like I said, what we have tried to do is give ourselves options, and so we believe that we have that now. We did that through working on our capital structure last year.

We have done that through our share repurchases year to date. We have done that through the authorization of $400 million. But all along, we continue to invest in our business and are looking for additional acquisitions.

Okay. Great. Thanks for the color, guys.

Thanks, Meyer.

Thank you.

And we will take our next question from Adam Klauber from William Blair.

Thanks, good morning, everyone. A couple of a questions. What is the organic of Wright running at, and did Wright help the program margin during the quarter?

Let's see. So let me go back on -- so on the margins itself for the quarter, is yes, it did have -- I will answer the second one first, and then come back to it. Is it did have a benefit to the margins.

As we know, that business itself has a little bit of seasonality to the profitability a little bit. But total Wright, as we disclosed previously and as it has been running, is up in the 30% margin business. And again, it flows back and forth, anywhere, it can go from a 36% to a 32% in that ballpark.

Second quarter, generally, a little bit higher. And third quarter, a little bit higher in that business.

Okay.

So some benefit inside of there. But if you try to look at it over the full year based upon its cost base inside of there.

Sure.

And then overall business is performing well. We talked about our new programs that we have inside of there, within schools, foods and new National program.

When we look at flood itself on it, Adam. Is one of the things that we try to do to figure our how we're doing and how we're performing in the marketplace is we look at our total policies in effect. And we look at that as a percentage of all of those written by FEMA.

And what we have seen over the last year is that our percentage of the total is continuing to increase. So with that, we feel like the business is performing really well at this stage.

Okay. Great. That's helpful.

And then finally, on Wholesale, clearly, that is being impacted by the negative property. Wholesale, you typically have that accordion where business flows back and forth between the standard and the E&S markets. Where are we on that accordion right now?

I think that the accordion would be two-fold. I think from a liability standpoint, I think that it is probably some of those that were viewed as EMS potential accounts are being seriously considered by standard markets. But that is on liability, not property.

On property, I believe it is -- the way I would describe it, it is a little bit like a free for all. I'd call it like the Battle Royal in wrestling. And so you have a bunch of people in there wrestling for accounts. And then periodically, you have one or two or three new wrestlers come in and get into the ring, and so that adds to the excitement. It also adds to the chaos in driving market rates down.

And some of those newer players have very big balance sheets. So I think that the Property space will continue, and the E&S will continue to be E&S-centric. You're kind of -- you're E&S or you're not E&S, for the most part.

But on liability, and some of the others, as the market continues to shift, the carriers are looking for areas to grow their business. Liability and wholesale may be one of those.

Okay. That is very helpful. Thank you.

Thanks.

And we will go next to Ken Billingsley from Compass Point.

Good morning. I just wanted to clarify a couple of answers you had before, so I would just like to follow up. One of them was on the worker's comp partner --

Can you speak up, Ken. You're sounding really faint. Sorry.

Is that better?

Yes, you sound better. That is much better, thank you.

So I just wanted to ask some clarification questions on some comments from earlier. I know this was only one of many things you mentioned. But on the worker's comp appetite declining for that one partner, what were they seeing specifically? Was it an internal issue or external issues that is causing them to back away?

I would say -- I think that they saw something in a market which was limited to a certain geographic area, and yet the filing they had didn't allow them -- after they did a loss analysis in that area, the filing with the state did not allow them to address it on a geographic basis. It had to be more of a state basis.

So you have -- that is maybe more than you wanted to know, but I would consider it a little bit of both. If that makes sense. And so if you had a different filing, if they had had a different filing, I think they could have dealt with it differently.

So like I said, those are things that you work through with your carrier partners. And we work through it with them.

So it is likely that they would return or want to do more once they can get their filing in order?

Well, that would be what I would like it to be and we'd like. I can't answer that, because I don't have that information right here with me today. I know that we are talking to them, and/or our other carrier partners about the ability to write that class of business in question.

So like I said, maybe it is more information than you want. But in the program business, if you think about it, we are an outsourced insurance company, as you know. And in doing so, we work with our partners very closely to make sure we have the right filings.

In some states, that is very easy and some states that is more complicated. And so file and use, versus an approval, versus all kinds of different variations.

And so we try to work with them the best we can, and then when we are presented with a challenge or an opportunity with this, we either try to work with them and get it in a position with a new filing that will work for them. I don't know if they will do yet or not, we don't know that. Or is there another carrier partner that works with us that will be able to take up some of that.

Okay. Then on the stock buyback, on the $100 million accelerated stock repurchase that you mentioned in the press release. Is this in reference to the prior one, or is this going to be a new $100 million ASR.

Ken, it relates to the one that we announced back in the beginning of March. And that was, again, just for sequence on these, we did initially a $50 million on the initial $200 million, then we did the $100 million in March, and that leaves us with $50 million on that $200 million. And that's what we mentioned, the $100 million we just did should be completed here end of July, sometime in mid August.

And the reason it is not done is not because we don't want it done, it is because we can't buy in the open market it can't buy that in, because of the trading volume.

Yes, and because we are underneath of an ASR, and this case, we have got JPMorgan as our agent on this one. It is up to them to manage what they buy in the marketplace off of volatility, and how they can purchase versus the VWAP, or volume average weighted price. So it is really up to them.

We don't actually direct the day-to-day buying. So our goal was hopefully we were going to have it by June, but we didn't. But that's all right, a couple of weeks is nothing significant in the grand scheme of things.

And the last question was a -- again, it's a follow up on the M&A side. And I might have missed this, but normally, we listen to these calls, everyone talks about the robust pipeline of M&A activity. And maybe I missed that comment, but can you talk about if there is any change or shift in attitudes towards that? I know you mentioned that it is more competitive and multiples are up.

But could you talk about maybe why you are not as robust maybe with the pipeline expectations? And then where is that competition coming from? Is it coming from the private side, public side? Is it private equity?

I would say that the biggest participant in this is private equity. And so, Ken, if you go back to 2006, as an example. 29% of all transactions announced were done by financial institutions, banks, and only 4% were done by private equity firms.

In there, you have a big group of public buyers and you have some private buyers. But in 2013 and 2014, private equity was 44% and 43% of the announced transactions. And in that same period, banks were only 8% and 5% of the transactions, while the publicly traded brokers, the percentage in the 20%s, which remains fairly constant over the entire period of time.

So we are starting to see private equity buy private equity, which I think is many times an indication of a frothy environment. And so, but there are other publicly traded firms that you know that are announcing transactions. And there is some private funds, but it's predominantly private equity.

We are always talking to people out there, always. And as I have said before, how and when, or why and when they sell is different and unique to each one.

We would tell you, and quite honestly, the reason that we did not make that comment this time is because the pricing continues to be very competitive. It is not that there aren't a number of transactions out there. There are actually a lot of transactions.

And there is a lot of activity because of the speculation of these high or higher multiples. But we are going to continue to stick to our knitting, which is we, are trying to execute better every day. We want to sell more accounts, and we want to retain the existing clients that we have.

We want to work really closely with our carrier partners, which enable us to have additional success. Investing in our teammates all along the way. And driving long-term shareholder returns for our stockholders.

And then the last question I have, that relates to that. So just looking if it's the higher multiples being paid, regardless of who is doing it, what is different in that business model that the paying the higher multiple makes sense? Given the current market conditions and where organic growth prospects are likely to be over the next 18, 24 months.

Okay. So as you know, there can be a pro forma, and sometimes there is a pro forma of a pro forma. And anybody can make any pro forma, make any number look good or potentially good, and some people are willing to accept lower returns than others.

And so if you were in a, for example, private equity firm, and you were expecting a 20% IRR. And on the pro forma of the pro forma, as best we can see, if it couldn't be higher than 14% or 15% or 16%, then that is just the decision that they have made.

As it relates to some people maybe don't look at their return on invested capital as closely, and maybe they do. But sometimes people bake in and calculate synergies from existing businesses that they already have, which might make a pro forma look a little differently, or maybe a little rosier.

And so, everybody does it differently. And since I haven't worked at those other firms, I don't know exactly. I can only speculate.

But I can tell you that we put our pro formas together. We feel comfortable with our pro formas. And as I like to say, it is a multiple of what.

I have had several people ask me that some people may be saying they are paying seven times. And I say, is that seven times revenue? Is that seven times a pro forma of 2018 earnings? Is it seven times what?

So I don't think it's so much the multiple number. It is what is -- what are the earnings that they are calculating, and that's where I think sometimes there's a divergence in that discussion.

So it is very interesting. It sometimes is challenging. Sometimes comical, but we keep going.

And different people are going to make -- typically people buy emotionally, and justify it intellectually. So they will go where they think that they will be best served, unless the number is so unusual and if nobody else can get to it.

So it is a very people-oriented business, as you know. And we continue to talk to all of these people to try to set ourselves up for the opportunity to acquire them, if that is -- when and if that opportunity presents itself.

Ken, also, and when we look at this space, with a lot of the really high multiples or it appears to be the really high multiples being paid by the private equity side, as Powell mentioned, their strategy is there is an exit to it, right? That means there is a liquidity event at some point in the future. And so that helps them quite often drive the returns.

And if you're someone like ourselves, as a strategic buyer, we've got to make sure that we are going to get the appropriate returns over time, because we don't have a liquidity event. We plan on buying the asset and holding it for a really long time, and have it as part of our team that's out there. So it is just a different philosophy maybe as to how each company thinks about returns inside of it.

Great. I appreciate you taking my questions. Thank you.

Sure. Thank you.

That concludes today's question-and-answer session. I would like to turn the conference back to our moderators for any closing or additional remarks.

Thank you, Tracy. And thank you all for your time today. We look forward to talking to you at the end of Q3, as we continue to work on our opportunities and our challenges.

Thank you. If you have additional questions, I know Andy will be reachable throughout the day. Thank you.

This concludes today's conference. We thank you for your participation. You may now disconnect.