Brown & Brown Inc (BRO) — Q3 2016 Earnings Call Transcript

Thank you, Ron, and good morning everyone and thanks for joining us for our third quarter 2016 earnings call. For the quarter, we delivered $462.3 million of revenue, growing 7% in total and 4.3% organically. Once again we realized organic growth in each of our four divisions with improvement seen in most of the divisions compared to the first half of the year. We'll discuss the drivers of this improvement in detail later in the presentation. For the quarter, we experienced a slight decrease in our EBITDAC margin compared to the prior year, which was primarily driven by lower contingents and GSCs, along with our continued investment in technology. Our earnings per share for the quarter increased 6.4% over the third quarter of 2015 to $0.50 a share. Excluding the change in estimated acquisition earn-out payables, earnings per share increased 10.6% to $0.52 on an adjusted basis. Andy will provide more detail about our financial performance in a few moments. Overall, we're very pleased with the top and bottom-line results for the quarter and the incremental improvement that was seen over the last few quarters. We like to thank all of our teammates for their contributions to these positive results. During the quarter, we saw modest growth in exposure units as a result of continued improvement in the economy and even though this trend was not seen across all geographies or industries. Catastrophic property rates for the quarter were down 5% to 20%. We think coastal property rates will not change in a material way as a result of Hurricane Matthew. Buyers of insurance will look very closely at hurricane deductibles, flood coverage and excess flood coverage in the future. We're also seeing non-admitted carriers offering admitted paper options in certain coastal areas. In the admitted market, rates generally remain consistent with previous quarters as they are flat to down 5%. The exception to this is commercial auto, where rates are flat to up 5%. Professional liability rates are flat with the exception of some lines which were up slightly. While the continued increase in overall exposure units has helped offset some of the rate decreases, we do expect rate pressure to continue for the remainder of the year and into 2017. From a retail perspective, we had another good quarter and delivered 2.8% organic growth. We continue to see a positive trend in the last several quarters. Many of you might be wondering what the impact will be of the recent approval by the Florida Department of Insurance regarding worker's compensation rate. The approved increase of 14.5% is effective December 1st of this year for all new policies and upon renewal for all existing policies. The impact will be immaterial this year and we estimate for 2017 to be in the range of $1.5 million to $2 million. We're pleased with our performance within national programs; it delivered organic growth of 7%. During the quarter, we had continued growth in forward momentum across many programs specifically our lender placed coverage program and Wright Flood business. In regard to Wright Flood, as of now, it's too early to quantify what the claims revenue we may recognize from Hurricane Matthew will be in Q4. While we have a number of programs performing well, we have a number of programs that continue to face material headwinds such as our property and auto programs that are being impacted by declines in pricing or changes in risk appetite or a combination of both as we discussed last quarter. We expect these headwinds to have an impact on our growth rate for national programs in the fourth quarter. Our wholesale business also had a good quarter delivering organic growth of 6.7%, driven by new business, which was tempered by the continued rate pressure in catastrophic property rates. As we mentioned before, cat property rates are down 5% to 20% and we expect rate pressure to continue for the remainder of the year. For our services division, one of our claims TPA businesses and our Social Security advocacy claims business performed well during the quarter. In summary, we're pleased with the performance of our businesses and view the third quarter as a good quarter both financially and operationally. Now, let me turn it over to Andy who will discuss our financial performance in more detail.

Great. Thank you, Powell. Good morning everybody. I'm over on slide six, which presents our GAAP reported results. For the third quarter, we delivered 7% revenue growth and an organic growth rate of 4.3%. Our pretax income grew by 3.5%. As a percentage of revenues, our pretax income decreased by 80 basis points, primarily due to a change in estimated acquisition earn-outs. I'll talk more about this in a few minutes. From an EBITDAC performance perspective, which we define as income before interest, income taxes, depreciation, and amortization, and the change in acquisition earn-outs, our EBITDAC margin decreased 90 basis points to 34% when compared to the prior year. Our EBITDAC margin was impacted by lower contingent commissions and GSCs recognized this quarter versus the prior year, which had about 40 basis points impact. Also during the quarter, we realized about 30 basis points impact associated with our technology investment programs. As a result, we're projecting the impact of our technology investments for the fourth quarter to be in the range of 30 to 40 basis points. We estimate the impact for 2017 to be in the range of 35 to 50 basis points. Our net income improved by 5.8% as compared to the prior year and is slightly higher than pretax growth due to a modest decrease in our effective tax rate to 38.8% this quarter versus 40.2% last year. The decrease to our effective tax rate is primarily driven by several permanent tax differences and the apportionment of taxable income to the state in which we operate. As of now, we see 39.2% to 39.4% as a good estimate for the full year effective tax rate. Our earnings per share for the quarter increased over the prior year by 6.4%. This increase is slightly less than the revenue growth of 7% and the difference was primarily driven by the change in estimated acquisition earn-outs. Moving over to slide 7, this represents the reconciliation of our GAAP reported results to our adjusted results, which exclude the impact of acquisition earn-out payables. For the quarter, we recognized an incremental $3.1 million of expense versus the prior year. On this adjusted basis, our pretax income grew 6.2%, net income grew by 8.6%, and our earnings per share grew 10.6% to $0.52 per share, partially driven by our share repurchases during the last year and our slightly lower effective tax rate. Moving over to slide 9, we're going to walk through the key components of our revenue performance for the quarter. Our contingent commissions and GSCs are down about $3.3 million as compared to the third quarter of the prior year. The decrease in contingents is primarily in our wholesale brokerage segment and is driven by increased loss ratios. We continue to expect contingent commissions to decrease in the fourth quarter as they will be impacted by lower written premium by our coastal property programs. We also disposed businesses or books of business in the past 12 months, which represented $2.1 million of revenue in the third quarter of last year. Please ensure that you make these reductions in your updated models. For the third quarter, we also recognized $17.3 million in revenue associated with acquisitions completed over the last 12 months. By removing these four categories, our organic revenue growth was 4.3% for the quarter. If we move over to slide number 10, when we look at our performance of each of the divisions in a bit more detail and we're going to start with retail. For the quarter, our retail division delivered 5.7% revenue growth with organic revenue growth of 2.8%. During the quarter, approximately 80 basis points of the 280 basis points of organic growth was driven by timing items related to revenue from previous quarters. Again, please keep this in mind when updating your models. For the quarter, retails margins increased by 30 basis points, primarily driven by an increase in contingents and GSCs. Moving over to slide number 10, for the quarter, total revenues for our national programs division increased by 5.6% in total and 7% on an organic basis. During the quarter, Wright Flood realized approximately $4 million of incremental revenue versus the prior year associated with weather-related events. As a reminder when we acquired Wright, we said that the 10-year average for the claims revenue from weather-related events was approximately $7.5 million. In 2014 and 2015, we recognized significantly less than then average. But appears in 2016, we'll be closer to that average. For the quarter, income before income taxes as a percentage of revenue increased by 450 basis points and our EBITDAC margin increased by 140 basis points. Our income before income taxes was driven by lower intercompany interest expense charges. Both income before income taxes and EBITDAC benefited from increased claims processing revenue from weather-related events, performance of certain of our programs, and was partially offset by lower contingent and GSCs. On slide 11, the wholesale division had another good quarter reporting total revenue growth of 14.3%, driven by the Morstan acquisition and delivered organic revenue growth of 6.7%. Our EBITDAC margins were 36.8%, which is a decline of 470 basis points from the prior year, which was driven primarily by lower contingents and GSCs. The margins related to Morstan and then higher transaction volumes that we discussed in the previous quarter. These latter two items will more than likely impact our margins during the next few quarters. The reduction in contingents and GSCs from the prior year was approximately $3.6 million. Over to slide number 12, our services division delivered total revenue growth of 4.2% and organic revenue growth of 1.6% for the quarter, with the difference driven by the SSAD acquisition that we completed in the first quarter of this year. For the quarter, our EBITDAC margin decreased by 120 basis points, primarily related to the revenue mix within the division. As we've seen in and commented in previous quarters, the quarter-over-quarter margin can be a bit choppy based upon the growth in specific businesses. With that let me turn it back over to Powell for closing comments.

Thank you, Andy, and great report. I'd like to take a couple of minutes to discuss Hurricane Matthew and its effects on Florida and specifically our area here in Volusia County. First and foremost, none of our team members at Brown & Brown or their family were injured. Those in offices from West Palm Beach, Florida, all the way up into the Carolinas, number one. Two, there's lots of homeowners' claims and some of those will not meet their deductibles, i.e. a hurricane deductible might be higher than a flat deductible and it's usually a percentage of the coverage A. Here in Volusia County, we had 90-an-hour winds and the eye of the storm passed 30 miles east of us. And with that little wiggle of whatever you want to call it to the right, it made a big difference in potential damages here in the Daytona Beach area. What you would see if you were here, we have lots of dock damage, pooling closures, roofs, particularly roofs on condominiums and there has been lots of water damage, particularly north of us. That's Flagler Beach, St. Augustine, Jacksonville, up into Georgia, South Carolina and North Carolina. I drove last night up in Flagler and there are two areas of A1A which are closed due to the erosion, the ocean washed under A1A and took out parts of the road and many of you may have seen that on television. 1947 was the last time something like this occurred here in Volusia County and I get that information from a source that was here that was my father. He was 10 years old at the time. The bottom line on the storm is it is the worst in the history of Volusia County but not nearly as bad as it could have been if the eye had come onshore. In addition, in areas north of here, as I referenced the damage was much worse and our thoughts and prayers go out to those affected citizens in those affected areas. On a lighter note, and in closing, we're pleased with the quarter. And the outlook for the near to intermediate term is good. We believe Hurricane Matthew will have limited impact on rates, if any. There will be more discussions around flood and wind deductibles, rate for catastrophic property continued downward affecting retail, wholesale, and national programs, and that will continue into Q4 and into 2017. We continue to look for acquisitions and the state of the market is similar to last quarter what we would call fully priced. With that, Ron, I'll turn it back over to you to open it up for questions.

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

Yes, good morning, Kai. I appreciate your observation. Firstly, I want to clarify that the moderate decrease in pricing was already happening before the storm, as it was in Q3, and the storm occurred on October 7th. Secondly, experiencing four to five years of consistent downward pressure, with reductions of 15% to 25% each quarter, is difficult to maintain. Therefore, I don't believe we should overreact to your observation just yet. The reason for my caution is that there is still significant interest in the coastal property market, with many investors eager to enter or be involved. Consequently, I anticipate ongoing downward pressure on rates. While it may ease somewhat, I still expect it to persist.

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

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

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

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

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

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

Yes, so what we said in our comments is we think it's going to at least be for the next few quarters. Not sure on the transactions, that really that depends upon what happens with continued new business flow as well as pricing. That one we'll have to just monitor as we go forward. And then as we commented back at second quarter after we completed the acquisition of Morstan in Q1, excuse me, in the second quarter, we said that we would over time that margin up. That will probably take a number of quarters if not maybe a few years to get there, so that will be a drag. But the business itself is performing really well top and bottom line, so we're pleased with it.

Thank you very much for all of the answers.

Yes. First regarding the technology spending, it appears that throughout this year, the investment and its effect on margins have been less than anticipated at the beginning of the year. Are there any updates on the spending trends you are observing, or is it just the effect that is impacting your margins? Additionally, is the projected impact of 35 to 50 basis points for 2017 still consistent?

Correct. So, let me go back just to make sure we reset on everything. So, when we started the year, we said about 40 to 50 basis points was our estimate. Then we updated midyear and said 30 to 40, and then for this quarter, we're about 30 basis points, fourth quarter, we think we'll be around 30 to 40, probably one of the lower end of the range. The underlying programs themselves are, in fact, picking up momentum. We went live with our new financial management reporting system in the third quarter and then full live with all of the offices in the fourth quarter. So, again, that's kind of kicking up the expenses on. And as it relates to 2017, the 35 to 50 would be off of 2016 and okay Elyse?

Okay.

So, our original estimate of 35 to 60 versus our starting point in 2015 does not change, we're still holding on that.

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

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

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

Correct.

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

The answer is quite similar to what we've said in the past. We discuss stock price and the possibility of repurchasing shares in almost every Board meeting. We consider this an investment option. However, the underlying question you're raising is whether we will buy back stock if we don't make many acquisitions in the near future. The answer is not necessarily. I want to clarify that we have no issue with holding cash on our balance sheet, even if some may criticize that choice. Our intent isn't merely to stockpile cash. If necessary, we will retain it to invest at the right moment in the right businesses to foster our growth. I understand you're looking for a definitive answer on our buyback plans, and I know this uncertainty is frustrating for you. We will assess the situation and when we believe the stock price justifies it, we will proceed with repurchases.

Okay. Thank you very much.

Thank you, Elyse.

Thank you.

Good morning, Powell, Andy. Thank you very much. I want to revisit the margins one more time. The 35 to 50 basis points in 2017 looks a bit better compared to the previous 35 to 60 range. I understand you have indicated that in the long term, you're aiming to return to a margin of 33% to 35% without providing a specific timeframe. My question is about the long term in 2018. Is the expectation that IT spending will be completed in 2017? Should we anticipate some margin improvement from the reduction in IT spending in 2018? So, margins are expected to improve even if they don't reach the 33% to 35% level? Is that the current expectation?

Good morning, Quentin. Let me clarify the first point. You mentioned 35% to 50%, which is better than your original range. However, 35% to 50% is based on the 2016 margins. We are maintaining our original range of 35% to 60% compared to our starting point in 2015. So, that range remains valid. When we stated that this would be a two to three-year program, it means it will not be completed in 2017 and will extend into 2018. As we discussed during our year-end results last year, we said that by the end of the program, we would be able to recover any decrease in our margins within that 35% to 60% range, and then we would see a slight improvement afterward.

Okay, great. Thank you for the clarification there. And then secondly, on Wright Flood, we talked about Matthew, but could you talk about any impact that you might have seen in claims handling activity or just otherwise from the Louisiana floods in the third quarter? And then secondly, with Wright Flood, I think there's a little bit of confusion still within the market. Obviously, you guys sold Colonial Claims, but how much benefit do you guys get in particular from claims handling from Wright Flood as opposed to the uptake from the National Flood Insurance Program and kind of how that business flows through would be really helpful.

Okay. In our comments, we mentioned that we picked up about $4 million of claims processing revenue year-over-year within Wright Flood. The majority of that was associated with the storms down in Louisiana, not exclusively, but majority was from there. What we can tell you is it was less than 6,000 claims that we got in Louisiana for reference point when we went through Hurricane Sandy back in 2012. That was over 20,000, so again, we're just trying to give you an idea of the volume of what's out there. A lot of this is covered in the press, but that doesn't always mean one that how it's being covered represents who has policies. And I think that was indicative when we had the storms last year up in the Carolinas. So, we always try to manage our way through on the message in and that's what really Powell was saying earlier in relation to the fourth quarter. It really depends upon who has coverage and exactly what claims are going to be.

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

Okay, great. Sorry, just to follow up quickly on that, the 6,000 claims from Louisiana floods, Hurricane Sandy 20,000 claims. Just to put some perspective on the organic growth, in national programs you did a seven this quarter. What would that have been without that increase in claims activity or how much of that was attributable to the $4 million in Louisiana claims?

It's not. Yes, well, you can quickly estimate the top-end at $4 million; that calculation would suggest it represents about 40% of the gross, so the actual underlying business still performed well.

Good morning, everyone.

Good morning.

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

Let me address the second part of your question first. We have worked very hard to create a strong balance sheet that we take pride in. We believe this balance sheet provides us with the flexibility and options to make significant investments. In our view, we are capable of pursuing any acquisitions we desire with our current balance sheet. Additionally, I want to clarify that we do not aim to accumulate cash on the balance sheet unnecessarily. We evaluate all investment opportunities, including hiring new team members, acquiring businesses, or returning capital to shareholders through share repurchases or dividend increases. Notably, we have just raised our dividend for the 23rd consecutive year. I want to assure you that we do not feel pressured to spend the funds on our balance sheet impulsively, as we prioritize long-term benefits over short-term actions.

And I'd probably add to that Josh is when we put together our new series A and the credit or the accordion underneath of there that gave us access to a $100 million and our goal when we put that together was to give capital to our organization that we can access when and if we needed at the right time. So, combination the cash that we generate each year was on our balance sheet and that revolver that's out there, we've got a lot of flexibility at this the stage when and if it ever comes to us as an opportunity. Everything that we see in the market right now and all trends don't give any indication that there's going to be any lockdown on availability of capital to a company with our balance sheet capabilities, but you never know. So, but we think we got plenty of flexibility.

I understand your point, and while it's my responsibility to assess whether your stock is undervalued, I'm curious about your statement regarding the lack of attractiveness of the stock for returning capital to shareholders at this moment. I'm trying to grasp the perspective you're weighing against maintaining flexibility.

So, the way we look at it is we evaluate what we believe the intrinsic value of the stock is. We then discuss it with the Board to determine if we believe it’s the right investment at that time. I'm not trying to oversimplify, but that's our approach. You'll make your own judgments based on your comments about buying stock or choosing not to buy it in the future. We won't comment on that. Essentially, that's how we analyze it as an option, and we have quarterly discussions with our Board about it.

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

No. But here's how I think it's important to visualize this. If you worked at a burger joint and were cooking burgers on a grill, in order to maintain the same revenue tonight as you had last night, you would need to put an extra 15 burgers on the grill and cook them. So, you're essentially flipping more burgers to achieve the same revenue when rates are decreasing, as seen in coastal property in both brokerage and binding authority. You could view losses as random at first, but within a large dataset, there’s some predictability. Conversely, as rates decline, the traditional losses in a large portfolio will lead to a higher loss ratio because your premium volume decreases. It may be a mix of factors, but just think of it as needing to flip more burgers. When Andy mentioned doing more transactions, that connects to this burger concept. To stay flat and then grow, you have to do even more transactions. This isn't new; we don't want to give the impression that this is some kind of revelation. It occurs in every market cycle like this. We recognize that, and we just want to highlight that we are flipping a lot of burgers.

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

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

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

And with all comments we've been making Josh, about continued downward pressure on continents, we would expect that to happen. We don't know definitively because if you step back and say if rates have been down for a number of renewal cycles, then the overall returns for the risk-barrier have absolutely contracted. We continue to drive off of profitability and so as well as obviously loss experience inside of there. So, that's why we're seeing shrink down, cycle that we go through.

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

When discussing the current market, I believe there's a normal level of deals happening, and our pipeline remains active as we engage with various stakeholders. Even business brokers attempting to sell these agencies understand that the current pricing is not sustainable and is likely high. We are seeking businesses that align culturally and financially. This year, we've achieved $52 million in annualized acquisition revenue, down from last year's $56 million and over $100 million in each of the three previous years, where we had significant transactions annually. We continue to connect with many potential sellers, and I am confident that opportunities will keep arising. As mentioned earlier, we've strategically positioned our balance sheet to consider these opportunities, anticipating many will emerge in the coming years, and we are eager to pursue them.

Well, thank you for giving me so much time on the phone and good luck.

Absolutely Josh. Thank you.

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

I believe it's important to understand that these are all different types of businesses that are performing very well in their respective markets. They are successfully renewing many of their existing clients, demonstrating high retention rates, and generating a significant amount of new business. While it’s true that there may be challenges such as rate pressure, particularly for those dealing with coastal properties, or lower contingent issues, the core business – which focuses on client relationships – continues to grow. They are acquiring more clients and keeping their existing clients, which has led to improvements in their earn-outs. Interestingly, when there is a change in acquisition earn-out payable that increases, we interpret that as a positive sign indicating that the underlying business is performing better. From a GAAP perspective, we cannot record the maximum earn-out because we cannot predict if they will achieve that target. Therefore, we estimate what we believe is the best figure at the moment, and if they exceed expectations, we adjust it upward, which we see as a good outcome.

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

I believe the answer to your question is straightforward. We prioritize cultural fit and financial viability in our acquisitions. As you mentioned, we discussed this in the second category. When new team members join us, we often have ways to support them in achieving their goals, and we hope they reach their maximum potential. We are invested in this success, just as they are. However, I want to clarify that recent performance over the last quarter or two has not changed our perspective on acquisitions. Our approach remains consistent with what it was six or nine months ago. The key is that we seek strong leaders who manage effective businesses. When a leader's vision aligns with their passion, it positively impacts their team. That's our consistent philosophy. If we have only one without the other, it may not lead to a negative acquisition, but lacking both will likely result in a poor outcome.

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

Yes, I would say that the commission environment is largely unchanged. While it resembles the last couple of years, it differs from previous cycles due to the presence of a more traditional finite marketplace. We now have sidecars and more alternative capital entering the market or remaining on the sidelines, providing additional options that continue to create downward pressure on rates for those properties. Therefore, I think the commissions remain generally the same, and I wouldn't say that has changed.

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

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

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

We expect to be on the lower end of that for the full year. Our commentary indicates we did not have an impact in Q1, about 25 basis points in Q2, and 30 in Q3. So, it is increasing.

Okay, great. Thank you very much.

Thank you.

Thank you.

Thanks. Good morning.

Good morning.

Good morning.

Did I hear in the remarks on retail organic, did you say that the quarter's organic was helped by business that was pulled from the quarter before?

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

Could you discuss the benefits business and how it is performing in relation to the overall retail business? Additionally, how is commission pressure affecting that smaller segment, given the limited size of the book?

So, I would tell you, Adam that we're very pleased with our benefits book of business and how it's growing. I would tell you and we said that before we experience more organic growth in the over a hundred than under a hundred, but they are both growing, which is good. And I would tell you that we have seen in our book, in under a hundred there was a lot of change over the last couple of years where you had carriers going from a commission level to a per head per month or how they are looking at exchanges/other alternatives and all these other things. What we're seeing now is sort of a leveling of commission dollars as it relates to those accounts. That does not mean that it's not under pressure on one-off accounts, that's not what I'm saying, but I'm saying generally speaking, I think that its kind of leveling out, and the under a hundred, as I said, both of them are growing and we're very pleased with our business.

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

So, are you talking about the West Coast geographically?

Yes.

I visited 23 offices last quarter, many of which were on the West Coast, and from an economic perspective, they appear to be improving. While I can’t say I was in those offices six to nine months ago, I can tell you that things are moderately better overall. In cities like Miami and Orlando, there’s substantial construction happening. The same goes for Las Vegas, Orange County, Seattle, and Portland, where the situation is also improving. I typically ask our team about construction, new projects, and renovation work. We inquire about the general exposure units regarding sales and payrolls across various types of insurance, not just contractors, which provides insight into the local economy.

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

What I want to emphasize is that moving forward, there is potential for change. Previously, the involvement of the plaintiff's bar was limited by the current statute, but now it is shifting back to allow them to be more active. It's important to understand that this situation is prospective, not current. That's the perspective I want you to have.

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

Yes, I want to highlight two points. First, commercial auto remains a significant challenge for our carrier partners, not just within our own business. Second, casualty pricing is becoming problematic for some carriers, as they feel that rates have dropped to a level where profitability is difficult. There are carriers expressing reluctance to continue writing if rates decrease any further. While this isn't a widespread issue, there are some who are closely examining their financials. In my view, casualty has always posed challenges for carriers. However, I don't believe our book of business has experienced anything unusual beyond the property losses seen in the past two years; overall, it seems to be normal.

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

Well, I can't speak for other wholesale businesses, but I believe we're likely performing in the top half or top third. The reason for our success is, in my view, our strong leaders, brokers, and team members. There's a lot of activity currently, which leads to inconsistent actions. We're aiming for more opportunities. In the presence of market disruptions, these situations can create additional chances. For instance, if a storm approaches, some markets may close while others may remain open for a while longer, providing a chance for wholesale brokers to get things done. In my opinion, wholesale businesses can profit in both declining and rising markets, but a flat market is not favorable for wholesale.

Okay. Thank you very much.

Thank you. And we're going to take one last question, okay Ron.

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

Thank you.