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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Brown & Brown Inc.'s Second Quarter 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 the 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 our future events, including those relating to the company’s anticipated financial results for the second quarter 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 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 in 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.
In addition, there are certain non-GAAP financial measures used in this conference call. A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company’s earnings press release or in the investor presentation for this call on the company’s website at www.bbinsurance.com by clicking on Investor Relations and then Calendar of Events.
With that said, I will now turn the call over to Powell Brown, President and Chief Executive Officer. You may begin.
Thank you, Matt. Good morning, everybody, and thanks for joining us for our second quarter 2019 earnings call.
I’m on Slide #3. For the second quarter, we delivered $575.2 million of revenue, growing 21.6% in total and our organic revenues increased by 3.9% for the second quarter. I’ll get into more details in a few minutes about the organic growth for each segment.
Our EBITDAC margin was 29.3%, which is up 20 basis points versus the same quarter in 2018. Our net income per share for the second quarter grew by 26.9% to $0.33, as compared to the second quarter of 2018. During the quarter, we also completed four transactions with annualized revenues of approximately $14 million. Overall it was a really good quarter. Later in the presentation, Andy will discuss our financial results in more detail.
I’m now on Slide #4. During the quarter the market continued to expand with customers investing in their business driving increase in exposure in us. We would say overall our customers remain optimistic about the market.
While the overall premium rates remain competitive, during the second quarter we did see some upward movement on rates for many lines, including automobile, employee benefits, general liability and property, both wind and earthquake. Accounts with minimal loss experience are still getting marketed and with rigor. The main line where we see rates consistently down across most regions is Workers’ Compensation. Most other lines of coverage are flat to up slightly, flat to 5%, with commercial auto up typically in the range of 7% to 10%.
Last quarter there was a lot of discussion that risk-bearers wanted to increase rates and it was most pronounced in London. There was some upward pricing pressure in the second quarter as risk-bearers are trying to get rate increases where possible, and specifically in the E&S space we are seeing some carriers be more selective in either certain lines or geographies or both, which is having a potential or a pronounced impact in certain areas. There is still a lot of capital that needs to get put to work and therefore we do not believe there is going to be large swings in pricing in the near future.
On the M&A front, we remain active and acquired four businesses in the second quarter bringing our year-to-date acquisitions to 12 with $50 million of estimated annualized revenues. We continue to be pleased with our investments in technology, innovation, and our new programs. During the quarter, we realized additional returns from our investments which helped to improve our margins and the experience for our teammates and customers. Investing in innovation will remain an important part of our strategy going forward.
On Slide #5, let's talk about the performance of our four segments. Our Retail segment delivered strong organic growth of 5.6% in Q2 with most lines of business growing through new business activity, good retention, and the benefit of exposure unit expansion and rate increases in certain lines of coverage.
As we mentioned last quarter, organic growth for Q2 was expected to be higher than Q1 due to the impact of the new revenue standard in the prior year. While we did experience some positive impact of the new revenue standard, organic growth for the quarter was better than expected. We are pleased with the 4.5% organic revenue growth delivered through the first six months of 2019 as this represents continued incremental improvement over the same period of prior years.
Lastly, we continue to be really pleased with the results of Hays as they had another good quarter and are near the upper end of our expectations for both revenues and profit. Jim Hays, Mike Egan, and their team are doing a great job of focusing on their customers and winning new business.
On the National Programs segment, grew 2% organically with good performance within our Earthquake programs, our All Risk program and better than expected results in our lender-placed business just to name a few. Most of our programs performed well this quarter. We continue to experience challenges in our Commercial and Personal Automobile programs as our carrier partners are evaluating returns and their risk appetite which continue to impact our retention and new business.
Our Wholesale Brokerage segment delivered another great quarter with organic revenues growing 7%. The growth was primarily driven by new business, good retention, and some rate improvement in certain lines. Our organic growth was positively impacted by the renewal timing of a couple larger accounts which we discussed in Q1 earnings call. We're pleased with the over 5% organic growth delivered by the wholesale segment through the first six months of 2019.
The organic revenue for our Services segment decreased 4.1% for the quarter consistent with last quarter organic growth was impacted by lower claims in our Social Security Advocacy business that resulted from the completion of advocacy work on our book of business in the prior year. This decline offset good organic growth realized by most other businesses within the Services segment. Overall, it was a strong quarter across the board and we are very pleased with our top and bottom line results.
Now let me turn it over to Andy to discuss our financial performance in more detail. Andy?
Thanks Powell and good morning every one. Consistent with previous quarters, we’re going to discuss our GAAP results and then our adjusted results, excluding the impacts of acquisition earn-outs.
I'm over on Slide #6. This slide presents our GAAP and certain non-GAAP financial highlights. For the second quarter, we delivered total revenue growth of $102.1 million or 21.6% and organic revenue growth of 3.9%. Our income before income tax and EBITDAC both increased 22.4% growing faster than revenues due to the continued leveraging of our expense base. Later we will walk through the detailed movement of our EBITDAC margin and the impact of Hays.
Our net income increased by $18.7 million, or 25.3% and our diluted net income per share increased by $0.07, or 26.9% to $0.33. Our effective tax rate for the second quarter of 2019 was 25.1% compared to 26.8% in the second quarter of 2018. The lower effective tax rate was driven by our state tax footprint and the corresponding apportionment. Based upon the results for the first six months, we are still projecting our full-year effective tax rate to be in the range of 25% to 26%.
Our weighted average number of shares were down slightly compared to the prior year. As we have mentioned before, our goal is to purchase shares related to our equity incentive plans in order to keep our share count on a full year basis relatively flat. And lastly, our dividends per share increased to $0.08 or 6.7% compared to the second quarter of 2018.
Moving over to Slide #7, this slide presents our results after removing the change in estimated acquisition earn-out payables for both years. We believe this presentation provides a more comparable year-on-year basis. This quarter we recorded a net reduction in our earn-out liabilities which is equivalent to close to $0.01 per share benefit. Our income before income taxes on an adjusted basis grew 19.2% or slightly slower than total revenues due to the incremental interest and amortization expense associated with acquisitions we completed in the last 12 months. On an adjusted basis, our diluted net income per share increased by $0.06 or 23.1% versus the second quarter of last year.
Moving over to Slide #8, this slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased 21.4% and our contingent commissions decreased $2 million as compared to 2018, which is consistent with our expectations and the guidance we provided during the Q1 earnings call. We continue to expect contingent's to be down $2 million to $4 million on a full-year basis as compared to 2018.
For the quarter, our guaranteed supplemental commissions increased by $10.2 million. This increase was driven by GSC within our National Program segment that will not recur in the future as the associated multiyear contract has ended. Please take this into consideration for the second half of this year and going into 2020. Our core commissions and fees increased by $92.7 million or 20.4%. When we isolate the net impact of our M&A activity, our organic revenues increased by 3.9% driven by the items that Powell mentioned earlier.
Moving over to Slide #9, to provide some additional visibility into the major drivers of our EBITDAC margin, we’ve included a walk through from 2018 to 2019. Hays negatively impacted our margin by approximately 100 basis points for the quarter. This resulted from phasing of revenues and profit in accordance with the new revenue standard which primarily impacted employee benefits. This drives higher revenue and profit in the first quarter and then lower amounts in the second through the fourth quarter. The second quarter was at the top end of our range for revenues and profit and the Hays team had another strong quarter.
Other reflects the underlying margin improvement we experienced across the remainder of our business. This was driven by higher organic growth, the net increase in GSCs, leveraging our expense base, and realizing some benefits from our previous investments. These margin improvements more than offset higher non-cash stock compensation cost as well as some incremental one-time legal costs we recorded this quarter. Taking all these items into consideration, it was a very good quarter for margin expansions.
On the following slides we presented the results of our business segments. We're going to start with retail which is on Slide #10. Our retail segment delivered total revenue growth of over 33% driven by acquisition activity over the past 12 months and organic growth of 5.6% for the second quarter.
Our EBITDAC margin for the quarter decreased by 130 basis points due to the quarterly phasing impact of Hays that we mentioned earlier. Excluding the impact of Hays, we are pleased that we delivered another quarter of margin expansion. Our income before income tax margin declined by 480 basis points due to higher intercompany interest expense and associated with our acquisition activity and the EBITDAC drivers.
Over to Slide #11. Our National Programs segment increased total revenues by 11.3%. This was driven by the previously mentioned one time GSC which was approximately $10 million, acquisitions during the past 12 months and organic growth of 2% driven by many of our programs. Income before income taxes increased by 65.4% primarily due to higher revenue growth, lower intercompany interest expense and continued cost management. EBITDAC increased by 32.6% driven by higher total organic revenues, continued management of our cost and scaling of certain programs.
Moving over to Slide #12. Our wholesale brokerage segment delivered total revenue growth of 7.4% and organic revenue growth of 7%. The EBITDAC margin increased by 120 basis points as a result of leveraging organic revenues and managing our cost base. Our income before income tax margin increased 110 basis points due to the same factors driving EBITDAC margins, but was offset slightly by higher acquisition earn-out payables.
Over to Slide #13, our Services segment delivered total revenue growth of 10.7% due to acquisitions completed in the last 12 months and our organic revenue decreased 4.1% for the quarter. From a margin perspective, EBITDAC grew faster than total revenues driven by the mix of business and management expenses. We do not expect this high level of margin expansion in future quarters.
Moving over to Slide #14, we want to provide an update on the Q2 performance for Hays. Total revenues were $44.1 million and were at the top end of our range and expenses continue to be slightly better than originally expected. For the quarter, we delivered $7.4 million of EBITDAC which is in excess of the top end of the range. Some of this favorability is due to timing associated with the new revenue standard and we expect some reversal in the second half of 2019. We continue to believe Hays will deliver within their previously communicated full-year range revenue and profit.
And then finally, a comment regarding cash flow conversion. In the first quarter we mentioned how our cash conversion percentage which we define as GAAP cash flow from operations divided by total GAAP revenues declined due to the timing of payments to our carrier partners. During the second quarter, this percentage increased an on a full-year base grew on a year-to-date basis our cash conversion ratio is slightly below last year.
With that, let me turn it back over to Powell for closing comments.
Thanks Andy for a great report. In closing we remain optimistic about the economy as business continues to invest or businesses continue to invest and hire more employees. Earlier, we discussed premium rates. Based upon what we're seeing right now we would expect most rates to continue to increase slightly, but competition will remain strong for accounts with low losses. Consistent with prior quarters our acquisition pipeline remained full and we're talking with a lot of companies. We have good momentum after closing 12 deals through the second quarter with annualized revenues of $50 million and we've announced two transactions already this quarter.
The primary challenge remains private equity firms and how they are approaching the pricing for deals. At times, they are willing to pay materially more than we are with a disciplined approach to capital deployment. Ultimately, our goal is to find companies that fit [indiscernible] makes sense financially and want to be part of a team for the long-term. We will maintain our disciplined M&A approach as it has proven to be very successful over the long-term.
I mentioned earlier that technology remains one of our key priorities. We'll continue to invest in our data strategy to improve the experience for our customers, how we engage with our carrier partners and the experience for our teammates. Overall we feel it was a great quarter for all of our segments and we have good momentum for the second half of the year.
With that, let me turn it back over to Matt to start the Q&A.
Thank you. [Operator Instructions] And first we will hear from Elyse Greenspan with Wells Fargo.
Hi, good morning. My first question was just on the retail growth in the quarter 5.6%, pretty strong number. I know when -- if we go back to the fourth quarter call, you guys had pointed to there being some movement with the Q1 potentially being weaker, Q2 being the strongest quarter of the year, I was hoping to just get a little bit more color on the impact that that kind of movement had on the Q2? And is there a way you could quantify if there was revenue recognition impact, if you could give us the dollar in millions, just so we can kind of break that out from the impact on the Q2 as we think about the organic growth in Retail going forward?
Hi, good morning, Elyse, it's Andy here. You know in fact, if you remember our comments on the first quarter, we had said that the impact of rev rec was less than anticipated and the same thing held true in the second quarter, well yes in fact it was higher than Q1, we did not have as big of a benefit in Q2 from rev rec. So underline we had a really good quarter. It just – it wasn’t material for the second quarter.
So you would that 5.6 as being like the underlying growth I guess that we should think about. I know you guys don’t like to give specific segment guidance going forward, but should that be, do you view that as a clean number for us to think when we use about, when we think about the growth that we could see in retail in the back half of the year?
Certainly we could take that and put it into two pieces is, there is a little bit of benefit in the 5.6, but it's nothing material, okay inside of there for. And then as we talked about on the earlier comments about where we are, we are pleased at 4.5% organic growth for the six months and the way I was thinking it's good to look at some trends because any quarters can kind of be up and down through all. But keep in mind that we've had employee benefits.
We have more of that revenue in the first half of the year and that business is growing well for us. So Elyse also, as you know, we don’t give guidance on organic growth, but we've said is the low to mid single-digit organic growth business. That's kind of how we view it in a steady-state economy. So, you know that the limited guidance we would give you.
Okay, and then in terms also, Andy you just said previously so you saw some strong employee benefits growth in the first half of the year. Would you say the rest of the retail book away from employee benefits was still growing like within the vicinity of 4% to 4.5% for the first half of the year?
Yes, well we didn’t that on the release, but I would say that all of our businesses are growing really well, just employee benefits are growing little bit faster.
Okay, great. I appreciate that color. And then my second topic on the margin side of things. You guys did have a one-off supplemental that you called out this quarter, and I thought that those typically run a – it is a pretty kind of just drops to the bottom line. So I was just trying to get a sense of the margin improvement. I think you alluded to in the comments that you guys did see margin improvement if we backed out that supplemental and so can you guys give us a sense of just ex that supplemental what the National Programs kind of the level of margin improvement you would have seen in the quarter?
Yes, we'll see if we can maybe put it into just two pieces. Let's do it at a total level first. If you look at the GSC, yes we did pick up about an incremental $10 million and they do flow through at higher margins. We had made the comment about incremental one-time legal cost and that was about another – that was about $5 million that we recorded in the quarter. So if you take those two they start to net each other down. That's why when we look at the underlying we said we were up 110 basis points even if taking that kind of a net benefit of those two, we still had a really good quarter at total company.
And then as it relates to National Programs when you go through, if you look at their margins and how much they're up, even pulling out the incremental GSC, now again keep in mind that contingents were also down in National Programs, we still expanded margins in National Programs for the quarter.
Okay, that's helpful. I appreciate the color. Thank you.
Our next question will come from Mike Phillips with Morgan Stanley.
Thank you. Good morning everybody. On your market overview slide, market overview and business overview slide on Slide 4, you mentioned some tightening underwriting criteria for some lines of business from some losses, and I wonder if you can elaborate on that, like what lines you're talking about and where you're seeing things there?
Well, think about we're seeing there is a little bit of pressure on rate. There's also a little bit pressure on terms and conditions. So you might see a deductible change from a flat deductible to a percentage in an area that's not coastal, which would be different, and there are some carriers more - I typically think more of, in the E&S market, but even in retail, who are reevaluating certain classes of business and if they want to participate and if in fact they are big rider of a certain class of business, it could be a property-related business or a liability related business and if they decide to change their vantage point that may have a change on the overall market. That's what we're referring to Mike.
Okay. Yes, I mean, I guess looking for certain specific lines property, non-property, liability, casualty, whatever and it sounds like you're seeing kind of across the board, more on the announcement?
It is, but I mean, where I'd start with is just property for example, where people become more selective or let's say somebody put up a large line or large limit, $25 million in the past and now they only are willing to put up $10 million or $15 million, things like that.
Okay, yes that's helpful, thank you very much. Second question on, you've commented last quarter on your non-cash stock comp that would be an up around $3 million to $4 million from 2018 levels. It was up on a year-to-date, this year it's up almost $9 million to $10 million. So can you - updated thoughts on how that could run out for the rest of the year?
Yes, hi, good morning, Mike. Yes, we were up about $3.5 million for the second quarter. We would expect that it will probably go ahead and trend up a little bit more for the back end of the year. The run rate, actually for the second quarter, is a pretty decent run rate right now.
The 3.5.
No, no, no, if you look at the total.
So you're up from $15 million to $24 million, so like $9 million for the year is that it?
No, no, no, hold on a second. Let's clarify. If take where our run rate is for the second quarter if you pick it up in there, then that would be a good estimate for the next two quarters on stock comp.
Okay, perfect. Thank you.
Probably coming in, in that 45 to 50 range.
Yeah, okay, awesome. Thank you very much Andy.
Sure.
And next we will hear from Mike Zaremski with Credit Suisse.
Hey, good morning. I was curious, I believe you guys have a sizable earthquake brokerage business and maybe you can help size that up and I'm wondering if anything is going on there, rates or our uptake given the - how it's taking place in California?
Okay, Mike. First of all, fortunately, there was no, that I'm aware of, no loss of life. And the amount of damage would be defined as minimal. And so, we do business in both the residential earthquake and commercial earthquake and prior to the event on July 5th, the 7.1 there was some pressure on rates already on those that were putting up very large limits, $50 million, $75 million, $100 million limits in quake zones and so that's a fluid market, and so as once the quake business, the quake occurred, there was a moratorium on writing quake coverage within 100 miles of the event and then it went down to 50 miles. And now, I believe it's open for all classes. But those did not affect the heavily populated areas of San Diego, Los Angeles or San Francisco, we could write in those all along.
And so, yes, there will continue to be pressure on those. I will tell you an interesting statistic, Northridge, I believe was a 6.7 and the difference between a 6.7 and a 7.1 is almost is between three and four times more powerful. And so they were very, very fortunate that it was out in the middle and a very rural area because otherwise there would have been significant damage. And so we continue to write lots of coverage and we'll continue to do so, to provide capacity of the marketplace in both residential and commercial going forward.
Okay, great that's interesting, I think good commentary. A couple of others may be I'll put them together. I believe you said lender placed was better than expected and I didn't catch if you still think there is going to be year-over-year pressure there going forward. And then also, you've been talking about maybe some commercial auto appetites being lower. Did that take place or are appetites being bailed out by what seems to be increasing rate momentum in that line of business?
Okay. Hey, good morning, Mike. It's Andy here. On the lender-placed, here's what we saw during the second quarter is, we had a couple of our customers actually had picked up some additional portfolios. So we had some growth in those, which is good for the business. We do expect to see some continued fall off in the back in of the year. We mentioned previously that we've got a couple of customers that were acquired. And so, that business will be winding down in the back end of the year is from everything that we can see right now.
Okay, great. And then commercial auto? Yeah, I'm sorry.
Yes, on auto. Let me, let me address that. So here's the gist broadly. Number one, there continues to be losses in excess of the expected losses. This is not exclusively as a result of this, but distracted drivers are as you know a huge issue and it's not slowing down.
With that said, markets are getting rate, but some markets don't feel like they can't get enough rate or they are reevaluating the kinds of business they want to write in commercial auto and maybe they write a class of business now, make this up like dump trucks and they've determined that they can't make money at any price in dump trucks based on their experience, whereas another market can think they can - they do think they can make money on dump trucks but it's at a significant higher price than the first carrier.
So what we're saying by that is, we have some programs that work in the auto space. If you change carriers at any time there is disruption in terms of the way you write new business in some of your retention, that is driven or impacted more by the fact that it's commercial auto because new carriers typically have different views on the ability to make money in certain states and jurisdictions, which will dictate the legal climate and thus your payments. So nothing's, it's not like something has changed dramatically Mike since last quarter. That's not the case. But what we're trying to say is, we do continue to see people being very selective on their automobile writings and we don't think that's going to change in the near to intermediate term.
Thank you.
And our next participant is Greg Peters with Raymond James.
Good morning. A couple of followup questions. In the wholesale commentary, I think you called out some timing issues that boosted the second quarter organic. Can you go back and give us a little more detail?
Yes, Greg, in the first quarter, we said it was about a 1% impact. It was about a 1% also in the second quarter. Down 1 in Q1 and up to 1…
Say it again Powell?
I said down, it was - remember, the revenue was trends, it moved from Q1 into Q2 because they renewed it or extended it and renewed it at a different time. So the impact in Q1 was down about 1% and the impact in Q2 was up about 1%.
Got it. So there wasn't any pull forward of revenue from 3Q or 4Q in the second quarter correct?
No, no, no, this was just a couple of accounts in Q1, which extended their policies and renewed in Q2.
Okay. In your commentary you also spoke about positive momentum in employee benefits growing faster. Is this a function of the accounting 606 rule or is this new accounts or rates, it seems like maybe it's all three, but maybe you could provide some additional color on that?
Yes, no, I would focus it on our ability to retain our existing customers and write new business. That's a growing business for us and that does not mean that we're not pleased with commercial lines or personal lines, quite the contrary. We are pleased with those too and they're doing well. But Andy did mention earlier and I did too that employee benefits is doing well, but I'm telling you commercial lines are doing well too, so let's not single one out. We're very pleased with how our Retail business performed in Q2.
Right. It seems like on the Retail side, it seems like most of the channel checks come back with extremely positive commentary and BB&T reported a blowout second quarter organic. Is this just a function of the middle market economy or do you have any perspective on that.
Well, again, it's hard for us to comment on someone else because we don't really know how they track organic growth and more specifically their mix of business as it compares to our mix of business. So I would purely be speculating on anybody else, that's number one.
But as it relates to us, I would tell you this. I think that we're just executing better, meaning, I'm not trying to be overly simplistic, but I just think we are executing better in the second quarter and the results show that way in our, in the organic growth.
So I don't - want you to think some, that there is something that's changed in the economy or any of this other stuff. I think it's interesting, some people criticize us on what they might call the muted view on the rate environment and the answer to the question is, that's what we're seeing in the middle market economy and many people are talking about rate impacts on large lines of business that might be on fees which have no impact on their commissions because they're paid on a fee and so it could be comparing an apple and an orange and we're not uptight about it. I just wanted to clarify that, because I know you were probably thinking that Greg. And the important thing is, is the rates have a positive impact, exposures have a positive impact, but really at the end of the day we're executing well and I'm very pleased, we're very pleased with how the team is doing.
Yes, just final question. Andy in your comments on free cash flow I think you said for the year-to-date running a little bit behind where you were last year on the conversion rate and - do you anticipate sort of the trend of the first half to continue into the second half being a little bit below the full year last year on the conversion rate or do you have any other commentary on that?
Yes, as we had mentioned before is we do expect it will be down a little bit this year. If you remember, fourth quarter of last year we got a bump in the working capital associated with the acquisition of Hays. We're anticipating that will kind of reverse back out to a normal level this year.
So last year, our free cash flow conversion as a percentage of revenue I think was right about 26%. We would expect that will come down a little bit this year, but as an organization, we continue to run somewhere around 22% to 23% as the conversion of free cash flow conversion. So again that's cash flow from operations less CapEx divided by revenues on there. We run right in that 22% to 23% pretty consistent all the time.
And Greg, and I'd like to point out that is not just this year, that's for the past four years, five years and up to 10 years. So that is something that we're very pleased about. Because for every dollar that we earn we're converting about $0.23 to reinvest in our business, which you've seen how we've done through acquisitions and organic growth and related.
So that is a point that I think it should be duly noted I would think. I know you know that, but I'll encourage everybody to think about that, because we're very proud of that and it's something that is industry leading.
Greg, the other thing to keep in mind on the free cash flow and we've talked about in some of our previous calls, our CapEx will be up this year and next year associated with the building of the Daytona Beach campus and again the ranges that we've given on that as we said, will probably be up somewhere around $30 million to $35 million in CapEx this year, and then we'll spend about another $30 million or $35 million next year on CapEx and then it will drop back down.
Got it, thank you for the answers.
Yes. And again that's CapEx on the building, not total. Okay?
Yes, yes. I got it. Thank you.
Okay, perfect. Thanks sir.
And our next question will come from Mark Hughes with SunTrust.
Thank you very much. Good morning.
Good morning.
You mentioned that there was upward pressure on quake pricing, any early read on order volume post the events?
The answer is, it's a little too early to say Mark, but what I would tell you historically that the absorption rate does go up, post-events. Okay? So I'll give you a statistic that just kind of amazes me. In the State of California and we write quake in Oregon and Washington, but in the State of California 12% of the people that live in quake zones buy earthquake coverage, 12. That sounds low to me. And so, when the event happens, a lot of people think about well what would happen if that happened to us. And some of those people actually buy insurance.
But we are not expecting some, it's not going to go from 12% to 50%. It just doesn't do that. It's a very unique dynamic that occurs there. But there's lots of people that are asking about it and talking about it, and thinking about it. And so, we are quoting more of it, but I think that it could have a positive impact, but it's too early to tell.
Very good. And then one other question on the Social Security Advocacy timing that's been a headwind for a couple of quarters, how much of a headwind would you anticipate in coming quarters? When do you kind of lap that effect? Was it as meaningful in the third or fourth quarter of last year?
Hi, good morning, Mark. It's Andy here. Yes, so we'll have continued headwinds for the third and fourth quarter, the larger being in the third quarter and then it kind of starts to wind down in the fourth quarter. Yes, we had said previously, we thought it would be somewhere around $8 million to $9 million on a full-year basis. We're still expecting somewhere around kind of that $4 million to $5 million for the back end of the year.
Thank you very much.
Thank you.
And next we will hear from Yaron Kinar with Goldman Sachs.
Thank you very much. I guess my first question is around the revenue recognition impact. So you didn't see as much of it in the second quarter or first quarter for that matter. Do you expect any of that to still come in the second half of the year?
The only real items that we're expecting in the third quarter and this was an item that popped up in Q3 of last year in National Programs, the $8 million that was the one-time adjustment that we made last year, that will reverse in the third quarter of this year, which again it's going to flow through the organic calculation for programs and that's really the only one out there, not material.
Got it. And then going back to Elyse's question on the margins for supplemental commissions, is there any way to quantify that? I know one of your competitor's have talked about roughly 60% margin, is that roughly what we should be thinking about?
Yes, I mean we've never said what the margin or the margin is for either the GSCs or the contingent commissions, but they are higher than average for the business.
Okay, thank you very much.
Sure. Thank you.
And our next question comes from Meyer Shields with KBW.
Thanks, two quick questions, one, I just want to clarify, because I think I had this wrong. Andy did you say that the $8 million recognition from last year will reverse itself or it just won't be there in the third quarter?
Well, it doesn't just doesn't show up in the third quarter of this year.
Okay, but it is on the [indiscernible].
Correct.
Okay, thanks.
So [indiscernible] from comparability. Right? You had a benefit last year that benefit will not be there this year.
Okay, perfect. Second, can you -- you talked in the presentation about rising employee benefits rates, does that have an impact on retail organic growth?
It does if you are on commission, it doesn't if you're on a fee. But it does impact what the, here's the way I would want you to look at it Meyer, is this, ultimately you know that there is a cost trend out there and let's say that cost trend medical trend is, let's say, 7%, 8%. And so, every year employers, whether it be your employer Brown & Brown or anybody else is faced with that burden in terms of providing that coverage.
And so what price increases what that does is it drives buyers, employers to consider, number one, what they can afford and plan design. So, sometimes people change their plans to manage the cost increases. And so, the answer to your question is, it can impact organic growth, if you add employees, which in turn increases the premium, which if you are on commission, you can get a lift. Different carriers do that differently. Sometimes they pay a per head per month, sometimes you're on a fee. So it's hard to make a broad statement. You can't say that everything that we write is on commission because it's not. But yes, there is some embedded organic growth there because of that rate lift.
Okay, fantastic. Thank you so much.
Our next question will come from Josh Shanker with Deutsche Bank.
Yes, good morning everybody.
Good morning.
Good morning.
I apologize, I joined a little bit late, but I think these questions have been answered. The first one involves the supplemental commissions in the program's business, is there any negative impact in the forward quarters as you pulled commissions out of the future to come into 2Q?
No, there is not, Josh. So that was a one-time that we received in the second quarter. And again, that was the final year, a multiyear calculation, but we were holding something out of Q3 or Q4 - was assuming you were just trying to understand how it all came in this quarter.
And not that we know the answer, but if I think about somewhere between 2 and 4 as a normal run rate. Is there any reason to think that's different in the future?
Boy, a little bit of a hard one to answer. And the reason I would say that is, the programs is the one that we at times have the most volatility with because you've got individual calculations for every one of the programs underneath of there.
Some of them are single year. Some of them are multiyear in nature and it just depends upon the performance. And so, we've been definitely up and down in that world. It again wouldn’t surprise us that they are down a little bit there. I mean, we saw and they trended down for the second quarter.
Okay, bless you. And in the second question, I mean it's my own fault, but I underestimated your acquired commissions acts phase in 2Q. I'm wondering if you can help sort of frame that 2Q versus the end of the year you have $14 million more coming in annually from the new, the acquired businesses. Can you sort of put the point on how we should think about non-Hays acquired premiums to the end of the year and not premium commissions?
Well, that assumes on what we end up of closing now.
Yes, yes, of course - what you've already closed, what you've already closed, don't try and predict new deals of course.
Yes okay. So remember, here's the deal Josh. We went to not announcing the size of the deals upon announcement and we are announcing them, which is consistent with everybody else at the quarter call. So we've announced two deals and we will talk about that revenue at the end of the third quarter and then if we announce anymore, which we think we have an opportunity to do, we'll announce all of those at once. So we don't give forward-looking guidance on revenues acquired.
Yes, I'm actually looking backward, just trying to see ex phase I see like $35 million, $40 million of acquired revenues and if I go to 4Q and 3Q last year, I see that's about in line. I'm wondering if, given that if you skew the thing a little bit, are we within elevated level that we're going to have a come off the plateau a little bit in the back half of the year assuming nothing about deals going forward?
Yes. Based upon when we closed the deals in 2018 Josh, yes you are correct. It will slow down presuming no other deals in the back end of the year.
Okay. That's absolutely nothing forward, just trying to understand the plan. Thank you very much.
[Operator Instructions] We will now take a followup from Mike Phillips with Morgan Stanley.
Oh yes, hey guys. Just real quickly, any impact you expect early on from and maybe next quarter's revenue for Services or Programs from Barry?
Limited, the number of claims has been much lower than we thought Mike, and so we will have a modest impact. But it's not going to be an event like we thought it was going to be and with the amount of rain that occurred, we were surprised there weren't more claims. So that's where we are right now based on what we know.
Okay. Yes, Mike just, yes just Mike just for clarity, we don't model anything up. I mean, the volume of claims that we're getting, are really, really small. So we are not envisioning any real uptick at this stage in Q3 versus last year.
Okay, great, thanks.
Yes, sure. Thank you.
And with no further questions on the phone, I'd like to turn the call back over to management for any additional or closing remarks.
All right, Matt. Thank you and thanks for joining us. We look forward to talking to you next quarter at the end of our third quarter. Have a wonderful day. Good bye.
Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.