Q2 2019 Earnings Call

Please standby.

Good morning, and welcome to the Brown <unk> Brown Inc. 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 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 of poor events in the future or 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 Companys.

Determination has 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 Companys 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 Companys website at Www <unk> BB insurance dotcom 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 and good morning, everyone and thanks for joining us for our second quarter 2019 earnings call I'm on slide number three.

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 and 18, our net income per share for the second quarter grew by 26.9% to 33 cents.

Compared to the second quarter of 2018 during the quarter. We also completed four transactions with annualized revenues of approximately $14 million. Overall is really good quarter later in the presentation, Andy will discuss our financial results in more detail.

Im now on slide number four.

During the quarter the market continues to expand with customers investing in their businesses driving increasing in exposure units.

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 off experience are still getting marketed 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 the risk bearers want to increase rates and it was most pronounced in London.

There was some upward pricing pressure in the second quarter as risk bears are trying to get rate increases where possible.

And specifically in the Ethernet space, we are seeing some carriers being more selective in either certain lines or geographies or both which is having a potential or a pronounced impact in certain areas.

There's still a lot of capital it needs to get put to work and therefore, we do not believe that it's going to be large swings in pricing in the near future.

On the M&A front, we remain active in 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 realize additional returns from our investments, which helped 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 five 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 is 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're pleased with the 4.5% organic revenue growth delivered through the first six months of 2019. This represents continued incremental incremental improvement.

Over the same period.

Of prior years lastly, we continue to be really pleased with the results of Hayes as they had another good quarter and our near the upper end of our expectations for both revenues and profit gym Hayes Mikey again 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 are 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 continued to experience challenges in our commercial and personal automobile programs as our carrier partners are evaluating returns in 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 of 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 a 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're 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.

Thanks, Paul and good morning, everyone.

Consistent with previous quarters, we're going to discuss our GAAP results and our adjusted results excluding the impacts of the acquisition earn outs.

I'm over on slide number six 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 EBITDAX, both increased 22.4% growing faster than revenues due to the continued leveraging of our expense base later will walk through the detail movement of our EBITDAC margin in the in that space.

Our net income increased by $18.7 million or 25.3% and our diluted net income per share increased by seven cents or 26.9% to 33 cents.

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 were 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 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 eight cents or 6.7% compared to the second quarter of 2018.

Moving over to slide number seven 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 a one cents 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 six cents or 23.1% versus the second quarter of last year.

Moved over slide number eight 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 continues 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 GFC within our national programs 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 in 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 mentioned earlier.

We will go to slide number nine to provide some additional visibility into the major drivers. Our EBITDAC margin. We've included a walk through from 2018 2019.

He has 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 haze 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 G. Fcs.

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 of these items into consideration. It was a very good quarter for margin expansion.

On the following slides, we presented the results for our business segments.

Start with retail which is on slide number 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 Hayes that we mentioned earlier, excluding impact of Hayes. We're 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 in the EBITDAC drivers.

Over to slide number 11.

Our national programs segment increased total revenues by 11.3%. This was driven by the previously mentioned one time, GFC, which was approximately $10 million acquisitions. During the past 12 months and organic growth at 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.

EBITDAX increased by 32.6% driven by higher total organic revenues.

Continued management of our cost and scaling of certain programs.

Moving over to slide number 12, our wholesale broker 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 margin, but was offset slightly by higher acquisition earn out payables.

Over to slide number 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 of expenses, we do not expect this high level of margin expansion in future quarters.

We will have a slide number 14, we wanted to provide.

An update on the Q2 performance for Hayes.

Total revenues were $44.1 million and we're at the top end of our range and expenses continued to be slightly better than originally expected for the quarter, we delivered $7.4 million of EBITDAX, 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 Hayes will deliver within the previously communicated full year range of 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 defined 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 in on a full year basis or 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 remains 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're willing to pay materially more than we are with a disciplined approach to capital deployment.

Ultimately our goal is to find companies that fit culturally make sense financially and want to be part of a team for the long term.

We will maintain our disciplined M&A approach as its proven to be very successful over the long term.

I mentioned earlier that technology remains one of our key priorities will 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 and a.

Thank you I'd like to ask a question. Please signal by pressing star one on your telephone keypad.

Using a speaker phone. Please make sure your mute function is turned off to that youre seeking to reach their equipment.

Again that is star one if youd like to ask a question.

And first we will hear from at least Greenspan with Wells Fargo.

Hi, good morning.

My first question was just on the retail growth in the quarter of 5.6% pretty strong number I know when we go back to you on the fourth quarter call. You guys had pointed to there being on 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 can quantify.

There was no revenue recognition impact if you could give us dollar and millions just so we can kind of break that out and the impact on the Q2, let me think about the organic growth in retail going forward.

Hi, good morning at least it's Andy here.

You back if you remember our comments on the first quarter, we had said that the impact of Rev. Rec was less than anticipated at 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 underlying we had a really good quarter.

It just it wasn't material for the second quarter.

See you would view that 5.6 says 10 being like the underlying growth I guess that we should think about I know you guys don't like to.

Gains on specific segment guidance going forward, but should that be TV that is a clean number for us to thank let me use about when we think about the growth that we could see in retail in the back half the year.

So maybe we take that and put it into two pieces is.

There is a little bit of benefit in the 5.6, but its nothing material okay inside of there.

Four and then as we talked about on the earlier comments about.

Where we are we're pleased at 4.5% organic growth for the six months and we always think it's good to look at some trends because any quarters can kind of be up and down.

Through all that 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 so lease also.

You know, we don't give guidance on organic growth, but we said at the low to mid single digit organic growth business, that's kind of how we view it in a steady state economy. So.

That's that's the limited guidance, we would give you.

Okay and then in terms. So you and you just said you saw some strong employee benefits within the first half the year would you say on the west the retail tuck away from employee benefits was still growing like that in the vicinity of 4% to 4.5% for the first half the year.

Yes, we didnt save head on their lease, but would say that all of our businesses are growing really well, it's just simply than what's going on with the faster.

Okay, Great I appreciate that color and then my.

Second topic was on the margin side of things you guys did have a one off.

Supplementals that you called out this quarter and I thought that those typically run at 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 you backed out that supplemental.

And so can you guys give us a sense of chest X that supplemental within national programs kind of the level of margin improvement you've seen in the quarter.

Yes, let's see if we maybe put it into two pieces, let's do it at a total level first.

If you look at the Gses, Yes, we did pick up about an incremental $10 million in they do flow through it at higher margins. We've made the comment about incremental onetime 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 out kind of the net benefit.

Those two we still had a really good quarter total company.

And then as it relates to national programs.

When you go through if you look at their margins and how much they are up.

Even pulling out the incremental GST again keep in mind that contingents were also down in Nash or 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 on your market overview slide.

Marketing review business the reset on slide four you mentioned.

Some tightening underwriting criteria for some lines of business bosses and I Wonder if you can elaborate on that like what lines you are talking about and where are you seeing things there.

Well think about.

We're seeing you know there is a little bit of pressure on rate. There is 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 N.S. market, but even in retail who are reevaluating certain.

Classes of business and if they want to participate and if in fact.

They're a big writer of a certain class of business and could be a property related business or.

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 was.

I guess looking for certain specific lines property non property liability casualty or whatever.

On that it sounds like you're saying kind of across the board more on the announced it but but I mean, where 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 or $15 million things like that.

Okay Thats helpful. Thank you very much.

Second question on.

Youve comment last quarter on.

On your non cash stock comp being up around $3 million to $4 million from 18 levels. It was up on a year to date. This year, it's up almost almost under $10 million. So.

Updated thoughts on how that could run out for the rest of the year.

Hi, good morning, Mike.

Yes, we were up about three and a half million for the second quarter. We would expect that it will probably go ahead and trend up a little bit more for the back into the year.

The the run rate actually for the second quarter.

Is a pretty decent run rate right now.

The first half.

No if you look at the total.

So so you're up from $15 million to $24.9 million for the year.

No not enough, we'll 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. Okay, perfect. So you'll get yes, thank you, becoming a kind of probably coming in in that 45 to 50 range.

Yes.

Okay awesome. Thank you very much.

Sure.

And.

Next we will hear from Mike Zaremski with credit Suisse.

Hey, good morning [noise].

I was curious I believe you guys have a a sizeable earthquake brokerage business and.

Maybe you couldn't help size that up and Ah wondering gotten anything anything is going on there a rates or our uptake or given the outlets that's taken 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 do business in both the residential earthquake in commercial earthquake and prior to the event on July 5th.

The 7.1.

We there were some pressure on rates already on those that were putting up very large limit.

50, 70 $500 million limits and quake zones.

And so that's a fluid market and so as once the the quake business or the quake occurred there was a moratorium on rating 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.

North Ridge 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 the.

They were very very fortunate that it was out in the middle in a very rural area, because otherwise there would have been significant damage.

And so we continue to write lots of coverage and we will continue to do so.

To provide capacity to the marketplace in both residential and commercial going forward.

Okay, great that was interesting commentary.

A couple others, maybe I'll put them together.

I believe you said.

Lender placed was better than expected and I didn't I didn't catch if you. If you still think there's going to be year over year pressure there going forward and then also.

[noise] you've been talking about maybe.

Some commercial auto <unk> appetite.

Appetites being low or did that take place or are our appetites being bailed out by what seems to be increasing.

Great momentum in that line of business.

Hey, 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 which is good for the business. We do expect to see some continued fall off in the back of the year. We mentioned previously that we've got a couple 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 on commercial commercial auto Im sorry.

On a hot on auto let me, let me address that so here's the.

The jets.

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 because as you know a huge issue and it's not not slowing down.

With that said.

Markets are getting rate, but some markets don't feel like they can 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 makes up like dump trucks.

And they determined that they can't make money at any price and 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 significantly 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 anytime there's 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 its commercial auto because new carriers typically have differing views on the ability to make money in certain states and jurisdictions, which will dictate the legal climate.

And the US your your payments so.

Nothing it's not like Something's changed dramatically Mike since last quarter, that's not the case, but what we're trying to say is we we do continue to see.

People being very selective on their automobile writings, and we don't think thats going to change in the near to intermediate term.

Thank you.

And our next participant is Greg Peters with Raymond James.

Good morning, a follow a couple of follow up 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.

They're down one and Q1 and up to one.

That said again Paul.

I said down it was a member of the revenue was trends it moved from Q1 into Q2, because they renewed it at or extended and renewed 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 Threeq or Fourq you in the second quarter correct No 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 or is this a function of you counting six so six rule or is this new accounts or or rates. It seems like maybe it's all three but maybe you could provide some additional color on that.

Yeah, No I would focus it on our ability to retain our existing customers and write new business.

That's a 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're kind of we're pleased with those do 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 commercialize is 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 most of the channel checks.

Come back with extremely positive commentary and in BB and 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, I, 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 surely be speculating on anybody else that's number one.

But as it was as it relates to us.

I would tell you. This I think that we're just executing better.

Meaning I don't I'm not trying to be overly simplistic, but I just think we are executing better.

And the second quarter and it result, and the results showed that way in our in the organic growth. So I don't I don't want you to think some you know that there's something that's changed.

In the economy or any of this other stuff I think it's interesting some people.

Criticize us on the 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 are paid on a fee and so it could be comparing an apple and an orange and were not uptight about it I just wanted to clarify that because I know you are 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 are executing well and I'm very pleased we're very pleased with how the teams doing.

Yeah.

Just final question on 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.

Do you anticipate sort of.

The trend of the first half to convenient second half being a little bit below the full year last year on a conversion rate or do you have any other commentary on that.

Yeah. 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 Hayes.

We're anticipating that we'll kind of reverse back out to a normal level. This year. So last year, our free cash flow conversion as a percentage of revenue that was right about 26%. We would expect that will come down a little bit this year.

As an organization, we continue to run somewhere around 22% to 23%.

As a conversion of free cash flow conversion. So again, that's cash flow from operations less capex divided by revenues on that 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 23 cents to reinvest in our business.

Which you've seen how we've done through acquisitions and organic growth and related so.

That is the point that I think.

It should be duly noted I wouldn't and I know you know that but I would 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 are 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 to 35 million in Capex. This year and then we'll spend about another 30 to 35 million next year on Capex, and then I will drop back down.

Got it thank you for the answers.

Yeah, and again, that's capex on the building not total okay.

Yeah, Yeah, I got it. Thank you okay perfect. Thanks, Sir.

And our next question will come from Mark Hughes with Suntrust.

Hi, Thank you very much good morning.

Well tell you mentioned you mentioned that there is 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.

The absorption rate does go up post event.

Okay. So I'll give you a statistic that they 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 and 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're not expecting some you know it's not going to go from 12% to 50%. It just doesn't do that.

It's a very unique dynamic.

That that occurs there, but there 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 you know I think that it could have a positive impact, but its too early to tell.

Very good and then one other question on the 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 is 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.

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 into the year.

Thank you very much.

Thank you.

And next we will hear from your own <unk> with Goldman Sachs.

Thank you very much.

Thanks, Mike 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 into the second half of the year.

The only real items that we're expecting to the third quarter and this was an item that popped up in Q3 of last year in national programs. The $8 million. It was the one time adjustment that we made last year that will reverse in the third quarter of this year, which again is going to flow through the organic calculation for programs.

So just and that's really the only one out there.

Alright material.

Got it.

And then going back to Lisa's question on the margins for supplemental commissions is there any way to quantify that I know one of your competitors are talking about roughly 60% margin that roughly what we should be thinking about.

Yeah, I mean, we've never said, what the the margin or the margin is for either the the Gs seas of the contingent commissions, but 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 it had this wrong.

And then did you say that the 8 million recognition from last year will reverse itself or 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 just on the family dollar.

Correct. So okay. Thanks Harris you got from compare ability right you had a benefit last year that benefit will not be there this year.

Okay perfect.

Second can you.

Yeah, well you talk 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 here's the way I would want you to look at it Meyer M. is that ultimately you know there's 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 wetherbee your employer brown and brown or anybody else is faced with that.

Burden in terms of providing though 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 later I think these questions have been asked the first one involves the supplemental commissions in the programs business.

Is there any negative impact in the fourth quarters. That's you pulled commissions out of the future to come into Twoq.

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 of a multi year calculation.

Well, we water hauling something out of Q3 or Q4.

Right why wasn't that assuming you were just trying to understand how it all came in this quarter and not that we don't know the answer but if I think about somewhere between two and four 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 the reason why we 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 multi year in nature and it just depends upon the performance.

It was so weve been definitely up and down in in that world. It again wouldn't surprise us that they are down a little bit there I mean, we saw them they trended down for the second quarter.

Okay.

Okay, Bless you and and the second question.

It's my own fault, but I underestimated your acquired a broker commissions.

Our next phase in our Twoq Hugh I'm wondering if you can help us sort of frame that twoq versus the end of the year you have 14 million more coming in annually from the new we acquired businesses.

You sort of put a point on how we should think about non Hayes acquired premiums are up to the end of the year.

And that brings commissions.

Well that assumes on what we end up closing though.

Yeah, Yeah of course like this Oh, yes.

Let me close where you've already closed don't try and predict new deals of course, yeah. 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 calls so we've announced two 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 you know 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 not I'm actually looking backward just trying to see expertise I see like you know 30 540 million of acquired revenues and if I go to <unk> for Q in Threeq, you would last year I see that's about in line I'm wondering if you given that he skew the thing a little bit are we within elevated level that we're going to have come off the plateaued a little bit in the back half of the year, assuming nothing about deals going forward.

Yeah based upon when we close the deals in 2018, Josh Yes, you are correct. It will slow down presuming no other deals.

Is that back into the year.

Okay very good thats not going forward just trying to understand the path. Thank you very much.

Yes.