Brown & Brown Inc

NYSE:BRO

Earnings Call Transcript 2019-Q3

[Operator]

Good morning and welcome to the Brown & Brown Inc. Third 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 future events, including those relating to the company’s anticipated financial results for the third 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 third quarter that its financial results differ from the current preliminary un-audited 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 non-GAAP financial measures to most comparable GAAP financial measure can be found in the company’s earnings press release or 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.

[Powell Brown, President and Chief Executive Officer]

Thank you, Augusta. Good morning, everyone and thank you for joining us for our third quarter 2019 earnings call. I am on Slide 3. For the quarter, we delivered $618.7 million of revenue, growing 16.5% in total and our organic revenues increased by 3.4% for the third quarter. Isolating the $8 million onetime adjustment we recorded in the third quarter of last year associated with our implementation of the new revenue recognition standards, our organic growth would be 5% for this quarter. I will get into more detail in a few minutes about the organic growth for each segment. Our EBITDAC margin was 31.5%, which is down 200 basis points versus 2018. Our net income per share for the third quarter grew 7.9% to $0.41 as compared to the third quarter of ‘18. During the quarter, we acquired six businesses of annualized revenues of approximately $36 million. That takes us to a total of 18 deals with $86 million of estimated annual revenue through the first 9 months and we are pleased with our M&A activity for the year. Later in the presentation, Andy will discuss our financial results in more detail. Slide #4. For the third quarter, we continued to see businesses invest additional capital, hire more employees and grow their companies, ultimately expanding exposure units. Overall, we would say that our customers continue to remain optimistic about the economy and the outlook but are mindful of any international economic changes and how they could impact our economy. Premium rates for the quarter continued to increase slightly or we would say firming a bit more. We do not believe its hard market and rates have not increased significantly as compared to last quarter. In general, there is a continued upward trend and for certain lines. The amount of increase is driven by the loss experienced in the account or certain classes of business. These include, but are not limited to, transportation, habitational, excess liability and New York City contractors, just to name a few. As we have mentioned before, accounts of losses will generally see rate increases well above those accounts with minimal or no loss experienced. One line of coverage that continues to see 5% to 10% plus rate increases is commercial auto and we’re seeing these increases across almost all carriers. As it relates to the E&S placements for CAT-prone properties, including wind and quake, we realized increases in the range of 5% to 15%, but there can be outliers, most Professional Liability lines for private companies are flat to down, public company D&O and E&O is up 5% to 15%. Work comp rates, as you know, in most states remain down 2% to 5%. Most other lines are increasing rates, somewhere between 2% to 5%. There continues to be a lot of interest from risk barriers to increase rates. And as you have seen in the adverse loss development and casualty line for several carriers in the United States, this is prompting carriers to review the adequacy of casualty pricing. If this pressure continues, we believe there will be more upward pressure, slight on casualty pricing, over the coming quarters. The E&S space is an area we continue to see some carriers be more selective in either lines or geographies, which is having a more pronounced impact on E&S rates versus the admitted market. One area that’s under heavy pressure is property coverage in California. A number of carriers have either pulled out or are pulling back from writing traditional property coverage for personal lines and some areas of commercial lines. The areas creating the most challenges are brush zones. These actions have forced some homeowners to obtain coverage from a state FAIR plan or admitted commercial placements going into the E&S market. We are also seeing rate increases for earthquake coverage. In general, while risk barriers have been able to get some rate increases and there has been upward movement from where we were a year ago from most lines, there is still a lot of capital in the market and competition for low loss accounts remains. In the current environment, we do not think that these conditions will abate. During the quarter, we named one of our senior leaders, Steve Boyd, as our new Head of Technology, Innovation and Data Strategy. Steve has a broad technology background, has been an operator with our National Programs Segment for many years and over the past couple of years has been leading our innovation initiatives. This combination plus his knowledge of our company will help us further our technology initiatives. I will talk more about technology later. Now on Slide 5, let’s talk about the performance of our four segments. Our retail segment delivered organic revenue growth of 2.9% in Q3. With the new revenue recognition standards and the amount of revenue recognized for our employee benefits business, we expected our organic growth in the first half of the year, which is about 4.5%, to be higher than in the second half of the year. During the quarter, our organic revenue growth was negatively impacted by the implementation of the New Revenue Standard. On a year-to-date basis, we are pleased with the 4% organic revenue growth delivered through the first 9 months of ‘19 as this represents good incremental improvement over the 2.8% organic growth we realized in the first 9 months of last year. Finally, we continue to be really pleased with the results of Hays and our other recent acquisitions, as they performed well. Our National Programs segment grew 1.6% organically. When we isolate the $8 million onetime adjustment recorded in the third quarter of last year within our lender placed business, our organic growth rate was over 7%. This is one of the best quarters we have had for this segment excluding any storm claim activity. Our growth was driven by continued strong performance from our earthquake programs, All Risk Program, our commercial and residential property programs and our education program, just to name a few. In general, most of our programs performed well and we had no major headwinds this quarter with carrier changes or changes in risk appetite. Overall, it was a great quarter. Our Wholesale Brokerage segment delivered another great quarter, with organic revenues growing 11%. Our organic growth was higher this quarter due to increased rates and more new business. Please note, we would expect the growth rate for the fourth quarter to be more in line with the organic growth for the first half of the year. The organic revenue for our Services Segment decreased 70 basis points for the quarter. Consistent with last quarter, organic growth was impacted by lower claims in our Social Security advocacy business that resulted from a completion of advocacy work on a book of business in the prior year. This decline offset good organic growth realized in most other businesses within the Services Segment. Overall, it was a good quarter. And we’re pleased with our financial results. Now, let me turn it over to Andy to discuss our financial performance in more detail

[Andrew Watts]

Great. Thank you, Powell. Good morning, everyone. Consistent with previous quarters, we are going to discuss our GAAP results, certain non-GAAP financial highlights and then our adjusted results, excluding the impacts of acquisition earn-outs. I am over on Slide #6. For the third quarter, we delivered total revenue growth of $87.8 million or 16.5% and organic revenue growth of 3.4%. Isolating the one-time $8 million adjustment, we recorded last year with our National Programs division. Our organic growth would have been 5% for the quarter. Our income before income tax and EBITDAC increased by 6.6% and 9.6% respectively. Later, we will walk through the detailed movement of our EBITDAC margin and the impact of Hays. Our net income increased by $9.5 million or 9% and our diluted net income per share increased by $0.03 or 7.9% to $0.41. Our effective tax rate for the third quarter of 2019 was 23.9% compared to 25.5% in the third quarter of 2018. The lower effective tax rate was driven by our state tax footprint and corresponding apportionment, along with a tax rate change in Florida. Based upon the results of the first 9 months, we are now projecting our full year effective tax rate to be in the 24% to 25% range. Our weighted average number of shares, were basically flat compared to the prior year. As we’ve 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. Lastly, our dividends per share increased to $0.08 or 6.7% compared to the third quarter of 2018. Also, last week, our Board of Directors approved a 6.25% increase to our upcoming dividend. We are pleased that we have increased our dividend for the 26th year in a row. 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 reduction in our earn-out liability of approximately $6 million. Our income before income tax on an adjusted basis grew 3.2% or slower than EBITDAC due to incremental interest and amortization expense associated with the acquisitions we completed in the last year. On an adjusted basis, our net income increased by 5.5%. Moving over to Slide #8, this slide presents the key components of our revenue performance. For the quarter, our total commissions and fees increased by 16.5%. Our contingent commissions were basically flat as compared to 2018 and we expect contingents to be down $3 million to $4 million for the fourth quarter. For the quarter, our guaranteed supplemental commissions increased by $1.5 million due to qualifying for certain incentives. Our core commissions and fees increased by $86.2 million or 16.8%. When we isolate the net impact of M&A activity, our organic revenues increased by 3.4%. This growth was negatively impacted by the onetime adjustment we recorded last year. Isolating this item, our organic growth would have been 5%, representing an outstanding quarter. Over to Slide #9 to provide some additional visibility into the major drivers of our EBITDAC margin, we have included a walk-through from 2018 to 2019. During the quarter, we had a couple of disposals that resulted in a gain that benefited margin by 80 basis points. In line with our expectations, Hays negatively impacted our margins by approximately 160 basis points for the quarter due to phasing of revenues and profits in accordance with the new revenue standard. I will talk more about the financial performance for Hays in a few minutes. Other reflects the underlying margin change we experienced across the remainder of our business. The main drivers were the prior year $8 million onetime item recorded in National Programs, higher non-cash stock compensation cost and higher claims experienced as part of our self-insured health plan and incremental hiring in high-performing businesses. These items more than offset margin expansion associated with levering, higher organic growth and the net increase in GSCs. On a year-to-date basis, we’ve expanded underlying margins, driven by higher organic growth, managing our expenses and realizing benefits from our previous investments. On the following slides, we have presented the results of our four business segments. We are over on to Slide #10, which is Retail. Our Retail segment delivered total revenue growth of over 29%, driven primarily by acquisition activity over the past 12 months, organic growth of 2.9% across all lines of business and increased contingent commissions and GSCs. Our EBITDAC margin for the quarter decreased 330 basis points due primarily to the phasing of profit from Hayes, which was about a 280 basis point impact. The margin impact associated when we recognize revenues for a new acquisition and higher non-cash stock-based compensation cost. These items more than offset some gains we realized from current quarter disposals and slightly higher contingent commissions and GSCs. Our income before income tax margin declined by 830 basis points due to higher intercompany interest expense and amortization associated with our acquisition activity and the drivers of EBITDAC changes noted previously. Consistent with our previous comments and the fact that we can have some noise between the quarters related to the New Revenue Standard, we think for this year it’s important to also focus on year-to-date performance. Year-to-date, our organic revenue growth rate is 4% as compared to 2.8% last year for the 9 months and our EBITDAC margin is 29.5% versus 30.2% for the 9 months ended in the prior year. Excluding the net impact of Hays and our gain on disposal, our margins have increased on a year-to-date basis, which is in line with our expectations. Also during the quarter, we acquired a business that will recognize substantially all of its revenue in the first quarter of each year. As a result, this will drive margin compression in the fourth quarter of 2019 of approximately 60 to 80 basis points. Moving over to Slide #11, the National Programs segment had lower total revenues by 40 basis points. This was driven by the onetime adjustment we recorded last year within our lender-placed business of $8 million and a decrease in contingent commissions, which more than offset 1.6% organic growth. Isolating the onetime adjustment, our organic growth would have been over 7% for the third quarter driven by strong growth from many programs. Income before income taxes remained flat primarily due to the decrease in total revenues from the prior year adjustment and lower contingent commissions. Both of these were offset by lower intercompany interest expense. EBITDAC decreased by 5.2% due to lower contingent commissions and the onetime prior year revenue recognition adjustment, which offset strong organic growth and continued management of our cost. Isolating the prior year adjustment, EBITDAC margins would have increased almost 100 basis points, even with lower contingent commissions. Overall, it was a really strong quarter for the National Programs Segment both on the top and the bottom line. Our Wholesale Brokerage Segment delivered total revenue growth of 11.7% and organic revenue growth of 11% and our contingent commissions were relatively consistent with the prior year. EBITDAC margin increased 210 basis points as a result of leveraging organic revenues and managing our cost base. Our income before income tax margin increased 290 basis points due to the same factors driving the EBITDAC margin, with the additional benefit from lower intercompany interest and amortization expense. Over to Slide #13, our Services segment delivered total revenue growth of 4.2% due to acquisitions completed in the last 12 months; and organic revenue decreased 70 basis points for the quarter. Consistent with last quarter, organic growth was impacted by lower claims in our Social Security advocacy business. Also during the quarter, we recognized incremental revenues associated with the termination of a customer contract. From a margin perspective, EBITDAC grew faster than total revenues, driven by the mix of business growth and management of expenses. Our income before income taxes grew faster than EBITDAC due to lower intercompany interest expense. For the fourth quarter, we expect revenues and margins to decline 5% to 10%, driven by our Social Security advocacy businesses and the termination of the previously mentioned customer contract. Moving over to Slide #14, we want to provide an update on the third quarter and year-to-date performance for Hays. Our total revenues for the quarter were $50.3 million and we are at the top end of our expected range. Expenses were higher than originally anticipated due to phasing related to the New Revenue Standard. This phasing is what partially drove higher margins and EPS in the first two quarters of this year and the $0.01 loss in the third quarter of this year. On a year-to-date basis, we have delivered $168.5 million of revenue versus our original estimate of $164 million to $172 million and $0.03 of earnings per share as compared to our original estimate of approximately $0.02. We continue to believe Hays will deliver within their previously communicated full year range of revenue, profit and earnings per share contributions. Finally, a comment regarding cash flow conversion, which we define as GAAP cash flow from operations divided by total revenues. At the end of the second quarter, our cash conversion ratio was slightly below last year. During the third quarter, our cash conversion accelerated and now our year-to-date cash conversion is over 24%, which is about 1 percentage point higher than last year. On a year-to-date basis, our cash flow from operating activity has grown over 25% as compared to total revenue growth of 20%. With that, let me turn it back over to Powell for closing comments.

[Powell Brown, President and Chief Executive Officer]

Thanks, Andy. Great report. In closing, we continue to remain optimistic about the economy, as businesses continue to invest and hire more employees. Like many of our customers, we’re watching the resolution of trade relations and other matters internationally to determine if they might impact our customers and the overall economy. We expect most rates to continue to increase slightly during the fourth quarter and into early next year and for competition to remain strong for accounts with low loss ratios or low loss experience. Our acquisition pipeline continues to remain good as we are talking with lots of companies. We have good momentum after closing 18 deals through the third quarter with annualized revenues of $86 million. We have announced three additional transactions already this quarter. Our goal as you know is to find companies that fit culturally, makes sense financially and want to be part of our team. We will continue to maintain our disciplined capital and M&A approaches as they have proven to be very successful over the long-term. As you know, technology remains one of our key priorities and we have a new head of technology. Our focus has been and will continue to be on investing in our digital strategy and partnering with other companies to improve the experience for our customers and our teammates in how we engage with our carrier partners. We believe technology will be an important part of the delivery of insurance over the coming years and we want to be positioned to capitalize on the opportunities when they arise. Overall, we feel it is a great quarter and we have really good momentum heading into the fourth quarter. With that, let me turn it back over to Augusta for Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question will come from Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, Wells Fargo]

Hi, good morning. My first question, you guys couple of times throughout the prepared remarks pointed to being optimistic about the economy and rates improving. So I was hoping we could spend a little bit more time on retail. I know rev/rec caused some timing issues between some of the quarters. But we did see a little bit of a slowdown sequentially in the third quarter from where you had been trending. Can you just give us kind of higher level view on what you are seeing and how you think the Q4 and potentially even 2020 could shake out on an organic basis?

[Powell Brown, President and Chief Executive Officer]

Sure. Good morning, Elyse. Couple of things. One, as you know, we talked about the revenue recognition standard and how we talked about on earlier calls about the organic growth will be slightly higher in the first half and maybe slightly lower in the second half. So that’s the first thing. The second thing that I would say is we have tried to look at it as we laid out for you on a year-to-date basis and we think of the 4% organic growth year-to-date through the first 9 months this year versus 2.8% last year. So we are pleased with that. As it relates to organic growth on a forward going basis as you know, we don’t give forward-looking guidance. We have always said that we believe that the organic growth rate of our business and specifically retail is a low to mid single-digit organic growth business and we continue to try to invest in that business when opportunities arise, whether that be through acquisitions as you have seen some of the larger ones, specifically Hays that we did last year or hiring additional people as offices outperform and we continue to go to the next level. So, I would tell you that from our perspective, from an economic standpoint, we are guardedly optimistic. Interest rates continue to go down or I don’t know what’s going to happen. Will they go to zero? I don’t know. If there was something, an unusual event, i.e., a hard Brexit, divorce or something with China or something like that, could that affect our economy? We believe the answer is possibly and if so, we are obviously cautious about that as well.

[Elyse Greenspan, Wells Fargo]

Okay, that’s helpful. And then Andy, you mentioned that there was a deal that you guys just completed within retail that skewed to the first quarter. A couple of questions there. Could you potentially size that deal? And then when you said in retail that margins would be compressed by 60 to 80 basis points in the fourth quarter, is that an all-in comment or is that just in relation to this deal or does that also include the impact of Hays?

[Andrew Watts]

So, good morning Elyse. Couple of things on that front. So the comment about the margin compression was specifically associated with what it will do in the fourth quarter to retail’s margins. So what we are trying to help everybody with is, whatever you have modeled out, then you would want to adjust it by kind of the 60 to 80 basis points down for the transaction. On this deal here again, it’s around about $20 million in revenue and what happens is it will recognize all of its revenue in the first quarter. So you will have – there is minimal, well, there is no profit in the back end of the year and then we get all in the first quarter. So hopefully, it gives you an idea of kind of how to model that. What we want to do is finish out the year and then we will give a better estimation as to what kind of Q1 and Q2 looks like once we close the year, but at least give you some guidance for the fourth quarter.

[Elyse Greenspan, Wells Fargo]

Okay, thanks. And then lastly on contingents, I know you gave some commentary in terms of the fourth quarter, but do you have a view in terms of contingents or any kind of color for 2020 or is it too early?

[Andrew Watts]

Yes, too early at this stage. So again, we would probably like to get through year end and then see if we get any guidance from any of the carriers. Most of those settle again in the first quarter. And as a reminder with the new revenue standards, what we are doing is we are accruing for the contingents throughout the year based upon what we believe will happen. So as a reminder, in Q1 of this year we had a number of adjustments positive because they came in a little bit better than what we had anticipated. And so again we are accruing for those. We will have to wait until we get to Q1 and then we will record any true-ups or true-downs based upon actual cash received as compared to what we would have anticipated we would have got during the year. So the new approach definitely creates a bit more volatility in the numbers than in the past.

[Elyse Greenspan, Wells Fargo]

Okay, that’s helpful. I appreciate the color.

[Andrew Watts]

Yes. Just one closing on there, just as a thought on contingents, at least our view is we don’t see anything in the marketplace today that’s going to start driving contingent commissions up at least in the E&S and our National Programs division.

[Elyse Greenspan, Wells Fargo]

Okay, that’s helpful. Thank you very much.

[Operator]

Thank you. Our next question will come from Greg Peters with Raymond James.

[Greg Peters, Raymond James]

Good morning, everyone. I wanted to follow-up on your organic comments. I was looking at your slide deck and listening to your comments, Powell and Andy, you talked about price increases, rate increases across many lines of business and you have posted some pretty impressive results on a year-to-date basis both in retail and wholesale. Can you talk about what the balance is between the revenue of organic revenue being driven by rates versus what’s being driven by actually new business wins?

[Powell Brown, President and Chief Executive Officer]

Right. Remember, what we have historically said, I am going to reiterate what we have historically said and we haven’t broken out specific the new business wins versus growth in existing business, but what we have historically said is two-thirds to three quarters of the impact is exposure units. So those could be increases in existing customers and/or new business wins. The one-third to one-fourth would be rate. And depending on the quarter, depending on the classes of business, and if those are classes that are impacted more severely in some case, then it might be slightly different than that. But that’s kind of how we look at it, Greg. And I think that your point is a good one, which is, we are keenly aware of the importance of growing our business and growing it profitably. And so we are very pleased with the 4% organic growth year-to-date and the – versus the 2.8% last year. And the margin profile that Andy talked about, where we’re effectively up ex-Hays and for 9 months, up slightly ex-Hays and any gains that we’ve had in the same period. So a lot of people have used this term hard market, I’m going to be the first to point out, and Andy would, too, that we don’t believe that. And depending on where you are in the country, it’s interesting what you see. So let me give you an example. If you go into New England, package group middle market packaged writers, accounts are flat to down in that part of the country. And you want to compare that to Los Angeles is burning this morning and there’s rolling brownouts. I mean so there’s effects on both ends of that spectrum. So it’s really typically geography-based or line of business-based or both.

[Greg Peters, Raymond James]

Thank you for that example. On the Services side, we’ve been hearing about the Social Security advocacy headwinds for, I guess, a couple of quarters now. And if I look at your organic results over the last 4 quarters, it definitely reflects challenges. Can you remind us exactly what’s going on there? And because this seems to be reversing it, do you think that, that might turn around in the coming quarters?

[Andrew Watts]

Yes. Greg, Andy here. So with that book of business, it’s been running now for – and the adjudicating of those claims – about 18 months and then we’ve been kind of winding down off of it. We’ll still have additional impacts in the fourth quarter of this year, so that was the guidance that we had given as well as the customer account. And then we’ll have some residual impact in the first quarter. And then we will have made our lap on that one.

[Greg Peters, Raymond James]

Okay. Thank you. I’m – just two other questions. First, Andy, you’ve called out the free cash flow conversion rate. I think in that previous call, you’ve mentioned that you would have expected or might expect for 2019 to come – go back to the historical range of 22% to 23%. And given the outperformance in the third quarter, do you think you guys are going to come in above that range or where do you think – how’s it looking for the full year?

[Andrew Watts]

We feel pretty good at this stage for the full year on the range that we are kind of at.

[Greg Peters, Raymond James]

Okay. And then finally, just on the M&A environment. Powell, can you give us an update how our pricing is? Is it more expensive to do a deal today than it was a year ago? It certainly seems like there’s a steady stream of news of private equity and strategic buying companies every day. I thought I’d get just an updated perspective there.

[Powell Brown, President and Chief Executive Officer]

Yes, I think that what I would say is I believe there’s 30 PE-backed firms in the space now and the traditional strategic that you are aware of. I would say, the – if there’s change in pricing, that change in pricing might be more pronounced in smaller deals becoming slightly more expensive because the larger deals were already expensive, and I don’t see them going up incrementally as much. That doesn’t mean they couldn’t go up. But I’m talking about deals that are under something from $3 million to $10 million of revenue and the corresponding earnings. There’s pressure on those multiples now more so than in the past because people that are short-term buyers are trying to gain scale. And so there is so many agencies that are considering selling or would consider to sell. And so that’s what’s going on. I will tell you that we’re very pleased with the opportunities that – and the teams that have joined organizations that have joined us so far this year. And we continue to be very optimistic about those in the future. But yes, it is continues to get more competitive.

[Greg Peters, Raymond James]

Okay, great. Thanks for your answers.

[Operator]

[Operator Instructions] Our next question will come from Mike Zaremski with Credit Suisse.

[Unidentified Analyst]

This is actually Charlie on for Mike. I know you talked a little about your new technology leader. Can you elaborate on where you’re focused on improving? And provide any color on what specific initiatives he will be working on?

[Powell Brown, President and Chief Executive Officer]

Sure. Thanks Charlie for Mike. We appreciate that. So Steve Boyd has a technology background coming into our organization 18 years ago as the CIO of Arrowhead, and then he migrated over to operations. And over the last couple of years, 2.5, maybe, years or so, he’s been involved in innovation initiatives across the organization. So broadly speaking, in technology, I think of it as several buckets. You have the data and how we use that data and manage that data to the benefit of our customers, our teammates and trading with our carrier partners. Security is a very, obviously, important segment. Innovation defined as emerging technology, and how that emerging technology can help us better interface with those three groups, i.e., customers, teammates and carrier partners. And in that innovation, it’s the vetting of technology. And as you know, there’s an enormous amount of money that’s pouring into Insurtech, some of which was intended initially to be disruptive and get between the buyer and the broker, and what they found in many instances is disrupting that relationship is a little more complicated and some of those organizations have pivoted and that pivot is to try to enable the brokers to enhance the relationship with their customers or simplify highly repetitive tasks. That could be policy checking. That could be gathering data that – not having to re-input data multiple times in the system, single input, things like that. So I also think of, broadly speaking, digital. Digital, defined as here now how do you use that to our benefit? I would tell you that the most technologically advanced area of our company is in programs. And so some of those capabilities that are being used in programs may have a direct impact right now in the near to intermediate future on something we’re doing in wholesale or programs – wholesale or Retail or Services. And so he will, obviously, be overseeing that as well. So I kind of look at it high-level, data, security, innovation, digital and all the underlying pieces with that. I will tell you that the thing that we’re most excited about, and I personally am, is Steve is a very talented leader, and he’s an operator. So he blends the ability to drive what we call business-driven IT. So we’re all pleased.

[Unidentified Analyst]

Got it. Thank you. That’s helpful. And then just as a follow-up, did you guys get any lift from the impact from Texas flooding during the third quarter? And do you expect any impact in the fourth quarter or first quarter of ‘20? Thanks.

[Andrew Watts]

Hi, good morning. Charlie, it’s Andy here. No, minimal in the third quarter. Just as a reminder, a good way for you guys to think about what happens post an event is it normally takes at least 30 to 60 days before claims start to really kind of come in, in the door. We started adjudicating those and we started recognizing revenue. So based upon when Imelda happened, again, that will be very unlikely for the third quarters. So just kind of keep that in mind for future storms. And then the storm itself, while it got a lot of press coverage, there was not a lot of flood activity there that was covered underneath the policies. So not driving a lot of claim activity. We will get a little bit, but it won’t be anything that’s going to drive incremental organic growth over the prior year. If anything, it probably keeps us flat year-on-year in the fourth quarter. And we will probably process most of those claims in the fourth quarter, but again, nothing material.

[Unidentified Analyst]

Thank you.

[Operator]

Our next question will come from Mark Hughes with SunTrust.

[Mark Hughes, SunTrust]

Yes, thank you. Good morning. In the wholesale business, were there any one-timers or anything – any items that wouldn’t recur? You said you expected the fourth quarter to be more like the first half. Is that just conservatism or was there something that was particularly beneficial in Q3?

[Powell Brown, President and Chief Executive Officer]

There was no one big deal, Mark, that’s not what I would say. It’s just there was a lot of new business. And there were on existing customers, there was some rate pressure in existing areas, if they were CAT-prone or depending on the structure of the accounts. But we would actually just say that it – unless something changes, and I don’t know if it’s possible, but we think that, that growth rate is more indicative of the first half of the year than this quarter – we don’t think one quarter makes a trend.

[Mark Hughes, SunTrust]

Okay. And then how would you look at coastal property pricing, given that we are – it seems like this year, it can end up being reasonably decent, a little bit of damage from Dorian. How do you see that trending when you think into next year? I know you don’t do a forecast, but in your experience, how would you anticipate renewals might look?

[Powell Brown, President and Chief Executive Officer]

Right. So let’s – I think there’s – it’s important to bifurcate or trifurcate that question. So number one, the first question is, is it habitational or not, okay? And habitational, let’s define that as good construction, fire-resistive and what I call sticks and bricks apartments, garden style, three-story, two-story, frame apartments near the water. So there are still carriers, for example, in Florida that will be very aggressive on superior construction condominiums in the state of Florida. That doesn’t mean everyone, but I’m saying so there is some rate pressure, but it’s mitigated because you have some of these outlying carriers that will do things that you might scratch your head on and say, hmm, I wouldn’t have expected that. As it relates to garden-style apartments, there is more pressure not only on the property but on the liability as well because, as you heard us say earlier, there continues to be some adverse loss development in prior accident years. And so there’s a focus on, do we have the right casualty pricing and particularly in something like that, meaning garden-style apartment. As it relates to other than habitational, it truly depends on how it was written before. What do I mean by that? There are some carriers that have written large single limits on facilities, particularly HPR and very good protection or facilities where they are now saying, in some instances, we don’t want to write the whole limit. So if you’ve got somebody that writes, I’ll make this up, a $200 million loss limit, and they determine that they don’t want a $200 million loss limit exposed in a CAT-prone area, even if it’s good construction, and they all of a sudden only want to write $50 million, I just made that up, then you got to go out and stack up – I’m about to sneeze, excuse me. Sorry. You’re going to have to go and get some other carriers to do the 150 x of 50 or whatever the layering is. So I say all that, and there’s still, let’s not forget, there’s still an inordinate amount of capital sitting out there. And so I believe that at any time, optimistic or new capital, however you want to classify it, can come swooping in and do some things. And so I think that kind of moderates the overall rate pressure going forward. That does not mean that there isn’t going to be upward pressure on stuff, but depending on where it is. And then you go inland, and it’s all over the place. You go to Atlanta or Houston – not even Houston – Dallas, you go to Denver, and it may be flat or it might be up because of the class of business or the losses.

[Mark Hughes, SunTrust]

Alright, thank you for the detail. Appreciate it.

[Operator]

Our next question will come from Sean Reitenbach with KBW.

[Sean Reitenbach, KBW]

Good morning.

[Powell Brown, President and Chief Executive Officer]

Good morning.

[Sean Reitenbach, KBW]

As a follow-up on the M&A environment, is there a growing recognition among smaller brokers of their inability to invest in capabilities and is leading to increased interest in being acquired by traditional brokers compared to PE or is that something that is maybe just becoming a factor and could lead to accelerating M&A?

[Powell Brown, President and Chief Executive Officer]

I think, Sean, I would actually – I think you’re tapping on something, but I would express it slightly differently. There is a recognition, particularly among people who, this is their single largest asset, the average agency owner in the United States is 54 to 57 years old, that’s saying sometimes, they’re either going to have to invest more heavily in those capabilities to compete or they might benefit from partnering with somebody, whether it be a strategic, to enhance those capabilities or potentially sell to a PE, to monetize the assets. But fundamentally, agency owners are very independent. I mean this is a true reflection of the American dream. I mean, you’ve got a very independent group of people who really work hard to do the right thing for their customers. So do I think that there is a shift in the thought process? No, I don’t think there’s a shift in the process. What I think is occurring is, as you know, you have more and more business brokers involved in selling businesses. And so people are out there preempting or trying to preempt things where agency owners are getting phone calls all the time from potential acquirers or business brokers. And in some cases, a business broker might say, we can get you X amount from your agency, just kind of having an idea, which that may or may not be true. I don’t know the specifics on the way – but the amounts of money are meaningful. So in some instances, those people are saying, look, it’s so much money, I kind of got to look at it. That doesn’t mean I was thinking about doing it right now, but I need to explore that for my family and whatever. So yes with an asterisk, how is that?

[Sean Reitenbach, KBW]

Thank you. That’s very helpful. And then secondly, in terms of earthquake rates, did you guys see a direct response to the July earthquakes or is that just something where there was momentum and that kind of helped increase momentum?

[Powell Brown, President and Chief Executive Officer]

Yes, there was momentum, Sean, before the July earthquake. What I would tell you that’s interesting, an interesting thing, number one – I marveled this – of all the people in California that live in earthquake zones, only about 10% or 11% buy earthquake coverage. That seems very low to me, number one. Number two, when there is an event, we usually see slight increase in purchasing. And that event, in this case, was a significant earthquake, but it was in a rural area. So the losses were next to zero, but the potential magnitude of that had it been 100 miles west was enormous. So let me give you an example, the measurement on the Richter scale of 7.4. The Northridge earthquake was, I think, a 6.9. It was either 6.7 or 6.9. The amount of energy in the July earthquake – this is amazing to me – 4x higher than the Northridge earthquake, 4x the amount of energy released. So what you’ve got is a recognition on the part of the marketplace that saying, wow, what would’ve happened had that occurred in Los Angeles, or San Francisco? And so there is some pressure on rates. The issue also is not only rates, but is limits, ability to put limits together. And fortunately, we have a very solid program which is performed really well for our carrier partners. And so we are able to put up significant limits in quake zones all over the West Coast.

[Sean Reitenbach, KBW]

Thank you very much.

[Powell Brown, President and Chief Executive Officer]

You are welcome.

[Operator]

[Operator Instructions] We have no other questions at this time.

[Powell Brown, President and Chief Executive Officer]

Okay. Yes, thank you, Augusta. And we appreciate everybody’s time and look forward to talking to you next quarter. Have a great day and a great rest of your fall. Goodbye.

[Operator]

That does conclude our conference for today. Thank you all for your participation. You may now disconnect.