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Brown & Brown Inc (NYSE:BRO)
Q2 2019 Earnings Call
Jul 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Brown & 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 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.

J. Powell Brown -- President and Chief Executive Officer

Thank you, Matt, and good morning, everyone and thanks for joining us for our second quarter 2019 earnings call, I'm on Slide number 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, again 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 '18. 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, is really good quarter. Later in the presentation, Andy will discuss our financial results in more detail.

I'm now on Slide number 4. During the quarter, the market continue 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 loss experience are still getting marketed with rigor. The main line where we're seeing 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 barriers wanted to increase rates and it was most pronounced in London. There was some upward pricing pressure in the second quarter as risk barriers are trying to get rate increases were possible. And specifically in the E&S 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 that needs to get put to work. And therefore, we do not believe there is going to be large swings and 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 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 for 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 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 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 of larger accounts, which we discussed in Q1 earnings call. We are 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.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Powell and good morning, everyone. 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 number 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'll walk through the detailed movement of our EBITDAC margin in 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 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 number 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 a $0.01 per share benefit. Our income before income taxes on an adjusted basis grew 19.2% were slightly slower than total revenues due to the incremental interest in 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 number 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 contingents 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 a GSC within our National Programs segment that will not recur in the future as the associated multi-year 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 number 9, to provide some additional visibility into the major drivers our EBITDAC margin, we've included a walk through from 2018 to 2019. Hays negatively impacted our margin by approximately 100 basis points to 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 a 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've recorded this quarter. Taking all these items into consideration, it was a very good quarter for margin expansion.

On the following slides, we present the results for our business segments. We're going to 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 Hays that we mentioned earlier. Excluding the impact of Hays, 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 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 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 number 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 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.

Moving over to Slide number 14, we wanted to provide an update on the Q2 performance for Hays. Total revenues were $44.1 million and we're 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 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 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 in a full year base -- 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.

J. Powell Brown -- President and Chief Executive Officer

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're approaching the pricing for deals. At times they're willing to pay materially more and we are with a disciplined approach to capital deployment.

Ultimately, our goal is to find companies that fit culturally 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's 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 had good momentum for the second half of the year.

With that, let me turn it back over to Matt to start the Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first we will hear from Elyse Greenspan with Wells Fargo.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

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 can quantify, if there was a 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?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, good morning, Elyse. It's Andy here. Back if you remember our comments on the first quarter, we had said that the impact of rev rec was less than anticipated. I think the same thing held true in the second quarter, while, 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.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

So you would view the -- that 5.6% is 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?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

We look so, maybe we 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, OK, inside of there, for -- 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 of it. 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 lease 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, this kind of how we view it in a steady state economy. So that's the limited guidance we would give you.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. And then in terms of, so -- and you just said pretty, as we 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 were still growing like within the vicinity to a 4% to 4.5% for the first half of the year?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Well, we didn't say that on the release, but we'd say that all of our businesses are growing really well, it's just employee benefits growing a little bit faster.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, great. Appreciate that color. And then my second topic was 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 it, it's 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 accept supplemental with the National Programs kind of the level of margin improvement you would have seen in the quarter?

J. Powell Brown -- President and Chief Executive Officer

Yeah. Elyse, let's say, we maybe put it into two pieces. Let's do it in a total level, first. If you look at the GSCs, yeah, we did pick up about an incremental $10 million and they do flow through at higher margins. We have made the comment about incremental one-time legal cost and that was about another -- that was about $5 million that we've 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 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, again keep in mind that contingents were also down in National Programs. We still expanded margins in National Programs for the quarter.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. That's helpful. I appreciate the color. Thank you.

J. Powell Brown -- President and Chief Executive Officer

Perfect.

Operator

Our next question will come from Mike Phillips with Morgan Stanley.

Michael Phillips -- Morgan Stanley -- Analyst

Thank you. Good morning, everybody. On your market overview slide, market overview, business overview slide, on Slide 4, you mentioned some tightening the underwriting criteria for some lines of business and some process. And I wonder if you can elaborate on that, like what lines you're talking about and where you're seeing things there?

J. Powell Brown -- President and Chief Executive Officer

Well, think about -- we're seeing 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 never 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, there a 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.

Michael Phillips -- Morgan Stanley -- Analyst

Okay, yeah. I mean, I was -- I guess, looking forward is certain specific lines property, non-property, liability, casualty, whatever on that. It sounds like you're saying kind of across the board more on the E&S. So [Speech Overlap]

J. Powell Brown -- President and Chief Executive Officer

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.

Michael Phillips -- Morgan Stanley -- Analyst

Okay. Yeah, that's helpful. Thank you very much. Second question on -- you've commented last quarter on, on your non-cash stock comp being up around $3 million to $4 million from 18 levels. It was up from a year-to-date. This year, it's up almost, almost $9 million to $10 million. So any updated thoughts on how that could run out for the rest of the year?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Hi, good morning, Mike. Yeah, 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.

Michael Phillips -- Morgan Stanley -- Analyst

The $3.5 million.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

No, no, if you look at the total --

Michael Phillips -- Morgan Stanley -- Analyst

So you're up from $15 million to $24 million, so $9 million for the year? Is that right [Phonetic]?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

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.

Michael Phillips -- Morgan Stanley -- Analyst

Okay. Okay, perfect.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

You'll be coming in kind of -- probably coming in, in that $45 million [Phonetic] to $50 million [Phonetic] range.

Michael Phillips -- Morgan Stanley -- Analyst

Yeah. Okay. Thank you very much, Andy.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Sure.

Operator

And next we will hear from Mike Zaremski with Credit Suisse.

Mike Zaremski -- Credit Suisse -- Analyst

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 wondering anything is going on their rates or uptake given the -- what's taken place in California?

J. Powell Brown -- President and Chief Executive Officer

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 at minimal. And so we do business in both residential earthquake and commercial earthquake and prior to the event on July 5th, the 7.1 we -- there were some pressure on rates already on those that we're putting up very large limits $50 million, $75 million or $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 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, they 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 between three and four times more powerful. And so they were very, very fortunate that it was out, in the middle 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.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, great. That's interesting and a good commentary. A couple of others, maybe 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 our appetites being bailed out by what seems to be increasing rate momentum in that line of business?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

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-end 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.

Mike Zaremski -- Credit Suisse -- Analyst

And then on commercial auto? Yeah, I'm sorry.

J. Powell Brown -- President and Chief Executive Officer

Yeah. 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 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 and 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 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 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 -- 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.

Michael Phillips -- Morgan Stanley -- Analyst

Thank you .

Operator

And our next participant is Greg Peters with Raymond James.

Greg Peters -- Raymond James -- Analyst

Hi, good morning. 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.

J. Powell Brown -- President and Chief Executive Officer

Yeah, Greg, in the first quarter, we said it was about a 1% impact, it was about a 1% also in the second quarter. So down 1% in Q1, and up [Speech Overlap].

Greg Peters -- Raymond James -- Analyst

Say it again, Powell.

J. Powell Brown -- President and Chief Executive Officer

I said down, it was -- remember, the revenue was transit [Phonetic], it moved from Q1 into Q2, because they renewed -- 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%.

Greg Peters -- Raymond James -- Analyst

Got it. So there wasn't any pull forward of revenue from 3Q or 4Q in the second quarter. Correct?

J. Powell Brown -- President and Chief Executive Officer

No. This was just a couple of accounts in Q1, which extended their policies and renewed in Q2.

Greg Peters -- Raymond James -- Analyst

Okay. In your commentary, you also spoke about positive momentum and the employee benefits are 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.

J. Powell Brown -- President and Chief Executive Officer

Yeah, 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're pleased with those two and they're doing well. But Andy did mentioned 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.

Greg Peters -- Raymond James -- Analyst

Right. It seems like -- on the retail side it seems like most, 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?

J. Powell Brown -- President and Chief Executive Officer

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 don't -- I'm not trying to be overly simplistic, but I just think we are executing better in the second quarter, and it result -- and the results show that way in the organic growth. So I don't want you to think some -- 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'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's doing.

Greg Peters -- Raymond James -- Analyst

Yeah. 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. Do you anticipate sort of the trend of the first half to continue in 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?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. As we had mentioned before is, we do expect it'll 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 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. 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 were right in that 22% to 23% pretty consistent all the time.

J. Powell Brown -- President and Chief Executive Officer

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 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.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Greg, the other thing you keep in mind on the free cash flow, and we 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 the ranges that we've given on that as we said we'll probably be up somewhere around $30 million to $35 million in CapEx this year and then we'll spend about another $30 million to $35 million next year on CapEx and then it will drop back down.

Greg Peters -- Raymond James -- Analyst

Got it. Thank you for the answers.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. And again that's CapEx on the building, not total, OK?

Greg Peters -- Raymond James -- Analyst

Yeah. Yeah, I got it. Thank you.

J. Powell Brown -- President and Chief Executive Officer

Okay, perfect. Thanks, Greg [Phonetic].

Operator

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

Mark Hughes -- SunTrust -- Analyst

Thank you very much. Good morning.

J. Powell Brown -- President and Chief Executive Officer

Good morning.

Mark Hughes -- SunTrust -- Analyst

You mentioned that there was upward pressure on quake pricing. Any early read on order volume post the events?

J. Powell Brown -- President and Chief Executive Officer

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 event, OK. So, I'll give you a statistic that, 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 by earthquake coverage 12% [Phonetic]. That sounds low to me. And so when the event happens a lot of people think about 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.

Mark Hughes -- SunTrust -- Analyst

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?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

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. 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.

Mark Hughes -- SunTrust -- Analyst

Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Thank you.

Operator

And next we will hear from Yaron Kinar with Goldman Sachs.

Yaron Kinar -- Goldman Sachs -- Analyst

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, in the second half of the year?

J. Powell Brown -- President and Chief Executive Officer

The only real item 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. So just -- and that's really the only one out there.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay.

J. Powell Brown -- President and Chief Executive Officer

That's material [Phonetic].

Yaron Kinar -- Goldman Sachs -- Analyst

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 competitors have talked about roughly 60% margin, is that roughly what we should be thinking about?

J. Powell Brown -- President and Chief Executive Officer

Yeah, but 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.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Sure. Thank you.

Operator

And our next question comes from Meyer Shields with KBW.

Meyer Shields -- KBW -- Analyst

Thanks. Two quick questions. One, I just want to clarify, because I think, I had this wrong. And 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?

J. Powell Brown -- President and Chief Executive Officer

Well, it doesn't -- it just doesn't show up in the third quarter of this year.

Meyer Shields -- KBW -- Analyst

Okay. But it's not an $8 million [Phonetic] hit?

J. Powell Brown -- President and Chief Executive Officer

Correct. So --

Meyer Shields -- KBW -- Analyst

Okay, thanks.

J. Powell Brown -- President and Chief Executive Officer

So [Speech Overlap] from comparability, right, you had a benefit last year that benefit will not be there this year.

Meyer Shields -- KBW -- Analyst

Okay, perfect. And second, can you -- you talked in the presentation about rising employee benefits rates. Does that have an impact on retail organic growth?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

It does, if you're 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 would 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're 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.

Meyer Shields -- KBW -- Analyst

Okay, fantastic. Thank you so much.

Operator

Our next question will come from Josh Shanker with Deutsche Bank.

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah, good morning, everybody.

J. Powell Brown -- President and Chief Executive Officer

Good morning.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Joshua Shanker -- Deutsche Bank -- Analyst

I apologize that I joined a little bit late, I think these questions have been asked. The first one involves the supplemental commissions in the program's business. Is there any negative impacts in the four [Phonetic] quarters as you pulled commissions out of the future to come into 2Q?

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

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 multi-year calculation.

J. Powell Brown -- President and Chief Executive Officer

So we weren't pulling something out of Q3 or Q4.

Joshua Shanker -- Deutsche Bank -- Analyst

No. I was only 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 million and $4 million as a normal run rate, is there any reason to think that's different in the future?

J. Powell Brown -- President and Chief Executive Officer

Boy [Phonetic] a little hard one to answer and 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. 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.

Joshua Shanker -- Deutsche Bank -- Analyst

Okay. The last few. And the second question, it's my own fault, but I underestimate your acquired, well commissions ex Hays in 2Q. I'm wondering, if you can help sort of frame that 2Q versus the end of the year? You're $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 premiums commissions?

J. Powell Brown -- President and Chief Executive Officer

So that assumes on what we end up closing now.

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah, of course. Outside what you've already closed, what you've already closed. Don't try and predict the new deals, of course.

J. Powell Brown -- President and Chief Executive Officer

Yeah, OK. So remember here is the deal, Josh. We went to not announcing the size of the deals upon announcement and we're 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.

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah, I'm not -- and I'm actually looking backward. Just trying to see -- ex Hays, 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 the Hays skews the thing a little bit are we -- with an elevated level that we're going to have come off the plateau a little bit in the back half of the year assuming nothing about deals going forward.

J. Powell Brown -- President and Chief Executive Officer

Yeah. Based upon when we close the deals in 2018, Josh, yes you are correct. It will slow down presuming no other deals in the back end of the year.

Joshua Shanker -- Deutsche Bank -- Analyst

Okay. That's -- nothing forward. Just trying to understand the past. Thank you very much.

J. Powell Brown -- President and Chief Executive Officer

Yes, thanks.

Operator

[Operator Instructions] We will now take a follow-up from Mike Phillips with Morgan Stanley.

Michael Phillips -- Morgan Stanley -- Analyst

Hey, guys. Just real quickly. Any impact you expect early on from -- and maybe next quarter's revenue for services and programs from [Indecipherable]?

J. Powell Brown -- President and Chief Executive Officer

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 what 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.

Michael Phillips -- Morgan Stanley -- Analyst

Okay. Thank you.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. I mean, just -- hey, Mike, first for -- in fact, we don't model anything about -- I mean, the volume of claims that we're getting are really, really small.

Michael Phillips -- Morgan Stanley -- Analyst

Yeah.

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

So we would -- we're not envisioning any real uptick at this stage in Q3 versus last year.

Michael Phillips -- Morgan Stanley -- Analyst

Okay, great. Thanks.

J. Powell Brown -- President and Chief Executive Officer

Yeah, sure. Thank you.

Operator

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.

J. Powell Brown -- President and Chief Executive Officer

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.

Operator

Again, that does conclude our call for today. Thank you for your participation. You may now disconnect.

Duration: 50 minutes

Call participants:

J. Powell Brown -- President and Chief Executive Officer

R. Andrew Watts -- Executive Vice President, Chief Financial Officer and Treasurer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Michael Phillips -- Morgan Stanley -- Analyst

Mike Zaremski -- Credit Suisse -- Analyst

Greg Peters -- Raymond James -- Analyst

Mark Hughes -- SunTrust -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Meyer Shields -- KBW -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

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