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Brown & Brown Inc (NYSE:BRO)
Q3 2019 Earnings Call
Oct 29, 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. 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 the -- 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 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 the -- 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.

J. Powell Brown -- President & Chief Executive Officer

Thank you, Gutsa. Good morning, everyone, and thank you for joining us for our third quarter 2019 earnings call. I'm 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 one-time 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. Again, in a 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 with 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 nine months and we're pleased with our M&A activity for the year. Later in the presentation, Andy will discuss our financial results in more detail.

Slide number 4. For the third quarter, we continue 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 continue to increase slightly, or we'd say, firming a bit more. We do not believe it's hard market and rates have not increased significantly as compared to last quarter. In general, there is a continued upward trend for certain lines. The amount of increase is driven by the loss experience of the account of certain classes of business. These include, but are not limited to, transportation, habitation, excess liability and New York City contractors, just to name a few.

As we mentioned before, accounts with losses will generally see rate increases well above those accounts with minimal or no loss experience. One liner coverage that continue to see 5% to 10% plus percent rate increases in 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've 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. This pressure -- if this pressure continues, we believe there'll 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 being 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 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 the State FAIR Plan or admitted commercial placements going into the E&S market. We're also seeing rate increases for earthquake coverage and general, while risk bearers have been able to get some rate increases and there has been upward movement from where we were a year ago for most lines. There are 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. He has been an operator within our National Programs Segment for many years and over the past couple of years has been leading our innovation initiatives. This combination plus knowledge of our Company will help us further our technology initiatives. I'll 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 benefit 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 nine months of '19 as this represents good incremental improvement over the 2.8% organic growth we realized in the first nine 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 Program segment grew 1.6% organically. When we isolate the $8 million one-time 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've 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 is 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 in more new business. Please note, we will 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 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.

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

Thank you, Powell, and good morning everyone. Consistent with previous quarters, we're going to discuss our GAAP results, certain non-GAAP financial highlights, and then our adjusted results excluding the impacts of acquisition earn-outs.

I'm over on Slide number 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'll walk through the detailed movement our EBITDAC margin in 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 for the first nine months, we're 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've increased our dividend for the 26th year in a row.

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 reduction in our earn-out liabilities of approximately $6 million. Our income before income tax on an adjusted basis grew 3.2% or slower than EBITDAC due to incremental interest in amortization expense associated with the acquisitions we completed in the last year. On adjusted basis, our net income increased by 5.5%.

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 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 one-time adjustment we recorded last year. Isolating this item, our organic growth would have been 5%, representing an outstanding quarter.

Over to Slide number 9. To provide some additional visibility into the major drivers of our EBITDAC margin, we've 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'll 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 one-time item recorded in National Programs, higher non-cash stock compensation cost and higher claims experience 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've presented the results of our four business segments. We're over onto Slide number 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 in GSCs. Our EBITDAC margin for the quarter decreased 330 basis points due primarily to the phasing of profit from Hays, which was about 280 basis point impact, the margin impact associated when we recognized 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 in 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 in 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 nine months, and our EBITDAC margin is 29.5% versus 30.2% for the nine 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 basis points to 80 basis points.

Moving over to Slide number 11, the National Programs segment had lower total revenues by 40 basis points. This was driven by the one-time 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 one-time 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 one-time 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 number 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 number 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're 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've 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 the 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 is 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 activities 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.

J. Powell Brown -- President & Chief Executive Officer

Thanks, Andy. Great report. In closing, we continue to be remain optimistic about the economy as businesses continue to invest and hire more employees. Like many of our customers, we're watching the resolution 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're talking with lots of companies. We have good momentum after closing 18 deals through the third quarter with annualized revenues of $86 million, we've announced three additional transactions already this quarter. Our goal, as you know, is to find companies that fit culturally, make sense financially and want to be part of our team. We will continue to maintain our disciplined capital and M&A approaches as they've 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 and 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 Gusta for Q&A.

Questions and Answers:

Operator

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi, good morning. My first question. You guys, a couple of times throughout the present -- 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 and what you're seeing and how you think the Q4 and potentially even 2020 could shake out on organic basis?

J. Powell Brown -- President & 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 would 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 try 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 nine 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've 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've 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. You know we -- 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're obviously cautious about that as well.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. That's helpful. And then, Andy, you mentioned that there was a deal that you guys just completed within Retail that skew to the first quarter. Couple of questions there. Could you potentially size that deal? And then, when you said in Retail that margins would be compressed by 60 basis points 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?

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

So that -- so good morning, Elyse. A 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're trying to help everybody with is, whatever you've modeled out, then you'd want to adjust it by kind of the 60 basis points to 80 basis points down for the transaction. The -- on this deal here, again, it's -- it's around about $20 million in revenue and what happens is, it will recognize all of its revenue in the first quarter. So we don't have -- there's minimal -- 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'll 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 Securities -- Analyst

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?

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

Yeah, too early at this stage. So again, we 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're 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'll have to wait till 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 anticipated we would have got during the year. So the new approach definitely creates a bit more volatility in the numbers in the past.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, that's helpful. I appreciate the color. Thank you.

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

Yeah. Yeah, just one closing on that. 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 Securities -- Analyst

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 -- Analyst

Hi. 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 posted some pretty impressive results on a year-to-date basis, both in retail and wholesale. Can you talk about what the balances between the revenue -- organic revenue being driven by rate versus what's being driven by actually new business wins?

J. Powell Brown -- President & Chief Executive Officer

Right. Remember, what we've historically said, I'm going to reiterate what we've historically said and we haven't broken out specific the new business wins versus growth in existing business. But what we've 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 or one-quarter 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 nine months up slightly ex-Hays in 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 -- good middle market, package writers accounts are flat to down in that part of the country. And you want to compare that to, you know Los Angeles is burning this morning and there is rolling brownouts. I mean, so there is a fix on both -- both ends of that spectrum. So it's really typically geography-based or line of business based or both.

Greg Peters -- Raymond James -- Analyst

Thank you. 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 I look at your organic results over the last four quarters, it definitely reflects challenges. Can you -- can you remind us exactly what's going on there? And because this seems to be anniversarying it, do you think that that might turn around in the coming quarters?

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

Yeah. Hi, good morning. Greg, Andy here. So with that book of business, it's been running now for an adjudication 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 made our lap on that one.

Greg Peters -- Raymond James -- Analyst

Okay. Thank you. I mean, just two other questions. First, Andy, you called out the free cash flow conversion rate. I think in a previous call, you mentioned that, you know you would have expected or might expect for 2019 to 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 is it looking for the full year?

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

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

Greg Peters -- Raymond James -- Analyst

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

J. Powell Brown -- President & Chief Executive Officer

Yeah, I think that, what I would say is, I believe there's 30 PE-backed firms in the space now and the traditional strategics 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. It 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 in the corresponding earnings. There is 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 sell. 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 have joined us so far this year and we continue to be very optimistic about those in the future. But yes, it continues to get more competitive.

Greg Peters -- Raymond James -- Analyst

Okay, great. Thanks for your answers.

Operator

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

Charles Lederer -- Credit Suisse -- Analyst

Hey guys, good morning. This is actually Charlie on for Mike. I know you talked a little bit 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?

J. Powell Brown -- President & Chief Executive Officer

Sure. Thanks, Charlie for Mike. So 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 has 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 is the vetting of technology, and as you know, there is an enormous amount of money that's pouring into insured tech, 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 reinput data multiple times in the system, single input, things like that.

So I also think of broadly speaking digital. Digital defined as, you know here now, how do you use that to our benefit. I would tell you that the most technology -- 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 or -- 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 is an operator, so he blends the ability to drive what we call business driven IT. So we're all pleased.

Charles Lederer -- Credit Suisse -- 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 taxes flooding during the third quarter and do you expect any impact in the fourth quarter or first quarter of '20? Thanks.

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

Hi. Good morning, Charlie. It's Andy here. No, minimal in the third quarter. Just as a reminder, good way for you guys to think about what happens post an event is it normally takes at least 30 days to 60 days before claims start really kind of coming in the door, we started adjudicating those and we start recognizing revenue. So based upon when [Indecipherable] happened, again, that would be very unlikely for the third quarter, just to kind of keep that in mind for future storms.

And then the storm itself, while we got a lot of press coverage, there was not a lot of flood activity there that was covered underneath of 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'll probably process most of those claims in the fourth quarter, but again nothing material.

Charles Lederer -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question will come from Mark Hughes with SunTrust.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah, thank you. Good morning.

J. Powell Brown -- President & Chief Executive Officer

Good morning.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

In the Wholesale business, were there any one-time or is there 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?

J. Powell Brown -- President & 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 they were on existing customers. There was some rate pressure in certain areas if they were cat-prone or depending on the structure of the accounts, but we would -- we would actually just say that, unless something changes, and I don't know if it is 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 Robinson Humphrey -- Analyst

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

J. Powell Brown -- President & Chief Executive Officer

Right. So let's -- I think there, it's important to bifurcate or trifurcate that question. So number one, the first question is, is habitational or not, OK. And habitational, let's define that as good construction, fire resistive and what I call sticks and bricks apartments, garden style, 3-storey, 2-storey 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 some of these outlying carriers that will do things that you might scratch your head on, 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 is -- there is 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 some of that right. 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 out and get some other carriers to do the $150 million ex of $50 million or whatever the layering is.

So I feel that and there is still, let's not forget, there is 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 P&L classify it, can come swooping in and do some things. And so I think that kind of moderate the overall rate pressure going forward --that does not mean that there's not going to be upward rent 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 -- I don't mean [Phonetic] 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 Robinson Humphrey -- Analyst

Thank you for the detail. Appreciate it.

Operator

Our next question will come from Sean Reitenbach with KBW.

Sean Reitenbach -- Keefe, Bruyette & Woods -- Analyst

Good morning.

J. Powell Brown -- President & Chief Executive Officer

Good morning.

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

Good morning.

Sean Reitenbach -- Keefe, Bruyette & Woods -- Analyst

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?

J. Powell Brown -- President & Chief Executive Officer

I think, Sean, I would -- 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 United States is 54 years old to 57 years old that 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 asset. But fundamentally, agency owners are very independent, I mean, this is a true reflection of the American dream. I mean, you 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 is 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 who are out there pre-empting or trying to pre-empt 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 for 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, there is 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 asterix kind of that.

Sean Reitenbach -- Keefe, Bruyette & Woods -- Analyst

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 to increase momentum?

J. Powell Brown -- President & Chief Executive Officer

Yeah. There was momentum Sean before the July earthquake. What I would tell you, that's interesting -- an interesting thing, number one, I marvel this, of all the people in California that live in earthquake zones, only about 10% or 11% by 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 -- 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 a 100 miles west was enormous.

So let me give you an example. The measurement on the richter scale was 7.4. The Northridge earthquake was, I think at 6.9 -- it is either 6.7 or 6.9. The amount of energy in the July earthquake, this is -- this is amazing to me, four times 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, the same wow, what would have 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 limit, ability to put limits together. And fortunately, we have a very solid program which has performed really well for our carrier partners and so we're able to put up significant limits in quake zones all over the West Coast.

Sean Reitenbach -- Keefe, Bruyette & Woods -- Analyst

Thank you very much.

J. Powell Brown -- President & Chief Executive Officer

You're welcome.

Operator

[Operator Instructions]. No other questions at this time.

J. Powell Brown -- President & Chief Executive Officer

Yeah, thank you, Gusta, 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

Duration: 52 minutes

Call participants:

J. Powell Brown -- President & Chief Executive Officer

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Greg Peters -- Raymond James -- Analyst

Charles Lederer -- Credit Suisse -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Sean Reitenbach -- Keefe, Bruyette & Woods -- Analyst

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