Brown & Brown Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Brown and Brown Incorporated Second Quarter Earnings Call. Advising your hand is raised. As a reminder, 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 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 to pay the financial results for the Q2 and are intended to fall within the Safe Harbor provisions of the security laws.

Operator

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 Q2 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

Speaker 1

as well

Operator

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 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 measures 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.bbbinsurance.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.

Operator

You may begin.

Speaker 2

Thank you. Good day, everyone, and welcome to our Q2 2023 earnings call. We had an standing second quarter and the first half of the year. We're very pleased with our strong top and bottom line results with robust total revenue, organic revenue and earnings per share growth. Today, Andy and I are in the London headquarters of GRP where we wrapped up our quarterly board meeting and have had the opportunity to engage with our European businesses and review strategic plans for the coming years.

Speaker 2

After our discussions, we feel even better about our leaders and the growth opportunities for our businesses here. Now let's get into the results for the quarter. I'm on Slide number 4, we delivered over $1,000,000,000 of revenue growing 24.7% in total and 11.2% organically as compared to the As a reminder, our calculation of organic revenue does not include contingent commissions, investment income, Other income or gains and losses on business sales. Our adjusted EBITDAC margin expanded 150 basis points to 34.2 percent And our adjusted earnings per share grew 55 percent to $0.68 On the M and A front, we completed 6 Acquisitions with estimated annual revenues of $24,000,000 This outstanding performance is a direct result of the relentless daily commitment by our 15,000 plus teammates to create innovative solutions for our customers. Now on Slide 5.

Speaker 2

The insurance marketplace continue to be very challenging for customers. They remain focused on the overall spend for And how to best manage their costs. Across most lines of coverage, rate increases were similar to recent quarters With admitted markets up 4% to 10% and excess and surplus markets up 10% to 20%. However, there are exceptions. Workers' compensation rates continue to decrease at a consistent rate.

Speaker 2

E and S professional liability rates, Public Company D and O and Cyber continue to moderate downward with flat rates being flat to down 10% or more. The area that remains the most challenging is cat exposed property. Carriers continue to evaluate their coastal property portfolios and we're seeing more admitted carriers exiting the California and Florida personal line space. As a result, these placements are becoming even more difficult. Consequently, more properties are moving to state sponsored plans and into the E and S space that might have otherwise been written by an admitted carrier.

Speaker 2

At the same time, we continue to see underwriters seeking to increase insured values per square foot due to inflation and higher replacement costs. Thus customers are seeing premiums rise significantly due to inflation and higher values. These factors are causing buyers to purchase loss limits, Increase deductibles, decrease overall limits or even self insure certain layers within a placement. Regarding the Florida insurance market, it has not materially improved. We have more admitted carriers either reducing their appetite or Stepping away from the market entirely, this is pushing more policies to Citizens and the E and S market.

Speaker 2

From a customer perspective, many businesses grew and hired employees during the quarter at levels similar to the Q1. While the overall rate of inflation continued to slow, business leaders remain cautious regarding the level of investment in their business in the Q2, but incrementally are feeling better than they did in Q1 and Q4 of last year. As it relates to overall M and A, the level of deals primarily from financial backers continued to slow during the Q2. As a result, we're seeing fewer bidders for businesses and valuations have come down slightly from their peak, but that doesn't mean that a good business won't trade at From our perspective, we remained active during the quarter acquiring 6 great companies. We completed the acquisition Hicorp Breckles, a retail agency based in Canada, 2 acquisitions in the United States and 3 here in the United Kingdom.

Speaker 2

We announced in May the pending acquisition of Kentrow Capital Limited, which we announced which we anticipate closing in the Q4. Kentro is an MGA retail agency headquartered in London with team of over $350,000,000 annual revenues approximately $90,000,000 and with locations primarily in the UK, U. S. In Continental Europe. Kentros MGA, Nexus underwrites across a diversified portfolio of 20 risk classes, including trade credit, financial lines and aviation.

Speaker 2

Xenia, its retail agency is one of the largest Trade Credit Brokers in the United Kingdom. We're excited to have Collin Thompson and his team join Brown and Brown. Overall, we are very pleased with the success of our M and A efforts and are in a strong position to leverage our disciplined approach I'm on Slide number 6. Our retail segment had a good quarter delivering organic growth of 6.3%. This growth was driven by solid new business, Continued rate increases and modest exposure unit expansion.

Speaker 2

Most lines of business performed well, while our dealer services business continue to face headwinds due to vehicle inventory levels and higher interest rates. To give some context around that, the impact to our organic growth was approximately 200 basis points for the quarter. Our program segment delivered a spectacular quarter with organic growth over 23% driven by strong new business, good retention and continued rate increases, especially around cat property. The majority of our programs grew nicely during the quarter. Wholesale Brokerage delivered an excellent quarter With organic growth of 13% driven by new business and retention as well as rate increases for most lines of business.

Speaker 2

Our open brokerage and delegated authority businesses had a great quarter. Organic revenue per service the services segment declined about 2% for the quarter due to external factors that continue to impact our advocacy businesses. This decline was partially offset by higher claims processing revenue for certain businesses. In summary, we're very pleased with the first half results, Delivering organic growth of nearly 12%, adjusted EBITDAQ margin expansion of 70 basis points and adjusted earnings per share growth of nearly 19%. Now I'll turn it over to Andy to discuss our financial results in

Speaker 3

more detail. Great. Thanks, pal. Good day, everybody. I'll review our consolidated financial results on an adjusted basis in more detail.

Speaker 3

As a reminder, our adjusted measures for the Q2 exclude the change in estimated earn out payables, one time acquisition and integration costs associated With GRP, Orchid and VDB and gains and losses on business divestitures, we believe isolating the above items provides a better reflection The reconciliations of our non GAAP financial measures, including these adjusted amounts to the most Closely comparable GAAP amounts can be found either in the appendix to the presentation or in the press release issued yesterday. On an adjusted basis, total revenues were over $1,000,000,000 for the 2nd quarter, growing 24 point 7% as compared to the Q2 of the prior year. Income before income taxes increased by 32.1% and EBITDAC grew by 30.5%. Our EBITDAC margin was 34.2%, increasing 150 basis points as compared to the Q2 of 2022. The effective tax rate for the quarter was 25%, which is in line with our expectations and compares to 27% in the Q2 of last year.

Speaker 3

The lower tax rate was impacted by the change in the market value of assets associated with our deferred compensation plan in the current year as compared to the prior year. Our adjusted diluted net income per share increased by 33.3% from last year to $0.68 Due to the changes in market value, our deferred compensation plan negatively impacted the ratio of salaries and related expenses to revenue by approximately 2 50 basis points year over year. Keep in mind, there's an offsetting benefit within other operating expenses. Lastly, our weighted average share count remained relatively flat and dividends paid increased by nearly 12%, both as compared to the Q2 of 2022. Overall, the performance by our team for the quarter was outstanding.

Speaker 3

We're on slide number 8. The Retail segment grew significantly, delivering adjusted total revenue growth 25.5 percent, driven by acquisitions completed in the last year, higher profit sharing contingent commissions and organic growth of 6.3%. Adjusted EBITDAC grew slightly faster than revenues and our adjusted EBITDAC margin expanded to 28.4%. This expansion was primarily driven by increased profit sharing contingent commissions, which were substantially offset by higher non cash stock based compensation and to a lesser extent, the hiring of incremental teammates to support our current and future growth. We're moving over to Slide number 9.

Speaker 3

National Programs had another outstanding quarter with adjusted total revenue growing of 25.7 percent and organic growth of 23.3%. Through the combination of revenue growth and leveraging our expense base, our adjusted EBITDAC margin expanded 510 basis points. We're over on slide number 10. Our Wholesale segment delivered an excellent quarter with adjusted total revenue growth of 23.8 percent and organic growth of 13.1%. Our adjusted EBITDAC margin contracted slightly due to some non recurring costs in the 2nd quarter that impacted by approximately 200 basis points.

Speaker 3

We're on Slide number 11. The Services segment's organic revenue contracted by 1.8% for the quarter The adjusted EBITDAQ margin decreased by 220 basis points. The primary driver of the margin decline was lower organic revenues and the impacts of inflation. We've got a few comments regarding cash generation and capital allocation. We generated approximately $390,000,000 of cash flow from operations for the 1st 6 months of this year, growing over $40,000,000 or 12%.

Speaker 3

Our ratio of cash flow from operations as a percentage of total revenues was approximately 18% for the 1st 6 months of this year as compared to 20% in the 1st 6 months of last year. As we discussed last quarter, the lower year to date ratio has been impacted by higher interest expense and paying taxes in the Q1 of this year Related to the Q4 of last year that were deferred as a result of Hurricane Ian relief. With that being said, the second quarter was Very strong for cash generation and we ended the quarter with approximately $630,000,000 of operating cash. As we mentioned previously, post the acquisitions of GRP, BDV and Orchid last year, we are committed to delevering to our more traditional levels. In the 2nd quarter, we reduced our outstanding debt by making incremental payments of approximately $130,000,000 We are in a strong capital position to continue to invest in our company, acquire great businesses and delever.

Speaker 3

With that, let me turn it back over to Powell for closing comments. Thanks, Andy. Great report.

Speaker 2

We continue to monitor the impact of inflation and increases in interest rates on our customers and the economies in which we operate. We expect business leaders will remain cautious regarding the pace of their hiring and how much they will invest over the coming quarters. With that said, consumers are still spending money and most of our customers are prospering. We believe this trend will continue for at least the next few quarters. From an insurance standpoint, buyers remain Continued increases in insurance rates, especially for cat properties, which we expect similar increases through the end of the year.

Speaker 2

With these market conditions, buyers will continue to either decrease limits, increase deductibles and in certain cases opt for loss limits. In regard to our carrier partners, they remain focused on capacity as well as the flight quality and diversification. Historically, we've delivered good underwriting results and are uniquely positioned with the breadth of our MGAs and MGUs to provide an opportunity for carriers to allocate capacity across multiple programs. The combination of our diversification and strong underwriting results positions us well to retain and possibly increase our capacity, which will support incremental organic growth from our programs. A few comments regarding our recent international acquisitions of GRP and BBB.

Speaker 2

We're extremely pleased with the performance of these businesses as they're ahead of our expectations for the 1st year. The leadership teams are focused on driving continued growth over the coming quarters years both organically and through M and A. GRP has been active over the past year acquiring over 20 high quality businesses. Additionally, we'd like to welcome all teammates that have joined us over the past few months. Overall, we feel great about our business and how our team continues to Execute and deliver.

Speaker 2

Our focus is on hiring and retaining the best teammates and leveraging the total capabilities of BrownBrown to retain our existing customers and win more new business. In summary, we had a great first half of the year and Great momentum heading into the second half of the year. With that, we'll turn it back over to Michelle and open it up for Q and A.

Operator

Our first question comes from Weston Blumer with UBS. Your line is open.

Speaker 4

Hi, thanks. Good morning. My first question is on the Retail segment organic growth. You had highlighted a 200 basis point headwind from dealer services in the quarter. I'm curious if you can disclose what that impact was in 1Q or how you're thinking about that headwind for the remainder of the year.

Speaker 4

And given those headwinds there, is it fair to say retail organic maybe lower in the second half, just given the property uplift that you typically see in the second quarter?

Speaker 3

Yes. Hey, good morning, Weston. So assuming we can add a little bit of color and some context around this is, we had mentioned this back during the Q1 as well as Q4 of last year That we did anticipate some headwinds for dealer services in the Q1 and we did see that. And it was probably in the range of about 50 to 100 basis points in that range. If you recall, when we released earnings for Q3 of last year, we had talked about the fact that We were starting to see the headwinds on the dealer services business in late 2Q of last year, And we saw those through the Q3 and Q4 and kind of now continuing through.

Speaker 3

The impact in kind of the back end of last year was About 1% by the quarters. So it kind of gives you an idea when you look at the organic and what the impact is. As we now head into the second half of the year and similar or Consistent with the commentary that we had in Q1, as we get on to a more comparable basis now in the second half of the year, We don't see the same level of headwinds for the dealer services business. We are We're very, very proud of those businesses. They perform really well.

Speaker 3

Just going through a little bit of a cycle right now, but they are great businesses and we made Significant investments in there over time through our capabilities.

Speaker 4

Got it. Thank you. And I guess sticking on retail, Can you maybe quantify the uplift you saw from property in the 2nd quarter and just remind us how much of that business is 2Q weighted maybe relative to the 3rd quarter for Q4?

Speaker 3

Yes. We don't disclose that level of granularity, Weston. But I think what we've talked about in the past is We do play significantly more cat property in the second quarter than we do in the third quarter. And the Q3 is probably potentially almost a third less than what we see in the second quarter. That's pretty consistent with what we talked about Last year.

Speaker 3

So that's why when we said that normally our organic is generally a little bit lower in the second half of the year versus The first half of the year because of the amount of cat property as well as employee benefits that we see in the Q1.

Speaker 4

Great. Thank you. And then just last one on Professional Lines. Are we close to the point where we're starting to lap the headwinds, just given the lower pricing within that market? Maybe you could just expand on that and what you're seeing in Professional Lines more broadly as we move into the second half?

Speaker 2

Yes. Weston, what I would say is, We continue to see downward pressure on public D and O. That's really where it's pronounced. In other places, it's not nearly as pronounced. So do we still see pressure?

Speaker 2

Yes. But will that continue for an extended period of time? Don't know. But that's the one place where we really see real softening in the market. And so my instinct would tell me in the near to intermediate term, we're going to continue to see that kind of pressure in that part of the

Speaker 3

space. Yes, Weston, you see it probably in the commentary in our deck. It's the one that we did call out that actually softened a little bit more The 2nd quarter versus the Q1. So, could it go a little bit more potentially?

Speaker 4

Great. Thank you. Appreciate the color.

Speaker 3

Thank you.

Operator

Please standby for the next question. The next question comes from Michael Zaremski with BMO. Your line is now open.

Speaker 5

Hey, great. Good morning. I wanted to touch on a topic that you guys have brought up and it was in the deck As well about challenging placements in certain parts of the marketplace. So I know net net, now that we're In July, is there any should we be thinking that there is the potential for some Lack of capacity that could impact your revenue growth rate or net net between just much higher pricing and maybe there isn't a lack of capacity, Brown

Speaker 1

is a

Speaker 5

big beneficiary. Just kind of curious if there's any nuances we should be thinking about in the back half of the year on the challenging marketplace?

Speaker 2

Right. So, Michael, the way I would look at it is this, let's set the stage Or what the market is right now. And what's happening is insurers In many instances are getting back to us on renewal business and even new business With very limited time or very close to the expiration date. So there's a lot of activity around analyzing limits and quotations and things like that Before we give it to a customer. We've also said that you have this The key inside of the marketplace with buyers which have had in particularly cat front property Increases for 5 6 years in a row.

Speaker 2

So what I would tell you is, Do we think that capacity is going to be dramatically constrained in Q3? There is a This is the hypothetical scenario that depends if there's a storm. So If we don't have a hurricane hit Florida, that's a different answer than if we do have a hurricane hit Florida. So We can't answer that question right now. Number 2, there is also the uncertainty that any broker, not just Brown and Brown faces, Which is at what point does a buyer of insurance basically say, I can't take any more increase.

Speaker 2

So what might happen is they may be buying a lower limit Or self insuring certain layers in their property placement, but they've gotten to a point where they can't take any more increased costs. So our growth would be driven more by new business at that point than just increased growth on the renewal book. So what I would tell you is this, it's a challenging market. We're writing a lot of new business. I'm very pleased with how retail is performing.

Speaker 2

And I would say that The question really hinges upon things that are a little bit outside of our control, specifically weather. And so we don't think that something is going to happen relative to the state of Florida or hopefully not in the other coastal areas Between now and the end of hurricane season. But if we did have that scenario, you're going to have a much different discussion around Business flowing into state pools, I. E. Florida, Citizens and other places, Because the market will have to sort itself out.

Speaker 5

That's a helpful commentary. I know it's not an easy Question to parse out. My follow-up is on, I guess, contingents and ultimately margins, should in the National Programs segment, we can see there was a higher share of contingents, which I'm assuming helped drive the margin higher. Any commentary on the sustainability? And maybe just Stepping back on the contingent commissions, if our for the overall company, are the contingents More weighted towards property or any specific business lines?

Speaker 5

And I guess

Speaker 6

I was just

Speaker 5

thinking, When we're looking at kind of outer year forecasts for the insurance carriers, we're all saying, hey, this is year 5 or 6 of A lot of meaningful rate increases, which you mentioned, and ROEs are expected to be much higher on a go forward basis on the property side of the business than they happened historically. So I'm just curious maybe that could give Brown and other brokers kind of a lift in contingents as well Yes, in future years.

Speaker 3

Okay. All right. Mike, you got a bunch in there. Let's see if we can unpack some of those. Let's start first with contingent because there's kind of there's maybe 2 pieces to this.

Speaker 3

Let's first take the retail And you'll see that it's up about $5,000,000 year over year. That is primarily driven by acquisition activity And most of that out of GRP as we've now kind of made the 1 year anniversary, we would expect to see that level of growth year over year should drop off quite a bit in the back end of the year. So that also gives you

Speaker 7

a little

Speaker 3

color on The 2nd quarter on retail. As it relates to national programs, so there are a couple of things going on. If you recall, In the Q3 of last year, remember we called out about a $15,000,000 adjustment in one of our programs associated with estimated claim costs or losses for Hurricane Ian. And if you recall at that stage, We had said, we didn't think we will record any contingents for the Q4 for that program. When we released 4th quarter earnings, we actually we did earn some contingents there, which is a good thing.

Speaker 3

And now as we're getting through the year and we're seeing development on those Claims, it is not as high as what was estimated at the time. So when you take the $5,000,000 or so that we picked up In the Q2 in National Programs, that split about in half related to adjustment to last year's amount And then we are accruing about the other half for higher estimated commissions this year, okay? So we're not anticipate that you would see $5,000,000 increases in contingents in the 3rd Q4 for national programs. Okay. That was really primarily isolated to the Q2.

Speaker 3

Now again, keep in mind, when we get to the Q3, you are going to have comparability for Adjustment that we made last year, okay?

Speaker 8

Okay.

Speaker 2

I'd like to also make a comment there around property in general. And this is kind of our view on this. The rates And property today are at what I would call all time high levels. And if you spoke to A risk bearer and they would talk to you honestly about their view on property rates. I think that you might hear that if we don't have an event this season That there would be a leveling or even possibly a slight moderation in pricing next year.

Speaker 2

So I just want you to kind of keep that in the back of your mind and not every program or not every Placement as qualifies for contingents, but the contingents are driven on loss experience. So you've got a higher rate, Obviously, you can sustain higher losses before you ex out the qualification. So just keep that in mind on the property thing because it is a thing that we talk to our clients about All the time. If there is one thing that comes up time after time after time is what's going to happen to property rates, When are we going to see some relief? How that type of thought process?

Speaker 3

Hey, my other question you asked is around kind of which lines that you earn on it. As a general rule, this is not hard and fast, but just kind of give you a direction on it. Normally, you'll see that in the employee benefits business. We earn incentives to the industry does not

Speaker 8

just us

Speaker 3

Normally, incentives and then kind of all other lines are contingents and then guaranteed supplemental commissions and it depends upon Yes. Thank you.

Operator

Please stand by for the next question. The next question comes from Gregory Peters with Raymond James. Your line is open.

Speaker 1

Great. Good afternoon, Paolo and Andy. I guess, you've Spending a fair amount of time so far talking about what's going on in the property market. And Paul, on Slide 5, you called out the personal lines business in Florida, Texas and California being challenging. Maybe you could step back and give us some perspective because I think Brown and Brown is a much bigger organization just Personal lines in Florida, Texas and California.

Speaker 1

Can you give us some perspective to size up how that business fits inside the bigger Brown and Brown footprint?

Speaker 2

Yes, sure. Just to give you a context on that, personal lines inside Our organization about $130,000,000 of revenue in retail. Sorry, yes, yes. And so when we're talking about that, We do also have a program I mean personal line business in wholesale and we have it in programs.

Speaker 1

Is the so it's $130,000,000 in retail for personal lines Across the country and wholesale and programs, what's the mix? Or I guess coming at it a different way because you talk about you're speculating about what may happen if there's an event or not event Florida or Texas. I'm just trying to understand the magnitude is what's the impact As I think about Brown and Brown, maybe you could use that as an entry to talk about the captives. I think those were an issue for you In the second half of last year related to Ian, maybe you could give us an update on that?

Speaker 3

Yes, Craig, let's see if we can maybe add a little context to the personal lines. If you recall, this is good 18 months ago or so, when we had all of The fires on the West Coast and that was kind of the start of that process. So we've been facing the headwinds of Declines in personal lines for a while, right? And that bled over from California, then into Florida, Louisiana, North part of Texas. And so that's been inside of our numbers for a while.

Speaker 3

So don't read anything into this that we're actually saying we think that there are incrementally larger headwinds now in our business. We've been working our way through those. The one where you probably see it Or we would see it percentage wise, the biggest impact is actually in our wholesale business. And that's back to Powell's comment about Properties in the past moving over into the state sponsored plans and back to our Earlier discussion about the embedded carriers pulling out of certain markets, that is forcing some policies back Into the E and S space and so we are actually seeing some uptick in our submissions and our buying rate in our wholesale business that's there. So don't know how long that continues on.

Speaker 3

Carriers change appetites and they decide to readjust their portfolios, but It definitely was for once at least not a headwind in the wholesale business, which is a really good thing.

Speaker 2

Can I make a comment on that Andy before you talk about the captives? I also want you to understand that we have personal line business all over the country. So that could be in the Northeast, it could be in Long Island, it could be in Illinois, it could be in Colorado, it Florida. What we're trying to say there, Greg, is to give you kind of And some color around the dynamics in the marketplace. Not so much to say that All of our personal lines is based in those 2 or 3 states.

Speaker 2

That's not what we're saying. What we're basically trying to say is the impact of the state sponsored Markets for the potential impact when you see big admitted carriers like State Farm And farmers and Allstate pulling out of a state like California, that creates a lot of challenges for people that are writing homeowners there, Getting homeowners, do you want to talk about captive and the captive impact?

Speaker 3

Yes. And Greg, just add one other piece. And we've talked about this on our calls before. We think diversification is extremely powerful. And so just as you know, we use the Discussion here about potential headwinds California, Florida, etcetera.

Speaker 3

Keep in mind, we bought an outstanding business at the end of the Q1 last year called Work It. And they primarily focus on high net worth Personal lines in the Southeast all the way up the Eastern seaboard. That business is growing really well. So just while there's headwinds, we also have things that are going well. That's what diversification is about inside of our business.

Speaker 3

And that's how we want to make sure that hopefully we continue to grow the organization because Everything doesn't work perfect every day, but if we have a lot of businesses that can move back and forth that balances everything else. So just A little bit of perspective for you. On the captives, another good quarter for us. So this was really kind of our last quarter of Meaningful organic growth. Recall, we started writing policies in the Q1 of last year.

Speaker 3

We got up to basically full Written premium at the end of the 4th quarter, as we said before, that will be we'll have minimal organic impact in the 4th quarter. We had about $6,500,000 of organic benefit this quarter. We still think we're going to be in the The upper range of the previous guidance that we gave, we said somewhere around 30 to 35, we think we'll be on the high end of that. And then it will come down to what happens with storm activity in the back end of this year or if there happens to be an To be an earthquake on the West Coast, but they're performing right in line with what we expected, Which is a good thing. Just keep in mind when we get to the Q3 in National Programs Is we did accelerate the recognition of premiums last year, with the claim cost that we had.

Speaker 3

So that will actually be about a $5,000,000 to $7,000,000 headwind on organic in the Q3 of this year, okay, as we get on to comparative, okay?

Speaker 1

Thank you. I just closed the loop on your captive commentary. Is there any change with the way the reinsurance Structured way that's structured and what the loss profile of that business looks for the remainder of the year?

Speaker 3

No, not substantial. I think a couple of pieces on that. One is, we were pleased to See that the reinsurance market was a little bit more orderly this year than it was last year. So we actually got all of our reinsurance treaties put in place back before or back in kind of the May timeframe, which is good. And then with that, we were able to Slightly reduce our maximum exposure.

Speaker 3

So we feel really good about kind of how the captives are performing, the organic growth that they've Delivered as well as the profitability.

Speaker 1

Got it. Thanks for the answers. Thank you.

Operator

Please standby for the next question. The next question comes from Rob Cox with Goldman Sachs. Your line is open.

Speaker 6

Hey, thanks. So some of the comments in the presentation were for the economy to continue moderating in the back half. Curious what you're seeing in your data that informs that view aside from the headwind in dealer services and if you're seeing the economy moderate from 2Q levels so far in July?

Speaker 2

Yes. Rob, it's Powell. I would tell you this. It's interesting because when you go out in Florida or you're here in London or Restaurants are packed and people are spending money. And so what we're saying and lots of economists Are dropping the probability of a recession in the second half of the year.

Speaker 2

I would just tell you that A lot of the customers that I've talked to and I hear about are just they just are approaching it Kind of cautiously. That doesn't mean that everything they're dead set, we're going into a recession or anything. It's a little bit of a wait and see. So do I have any data, real time data in July that would tell me, no, I don't. But I don't think that's really I think it's more of an instinct rather than something that they're seeing every day in their businesses.

Speaker 2

That's how we interpret that.

Speaker 6

Okay, got it. Thanks. And maybe just a follow-up on wholesale. There's really a step change in the organic growth there accelerating. And I think you commented on it a little bit, But, I'm just curious if you could give us a little more color on what drove that substantial growth quarter over quarter.

Speaker 6

Was it submission growth, Market share gains, business mix?

Speaker 2

I think it's a little bit of everything actually. Remember, if you have There's a lot of property business that comes up in Q2, whether that's in our retail business, but So in our wholesale business and that doesn't necessarily mean it's with Brown and Brown retailers, it could be with independent retailers. So there's just a lot of property, that's number 1. Number 2, I think that from a standpoint of submission count is very good. So we're getting a lot of opportunities.

Speaker 2

And in some of those opportunities we're having some higher hit ratios, I think. And it's not something so pronounced, But it's just a little uptick, I think, in certain areas. And by doing that, you put all that together with the increase in rates and you get a 13% organic growth, Which is a great quarter for wholesale.

Speaker 3

Yes, Rob, but we would also our comment earlier about personal lines, It was a headwind in the Q2 of last year. We actually had a tailwind in Q2 of this year, Which is so that also helped contribute to the strong 13 plus percent organic growth.

Speaker 6

Great. Thank you.

Speaker 8

Thank you.

Operator

Please standby for the next question. The next question comes from Mark Hughes with Truist Securities. Your line is open.

Speaker 9

Yes, thanks. Good morning. Pal, the higher submission count, higher hit rate, is that Broad within wholesale or is that influenced most of that property?

Speaker 2

I think it's sort of across the entire platform. But I don't want you to read too much into that. I mean, the point is that you can have an incremental uptick And you're quoted the bound ratio and that has a positive impact, but you got rate in there, you have Lots of new submissions. Remember, one of the things in terms of providing color on the marketplace, let's just use Andy made the comment about personal lines. If you're in a state where all of a sudden your admitted carrier non renews you, you may be going 1, 2, the state plan.

Speaker 2

2, you may the state plan depending on what state you're in may not even provide enough Coverage for your coverage A on your homeowners and therefore you may be going into the E and S market. So a lot of those things, there's just unique dynamics because of the market being in sort of turmoil or disrupted. They create more opportunity in E and S, just plain and simple.

Speaker 9

Understood. And then Andy, you mentioned the $6,500,000 benefit from this quarter from the captives and that is still going to have a positive impact in the 3rd quarter. Can you quantify that perhaps?

Speaker 3

No. So this or in March, so the 6,500,000 Was the benefit year over year to organic from the captives in the second quarter, okay? When we get to the 3rd quarter, we'll actually have a $5,000,000 to $7,000,000 headwind And that's because we accelerated the recognition of the revenue on the premiums In connection with the projected claims cost in the Q3 of last year. Again, I have no idea what will happen if we have Any sort of storm in the Q3, we're just telling you kind of what we know right now. And then it will be there'll be minimal Organic benefit in the 4th quarter because we're writing a specific amount of premium, Which is what we're going to write in the Q4 of this year, which is the same amount that we wrote in the Q4 of last year.

Speaker 9

Okay. And then any updated thoughts on margin for this year, Andy, for the full year with the good 2Q results?

Speaker 3

No, we're not at this stage changing our overall outlook. We adjusted that at the end of the Q1 and said we would be Up slightly for the full year, very pleased with the Q2 results and things always move around. But we feel real good about the business and The outlook for the year and everything, but no, we're not going to have any major changes on that front right now. But feel very good about the business and Potential for profitable growth.

Speaker 8

Thank you.

Operator

Please standby for the next The next Question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Speaker 10

Hi, thanks. Good morning. My first question is on the captive. Appreciate the disclosure on the expected revenue, Andy, by quarter. I just want to understand the loss dynamics.

Speaker 10

I know you guys had provided some Color with the Q4 deck in terms of the underwriting risk. So am I thinking about it correctly if that if there's no losses this year, That's 100% margin business or you guys assuming some losses, I know you gave us $13,000,000 per occurrence or $25,000,000 per year as your exposure?

Speaker 3

Yes. So a couple of things on that front, Elyse, is One is no, it would not be 100% margin. We do have running cost of the actual captives inside of there. That obviously will be higher margin if there's no storms that are there. But what we said is we retain $13,000,000 on a per occurrence And up to a maximum of $25,000,000 were capped at $25,000,000 on this year either through combination of Wind event or a quake event that's out there.

Speaker 3

So it gives you at least gives you an idea if we're on the higher end of our revenue range. You get an idea if things really go completely sideways, the potential profit that we can still participate on these captives. That's why we created them. That's why we're participating because we're on we Have put these over top of 2 very, very well performing programs for a long period of time. And as we mentioned before, The captives, while they go underneath of that name, the actual outcome is identical to a contingent.

Speaker 3

We're participating in the underwriting profit. So it's you'll see some volatility back and forth, but now they're working right as we designed.

Speaker 10

Thanks. And then, you went through right in the segments what drove the stronger contingents year over year. If my question related to the contingents was, if contingents had been flat, would you guys have still seen margin expansion in the quarter? I believe the answer is yes. I just wanted to confirm that.

Speaker 3

That would be an absolutely yes. We would have seen margin expansion in the quarter. And if you were to back out the incremental net investment income, then that might be your other question is, the answer would be is yes, we still expanded margins in the quarter. So we feel really good about

Speaker 10

the performance. Great. And then last one, Within the retail segment, you guys did call out the dealer services, right, the headwind there in the Q2 related to The rest of the segment, so just core retail and benefits, can you give us a sense of the growth between the two pieces in the second quarter?

Speaker 2

Can you repeat that please, Elyse?

Speaker 10

Sorry, I was saying away from dealer services, how did like The rest of retail versus benefits performed in the Q2 organically where they both pretty close to each other was benefits greater than retail?

Speaker 2

Yes. No, the answer just so you know is, first of all, we're very pleased with both the commercial and the employee benefits. Remember, employee benefits has a unique dynamic relative to revenue recognition in Q1 and sometimes that also impacts it can impact into Q2. So I don't look at it on a quarter by quarter basis, although I have, I think about it over an extended period of time. So it could be either Q1 I mean, sorry, the first half or on a yearly basis.

Speaker 2

And so We're very pleased with how the commercial business and the employee benefits business is performing

Speaker 8

now. Yes.

Speaker 10

Thank you.

Speaker 8

Thank you.

Operator

Please stand by for the next question. The next question comes from Mike Ward with Citi. Your line is open.

Speaker 7

Thanks guys. Good morning. Maybe just back on Florida, you mentioned it's not getting any better. Just Curious, is that something that we just have to wait to get through wind season? Or does more need to be done around interpreting the law?

Speaker 7

Or do carriers see, the need do they need to see more from lawmakers, I guess?

Speaker 2

No, I don't Mike, I don't think that I mean that could always potentially help, but I don't think that's the case. I think what it is, is remember the in cat prone areas, not just Florida, have been really popped in terms of losses in the last 5 or 6 years. And so what we really need is and I know this will sound kind of interesting, but we need a little time and distance. So we got to give them catch let them catch a break. And so as I said, we went through a period of time In the late 90s early 2000s where we had some storms in the early 2000s, but then we went through a period where The property market

Speaker 3

is good.

Speaker 2

And so you make money, the risk bearers over 5 or 6 years, then the market is very competitive. It just hasn't panned out like the risk bearers think and that's partially being driven by their loss experience and also being driven by their reinsurance costs. So what I want you to think about is, watch the storm season And in the event that we don't have a big event, which we think we won't, but if we don't have a big event, then Do we see some stabilizing of rates? Do we see rates going up a little bit, but not nearly as much as they are now? Or do we see slight Decreases.

Speaker 2

That's how I would phrase it.

Speaker 7

Super helpful. So it sounds like you're very happy with GRP and your other European acquisitions from last year. Just wondering if you can sort of comment on how you see those impacting organic now that they'll be part of the calculation going forward?

Speaker 2

Yes. So remember GRP lapped on 7.1 And VDB laps on 8.1, okay? And so we don't break out Specific performance by business, but the way I would address that is, we believe that GRP And BBB for that matter is performing in line with the overall division, be it retail or wholesale From both an organic growth basis and a margin basis. And we're very pleased with

Speaker 8

Both.

Speaker 7

Okay. Super helpful. And then maybe just last one on interest Income, you've already exceeded your guide for the full year. I'm just curious any comments on the back half? Thank you.

Speaker 3

Hey, good morning, Mike. The I guess, one kind of depends upon what happens with interest rates from some of The Central Banks, primarily here in the U. K. And then in the U. S.

Speaker 3

But if you look at the second quarter On what we recorded, that's probably a decent run rate for right now. It may move around a little bit based upon what our cash balance is And interest rates, but probably wouldn't anticipate any major movements there.

Speaker 8

Thanks guys. Thank you.

Operator

Please standby for the next question. The next question comes from Yaron Keaynor with Jefferies. Your line is open.

Speaker 11

Thanks. Good morning, everybody. Just want to go back to the last question, if I could, On GRP and BBB, I thought earlier you had said that they're actually performing better than you expected. And yet in your last comments, you said that they're in line with the Divisions performance. I thought at the time of the acquisitions that you said that you expected those businesses to perform in line with the division, so maybe I'm misremembering.

Speaker 2

Well, wait a minute. I just want to make sure.

Speaker 3

Yes. Thanks there.

Speaker 2

Yes. So we might be talking about 2 things. We are very pleased with the And part of the performance that we're talking about is remember they acquired over 20 Different unique businesses, which we think are very good going forward. So let's but on the core basis, I believe when we announced that, that we talked about, we believe that They would perform in line, possibly better, but in line with the divisional performance and what I'm reiterating is They are performing in line with the divisional performance or a little bit better,

Speaker 8

but we're pleased with that.

Speaker 3

Yes. And Jaren, when we announced the deals, The guidance or the commentary we gave at the time was really around the margin, not on organic growth. And so didn't want to see maybe those Two topics kind of intertwined on this. We're very, very pleased with the business and how they're performing versus Our expectations on the top line and the bottom line and the margins for the businesses related to the divisions That they reported inside of are right in line with our expectations from a margin perspective. So we're Really, really pleased with how the team is performing in both the businesses over here.

Speaker 1

I appreciate

Speaker 11

And then on Cynthro, can you maybe talk about is there any revenue seasonality you Margins expected to be relatively in line with the division in which it's housed and where will it be

Speaker 1

housed? Perfect.

Speaker 3

Yes, so overall the business is relatively evenly weighted through the year. A meaningful portion of that business is around trade credit. So it's not like you kind of see it all lumps up into 1 quarter or anything. So Relatively even. And then the margins for the overall business, and again, you have to kind of look at it in the 2 pieces Between programs and retail, which is the Nexus and the senior portion of it.

Speaker 3

The margins there were comparative for similar businesses in there.

Speaker 11

And do you have any idea of how the revenues will be distributed between the retail and the Programs business?

Speaker 3

Sure. Yes, it's about 75%, 80% programs, Biren, with the residual on The retail side.

Speaker 11

Thanks so much.

Speaker 3

No, thank you.

Operator

Please standby for the next question. The next question comes from Meyer Shields with Keith, Rouette and Woods, your line is open.

Speaker 8

Great. Thanks. So 2, I think, really quick questions. First, in the Presentation, you talked about wholesale casualty rates up 10% to down 10%, and it seems like a pretty significant shift. Is that down 10% just like Professional liability or are there other lines that are moving to competitive pricing?

Speaker 2

I think it could be It's more broadly than just some of that. So yes, it is it's competitive.

Speaker 8

Okay. Sorry to hear that, but there you go. Bigger picture question, I guess, you've added 2 tremendous heavyweights to the Board. I was wondering what we should expect from them?

Speaker 2

Well, first of all, we're very pleased That Veronique Messejada and Paul Trump have joined the Brown and Brown Board. They have both Very deep industry expertise. They also have not only underwriting, but understanding about Not just in the United States, but overseas and things like that. And I think that I would Want you to consider them just like any other Board member that joined Brown and Brown. We think very highly of them.

Speaker 2

We are very pleased to have their industry expertise, but I don't want you to take something out of context. These are people that we have known and worked with and think very highly of and they've already added to Our Board in the 1st Board meeting, which was last week. So we're really, really pleased with both of them Joining the Board and look forward to many years of really great contributions from both of them.

Speaker 8

Okay. That's helpful. If I can throw in one quick last question. I know Florida pricing is Technically filed in use, but I think people treat it as prior approval, just so they don't have to go back and change things.

Speaker 5

Is there any

Speaker 8

receptivity on the part of Either the insurance department or the legislature to actually just make it more Disciplined by competition and actually be sort of a truer filing use state to attract bigger insurance companies back to the market?

Speaker 2

Meyer, we're not aware of that right now. I will tell you that The Insurance Commissioner and that in the State of Florida is underneath the CFO. I know that the CFO of the State of Florida And the Insurance Commissioner and then ultimately into the Governor's office, they are all thinking about ways to Retain existing carriers and attract new carriers because they're very conscious of the exploding growth in Citizens. And so, the answer to the question is, no, we're not aware of it. However, I can assure you That they are thinking about it in terms of ways, not that question specifically, but ways to actually get Carriers to stay and bring more carriers to the state of Florida to create a more competitive environment.

Speaker 8

Okay. That's very helpful. Thank you so much. Absolutely. Thank you.

Operator

Now I would like to turn the call back to Powell Brown for closing remarks.

Speaker 2

That's great. All right. Thank you all very much. We are very pleased, as we said, with the quarter and look forward to an exciting 3rd and 4th quarter of the year. We got a lot of cool things going at Brown and Brown and we appreciate your time and we look forward to talking to you next quarter.

Speaker 2

Good day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Brown & Brown Q2 2023
00:00 / 00:00