Q2 2020 Brown & Brown Inc Earnings Call
Good morning, and welcome to the Brown <unk> Brown Inc. second quarter earnings calls.
This call they seem to be caught that.
Please note the just the need for me some discussed during this call, including information when things into flights presentation posted in connection with disclosed any clothing and says given in response to your questions maybe at least a few children. So it's an event, but all device before but looking in nature.
Such statements reflect <unk> current views with respect to future events, including those relating to the company's anticipated find that showed your vote for the second part there and not intended to fall between the safe Harbor provisions of the securities laws.
Actual results what events in the future and subject to a number of risks and uncertainties and may decide to materially from those good hunky anticipated or desired Oh, that's what I've seen any forward looking statements made as it is all of 'em that'll factor.
Such factors include the company's determination at this finalizes its financial results for the second factor, but its financial results differ from the Credentialing and I'd on old because number set forth in the press release issued yesterday.
Other factors that the company may not have currently identified qualified and those risks and uncertainties identified from time to time into companies reports filed with Securities and Exchange Commission.
Additional discussion of these and other factors affecting the company's business and prospects as long as additional information regarding forward looking statement, if something into slide presentation posted in connection with the Scott I mean, the company's filing suit the securities and Exchange Commission.
Disclaims any intention or obligation to update or revise any forward looking statement, but her as a result of new information future events or otherwise.
In addition that I certain non-GAAP financial measures used in this confidence God.
Let's see lease shut off any non-GAAP financial measures to the most comfortable gets financial Im not sure can be found in the Companys earnings press release, what in the Investor presentation for discussion on the company's website at Www dot eating should on stuff come by clicking on Investor Relations and then Kolenda.
Evan.
But that said I will note now turn the call over to father Brown, President and Chief Executive Officer, you may begin.
Thank you Anita and good morning, everyone and thank you for joining us for our second quarter 2020 earnings call.
Over the last four months, we've successfully transitioned over 10000 teammates to work environment and have commenced.
Hey stage returned to the workplace for businesses.
We remain focused on the safety of our teammates their families our customers and trading partners.
I wanted to mention that I did contract Cobot 19, a number of weeks ago wallet felt a little sluggish at times. It did not prevent me from making phone calls and engaging with people virtually I'm feeling fine now and have received my negative test results yesterday.
As it relates to the economy.
We believe a favorite turn of the economy to free Cobot 19 levels is gonna be slow and sporadic. Therefore, we as a society cannot lose our focus and determination to do our best to contain the client of ours.
This is possible through the efforts of all our front line workers.
Each of us taking our own personal responsibility to help contain further spread.
Our teammates continue to do an outstanding job focusing on our customers and providing them with creative and innovative risk management solutions.
During the quarter, we continued to host regular cobot 19 response calls for customers and prospects with the goal of helping other companies share best practices and successfully manage through these difficult times.
In addition, our Cobot 19 relief center has been well received and we and we will continue to find creative ways to help everyone get back to the new norm.
Like last quarter I continue to be humbled by the determination dedication and commitment of our teammates to our customers now lets transition the result to the results.
Sure.
I'm on slide three.
For the second quarter, we delivered 599 million of revenue growing 4.1% in total and 50 basis points organically.
I will get into more detail on a few minutes about the performance of each of our segments.
All right EBITDAC margin was 29.5%, which is up 20 basis points over the second quarter of 2019.
Our net income per share for the second quarter was 34 cents, increasing 3% on an as reported basis and 6.3 on adjusted basis as compared to the prior year when excluding the change in acquisition earn out payables.
During the quarter, we completed another three acquisitions with annual revenues of approximately 46 million in revenue with the largest being alone protect or insurance services, we'd like to extend a warm welcome to all of our new teammates to joined during the quarter.
In summary, we're pleased with our performance for the quarter given the headwinds I'd like to thank all of our teammates for doing their best to retain our customers and win new business. They're all doing an excellent job later in the presentation Handy will further discuss our financial results in more detail I'm now on slide four.
During the second quarter, we started to see the financial effect to the pandemic with certain industries significantly slowing down, including hospitality restaurants, and entertainment, resulting in corresponding reductions in exposure units.
Conversely, other industries, such as health care and construction were resilient and in some cases continuing to expand.
For the quarter, we we expected there'd be significant decline in payrolls, and consequently, our employee benefit and workers compensation lines of business would be the most impacted however, what occurred is that our employee benefits business grew during the quarter due to new business and many employers.
Our load employees, rather than reducing their workforce.
On the other hand, our workers compensation lines of business declined faster than we anticipated.
The solutions provider, we worked with many customers during the quarter to manage their cost. This included collaborating with carriers to provide mid term premium adjustment for certain coverages that are impacted by changes in sales or payrolls.
While there has already been a significant impact on many businesses. It's unknown what the full effect will be over the coming quarters, a lot depends on how much additional funding has provided a federal or state level for businesses and individuals.
I'll talk more about our views on outlook later in the presentation.
From a rate perspective, we continue to see upward movement for most lines coverages carriers further tightened underwriting standards and reduced their participation in certain lines of coverage geographies industries or limits. These increases were generally above what we experience for the first quarter and continued.
Trend from the past few quarters.
Ultimately the amount of rate increase was driven by the loss experience for a given account or the class of business for the carrier.
During the quarter, we did see a slowing in the rate of decline for workers compensation rates being down a 1% to 5%.
Premium rates for the for accounts in the admitted markets generally increased 2% to 7%, excluding commercial auto which continue to increase 5% to 10% or more.
From an EPS perspective coastal property rates increased 15% to 25% general property rates increased 5% to 10% professional liability rates increased 10% to 20%.
Cyber rates were up 10% to 20%.
Based on what we experienced in the second quarter, we expect rate increases will remain fairly consistent for the remainder of the year.
Regarding the M&A landscape I thought things would slow down a bit for a while however, we were still able to close three transactions with an estimated annual revenues of 46 million and have already completed a few deals in July the biggest questions for buyers and sellers remains how to project the financial.
Implications of the pandemic and therefore, how to appropriately value businesses.
With this uncertainty the percentage of money paid at closing might decrease somewhat but it does not appear valuations will materially change at this point.
Now on slide five let's talk about the performance of our four segments, our retail segments organic revenue declined 2.6% for the second quarter.
This quarter, we recorded a reduction in organic revenues of approximately $8 million for general liability policies revolting, resulting from the economic disruption associated.
With Cowen 19.
This adjustment represents an impact organic revenue growth of over 250 basis points for the quarter. We also experienced rate increases for most lines and good retention.
While we experienced a decline in new business as it was harder to engage with prospects.
Still had a number of great wins and are pleased with our results for Q2.
Our national programs segment grew an impressive 15.5% organically delivering another strong quarter.
Once again, the organic revenue growth was one of the highest you've ever delivered our growth was driven by continued strong performance from many of our programs, including our lender placed our commercial and residential earthquake and when programs just to name a few.
This growth was driven by new business, good retention and rate increases some of our programs did experience headwinds during the quarter, such as our sports and entertainment and workers compensation programs.
In early May we completed the acquisition of loan protect or as I said earlier, we're pleased with this acquisition in the solutions will be able to deliver to our customers over the coming months and into the future overall it was a great quarter for national programs.
Our wholesale brokers segment organic revenue growth was slightly positive for the quarter.
Our performance was impacted by lower new business and retention driven by the impact of the pandemic and the continued reduction in appetite for carriers for certain lines of coverage industries and geographies, primarily in the binding authority space.
The organic revenue for our services segment decreased 15.4% for the quarter. The main drivers of our decline or social security advocacy businesses, driven by lower claims volume as terminated customer contract in one of our claims processing businesses lower claims for many of.
Our business is related to the pandemic and related weather related claims as compared to the prior year as we've seen in the past our services segment can have more volatility in its revenues, depending on the volume and timing of claims activity.
Based on what we're seeing now we expect organic revenues for the services segments it declined 5% to 10%.
The second half of the year as compared to the second half of the prior year.
Overall, good quarter and we'd like to thank all of our teammates who deliver innovative solutions in this very challenging environment now, let me turn it over to answer to discuss our financial performance in more detail think about good morning, everybody.
Over on slide number six consistent with previous quarters will discuss our GAAP results certain non-GAAP financial highlights and then our adjusted results excluding the impact of the change in that.
For the second quarter, we delivered total revenue growth of $23.6 million for 4.1% and organic revenue growth of 50 basis points.
Our EBITDAX increased by 4.8% growing faster than revenues as we were able to manage our expenses in relation to lower organic revenues and offset the headwinds associated with increased noncash stock based compensation costs of approximately $10 million.
Lower guaranteed supplemental commissions or Gsvs annual results from one of our acquisitions from the third quarter of 2019 that recognizes substantially all its revenue in the first quarter of each year.
I'm pleased with the expansion of EBITDAC margin as it demonstrates the power of our operating model and the focus of our leaders to manage their cost.
A quick comment regarding our employee compensation and benefits and other operating expenses as a percentage of revenue.
The employee compensation and benefit ratio increased as compared to the prior year driven by higher noncash stock based compensation cost and an increase in the value of deferred compensation liabilities driven by changes in market values with this increase offset within other.
Operating expenses.
Ratio of other operating expenses decreased due to proactively managing our variable expenses and to a lesser extent the benefit from the aforementioned change in deferred compensation costs.
Our income before income tax increased by 4.8%.
Growing in line with EBITDAC.
While we had incremental amortization and depreciation from recent acquisitions, our interest expense declined due to lower rates. Our net income increased by $4.2 million were 4.5%.
Diluted net income per share increased by 3% to 34 cents.
Our effective tax rate for the second quarter was 25.2% compared to 25% in the second quarter 2019.
The tax rate for the quarter was impacted by a one time state tax refund as well as the change in the market valuation of our company owned life insurance related to our deferred compensation plan.
Our weighted average number of shares were substantially flat compared to the prior year in our dividends per share increased eight and a half sense were 6.3% compared to the second quarter of 2019.
We're over on slide number seven to 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.
During the second quarter of 2020, we had minimal changes in our earn out liabilities.
Isolating the change in acquisition earn outs in both years, our income before income taxes grew $9.3 million or 7.7%.
Our net income on an adjusted basis increased by $6.8 million or 7.5%.
And our adjusted diluted net income per share was 34 cents.
Increasing 6.3%.
All these increased faster than total revenue growth of 4.1% overall it was a really good quarter.
Slide number eight.
This slide presents the key components of our revenue performance for the quarter, our total commissions and fees increased by 4.4%.
Our contingent commissions and GFC decreased by $1.7 million as compared to the second quarter of last year.
This decrease was driven by a onetime GFC in this second quarter of 2019, but was partially offset by qualifying for incremental contingent commissions within our national programs segment and a positive.
Adjustment related to Finalization of the estimates we recorded in 2019.
Organic revenue.
Which isolate the net impact of M&A activity increased by 50 basis points for the second quarter.
Order slide number nine.
Our retail segment delivered total revenue growth of 60 basis points, primarily driven by acquisition activity and higher profit sharing contingent commissions, which were substantially offset by declining organic revenue growth of 2.6% driven primarily by the impacts of coven 19.
In accordance with AMC six so six we lowered our estimates for the revenues, we expect to earn from existing general liability and other policies with premiums are subject to modification based on changes in exposure units such as the revenue of the insured.
Our revenue estimates were revised after assessing the projected impact of the pandemic.
Resulted in a reduction of organic revenue by approximately $8 million and organic revenue growth by over 250 basis points for the quarter.
Our EBITDAC margin for the quarter decreased by 150 basis points EBITDAC declined 5.1% due to the profit impact of $8 million negative revenue adjustment.
The impact of the aforementioned prior year acquisition.
Decreased organic revenue.
Higher in noncash stock based compensation intercompany Ti costs all of these items offset in material cost savings achieved in response.
Percent and organic revenue by 15.5.
The increase in total revenue was driven by strong organic growth new acquisitions, and an increase in profit sharing contingent commissions, which were partially offset by decrease GFC.
The organic growth was driven by many programs due to good retention, new business and rate increases and was partially offset by certain programs impacted by coven 19.
EBITDAX increased by 22.7% and our margin increased by 180 basis points due to strong organic growth and increased contingent commissions. The continued leveraging of our expense base as well as decrease variable cost, but was partially offset by lower GFC.
Yes. It was another great quarter for our national programs segment growing EBITDAC substantially faster than total revenues income before income taxes increased $8.1 million or 20.1%, increasing the margin by 70 basis points. This was driven by EBITDAC margin expansion.
Which was partially offset by higher acquisition earn outs and intercompany interest expense.
Over to slide number 11, our wholesale brokerage segment delivered total revenue growth of 9.5% and organic growth of 10 basis points total revenues grew faster than organic revenue due to new acquisition and higher contingent commissions.
EBITDAC grew by 9.1% and the margin was substantially flat as compared to the prior year due to lower organic growth higher inner company expenses and increase in noncash stock based compensation.
We were able to offset these headwinds with higher contingent commissions and the delivery of a reduced variable expenses.
Our income before income taxes grew by 7.9% and the margin decreased by 40 basis points due primarily to higher intercompany interest expense.
Over to slide number 12.
Total revenues organic revenues for our services segment declined 15.4% driven by the items Al mentioned earlier.
For the quarter income before income taxes decreased 31.2% and our margin decreased by 340 basis points.
EBITDAC declined by 25.2% in the margin declined by 280 basis points.
Driven by the mix of profitability associated with lower organic revenue and higher intercompany expenses.
These were partially offset by reducing certain variable expenses.
Through comments regarding outlook and liquidity and cash conversion for the quarter first our outlook, we mentioned earlier that contingents and noncash stock compensation for the second quarter increased as compared to the prior year as of now we're not expecting material differences for either of these items for.
The second half of the year versus the same period last year.
As it relates to liquidity and cash conversion early in the second quarter, we borrowed $250 million on our revolving line of credit to pay for the loan protector acquisition and to have additional liquidity in case, the premium payment moratoriums impacted our cash receipts.
Based on our financial performance, we repaid 150 million on the revolver before the end of the quarter.
You will also see our cash flow from operations as a percentage of revenue increased to levels higher than normal. This was primarily due to the cares act, allowing companies to pay their first quarter federal taxes in July.
We expect our cash flow from operations as a percentage of revenues for the third quarter will decrease from historical conversion levels due to making this payment of approximately $50 million at the end of the quarter. We remain in a strong financial and liquidity position with that let me turn back over to file thanks, Andy for good report.
Sure.
Lastly, I started with comments about our teammates and their families and I want to close with the same focus we are a team of 10000, plus dedicated and hardworking individuals who are driven to serve our customers.
We cannot deliver great solutions and grow our business. If we don't have our team at full strength.
Therefore, our focus is always on the safety and health of our teammates.
We previously provided guidance at our revenues could be up slightly to download to meet mid single digits for the year based on the continued uncertainty of the recovery. We believe our full year organic growth could be slightly positive to slightly negative. However, there are still a lot of questions regarding how and when the economy will Rick.
However, we believe it's going to be slow in sporadic and we might see might not see a recovery to pre pandemic levels until 2022.
Big questions right now our will employment levels continue to increase will consumers continue to increase their spending how much additional stimulus will be needed and provided regarding rate. We think most rates will continue to increase in the second half the year.
We continue to talk with a lot of acquisition candidates and have a really good pipeline.
Through the ended the second quarter, we closed 10 transactions with estimated annual revenues of $85 million. We've also closed a few deals already in July and are hopeful we'll close more over the remainder of the year, but we expect the marketplace will remain highly competitive the main questions will be around financial forecasts.
Once.
In these times customers need innovative and creative risk management solutions, we believe our teammates and capabilities are well positioned to be great partners for our customers at Brown <unk> Brown, we're committed to delivering as many innovative solutions as possible for the benefit of our customers and teammates.
We look forward to a success a successful second half of 2020 and with that let me turn it back over to a need up for the Q and a session.
[music].
Thank you Sir.
I would like to ask a question. Please signal by pressing star run on your telephone keypad.
If you're using a speaker phone James makes audio mute function extended Joe and I guess taken us today and again this bad one ask a question.
Okay. So first question from Mike Sedensky Credit Suisse. Please.
Please go ahead.
Hey, good morning, and Powell, our all have been here.
Covered.
First question.
In terms of the 8 million bar adjustment.
It sounds like you described to this sounded kind of similar to.
An audit premium adjustment.
And it sounds like it's something that her to the extent your clients.
Remain some clients remain under pressure or over just kind of you look through the entire booking.
Hopefully those come about a one and done I'm, just trying to better understand how to think about that adjustment.
Hi, Good morning, Mike It's Andy here.
You're correct, what we tried to do for this quarter.
After working with customers in our carrier partners and seeing the carriers were receptive and a number of cases to doing mid term premium adjustments, which we would traditionally see at the end of audits for those GL policies. What we try to do is for all of the outstanding policies that were out there we looked at consumers.
Spend and tried to come up with a estimate as to what we thought revenues could be down in general across the outstanding policies.
We have so hopefully we've captured that well you know all depends on how the next few quarters play out for US we may need to adjust set up and down but that's kind of our best estimate right now.
Okay.
That's helpful and.
I am thinking about Pablo you. Thank you for giving US an update on kind of clearly a lot of uncertainty on the organic in the back half of the or no year to date organic some fairly healthy fairly resilient would you say some of your peers talk about pulling expense levers you guys.
Guys habits, while this or would you say that you know if.
It's a back half starts looking.
Like it can be mildly negative are there are these expense levers in incented on the call those continue to to help.
In terms of the margin impact.
Well, let let's let's talk about that for just a moment. So again there are certain costs that are fixed than our structure and there's going to be certain variable costs and in those operating expenses of variable cost a would be travel t. any just just use data.
The as a fairly easy one and so we have a lot of he made the travel a lot to see customers under normal circumstances.
So obviously, if a customer says we want you to calm we ask our customers, but we go.
So we have people that are flying to see customers now, but it's just not as frequently.
And so I don't want to leave you with some impression that we have some a lever yet to pull or something if it's not it's not like that it's basically each office is running their business.
Best way, they see fit to serve the customers that we serve there and as a result, our t. any as as real and some other variable expenses are down because of its operating environment.
Those could go up if in fact, among the economy started to open up and grow more and the Corona virus situation was a little healthier not like it looks right now or Conversely, we could stay in this current environment and her.
Paid that are those variable operating expenses would also be down and in future quarters.
In the current environment, it's more specular, it's it's predicated on what happens.
Going forward.
Hello.
Sorry, one last follow up to your tier answer.
Teeny debt I mean.
I mean.
Okay. We can asked me what percentage of of your expense base. TV is just we got it kinda give us a feel for how much that's that's moving up and down.
Given the benefits setting on everyone's mind, yes, sorry, sorry, Mike we don't we don't disclose that.
Okay.
Thank you for the answers.
Thank you.
Your next question from any Greenspan from Wells Fargo.
Please go ahead.
Hi, Thanks, Good morning, and tell why we just echo my comments last year.
Given a lot better.
My first question.
To the Danny.
Ladies organic guide.
I think when we last quarter, you and no. One set you up here as a point that you're there being a lab that third quarter conceptually the worse than the second quarter I did miss but wanted to get an updated thoughts there and maybe.
My next question, Mike Good morning.
8 million adjustment or whether you think.
We should think about that that's better just in terms of Alaskan impact to be more imagine.
All right at least actually.
When we made those comments and the Q1 call.
We believe that Q3 would be the.
Toughest quarter, and again, you're not going to like this because it's not with enough certainty because no one no no from we'll be able to give you what you want.
It's going to be speculation, but we would be adjustment in Q2.
As Andy said earlier for the $8 million, we believe that that is our best estimate of the impact on future policies that we can see right at this moment. So again remember there are things at play that are very hard.
Our two anticipate and this is not an excuse this is an observation and you might say like what okay first of all solvency of.
Customer are they going to be solvent in the next quarter or not we hope so, but I'm, saying, they're gonna be firms that from a struggle even more and if that's number one number two the impact of rate increases on the purchase of insurance. So there is a point at which saw.
People cannot pay.
Or they have to dramatically changed their program. There are certain things that are mandated by law. There are certain people certain things that are.
Nice to have or you'd rather transfer that risk to other people that's number two number three.
I'm very interested as all of US are and what is the next round of stimulus going to be and how is that going to.
Impact.
You know consumer behavior and then the other thing that you have to keep in the back your mind is by the way just take a look at for example, Portland and the businesses in the area that affected downtown that are unable to operate.
So you got to put all that into sort of a mixture and mix it up and so were and by the way. The final thing that I Didnt say would be the ability to get to new prospects.
So some people are willing for up to come out there some people want to see us virtually some people.
Our just got their hands, so full that they just want to renew with who they've got if its with us that might be good, but we may see a in the future our new business continue to wane, a little bit don't know.
I would tell you that.
What and this doesn't translate to the numbers, but I'm going to just say this everybody knows I.
I couldn't be happier with the way that our team is responding under what I would call a very difficult situation.
That's helpful.
Well, if I Miss to sum up one of those Tom and.
We then right.
Obviously now.
Yes.
So you have your data the organic slot.
Now he.
Significantly better like you were thinking could've been a worst case, we now know until would you say that.
A combination.
That's right off though.
Backlog economy, holding up better than some of that any money on and then you know.
Exposure is also just in general about finding as much as well.
Well I actually there's a couple of parts to that story number one.
As you know we tried to I mean, we don't historically give guidance on organic growth and these are very unusual circumstances. So we've tried to give the best.
Our best snapshot that we can.
That again it takes into consideration that there are lots of variables that many of which we don't have a control over.
And the final thing that I think is that merits discussion is this.
I know that some of you all have tried to draw a parallel between the first quarter performance and retail or the business and the second quarter.
And I want to make sure that we clarify something because I think it's very important that is definitely like comparing an apple to an orange.
So I don't think then you can compare the performance whether it be our business or anybody else's business. The performance of a business unit, let's just say our retail in Q2 to the performance in Q1 and draw some dramatic.
Conclusion, because what you got to understand is our business is a reflection of what what we've said the middle and upper middle market economy in the United States and our mix of business, our customer base, maybe impacted differently than others don't know that but what I'm.
Fang is is.
If the economy is just kept on banging along in Q2 or Q3 like it was in Q1.
I think that our organic growth numbers as an example would've been dramatically higher and our other business segments.
So I just want to make sure we're clear on that and we're trying to give the best estimate.
And I know it frustrates you lease because it frustrates us Andy and I and everybody else on the team.
But we were very pleased with the second quarter.
As I said, both our financial results, but more importantly, the attitude internally, how we're working with our customers our teammates.
This is a much different environment than anybody has operated in and I think that we're doing remarkably well under the circumstances.
That's helpful. Powell and then my last question maybe goes back one of my question on you guys mentioned, Ricky very expensive several times in the prepared remarks, and then into the sponsors question. It sounds like a good chunk of that it's on he teeny Teeny car.
Right.
Just fine.
Yes.
You're standing that correctly worldwide on.
Perhaps on some other expenses that you're playing down as well just trying to get it back.
One of the go forward in time, and he said about the year on margin.
Yes, it is on the expense.
Hey, good morning always good to hear yeah. There was there was more than just TNT inside of there. So everything from professional services overtime et cetera. So those are kind of any of our variable costs all of our leaders looked at.
In order to adjust them accordingly, I just use that as an example, it was not yet there was not the only it was just one that came first them on.
That's why we're trying to get yeah. That's why we're trying to give you some some additional color regarding.
The movement between employee benefits in compensation and other operating costs because of what the the offsets between the deferred compensation costs that are in the two different categories.
Well basically, but maybe you don't want to quantify.
We think about going forward.
Then as a percentage of revenue right.
Thank you is that a good way think about.
Exactly.
Sure.
No.
Don't use that low of a ratio because again its artificially low because of the deferred comp item. So again, you've got a credit sitting down and other operating and then an expense other employee benefits. They feel Wynn palace talking about earlier, what we would expect as if the economy continues to start.
Continues to open up we would expect the variable cost will start to go up overtime will they jump back to where they were in the first quarter of this year or you know or 2019, probably not.
They'll probably slowly increase because a lot depends on can we go see customers and how that works out, but we would expect to see some growth in a in that area over the back into the year.
Okay. Thank you for the color.
Yeah, and then Elise did you just want to make sure that.
You understood. The reason for the change in the guidance on the third quarter.
Because of the piece that we just didn't understand in Q1 is what mid term adjustments could be we had just no idea that stage like we got better visibility in the second quarter. We originally thought we might see more of that and you know kind of the third and fourth quarter, the $8 million adjustment that we were.
Recorded.
The second quarter, hopefully as our best estimate that should take some pressure off of the third and fourth quarter and maybe a little bit into the first quarter of next year.
Okay. That's helpful.
Thanks.
Thank you.
Thank you then they'll be Pico next question from Sans the final from Deutsche Bank.
Please go ahead.
Yeah. Thanks isn't just echoing everyone's comments about you know the helps seems to be coming back to brown <unk> Brown, that's great to hear.
Just wanted to continue a question on the expense actions it feels like variable cost.
It's been addressed and then I don't need to dig tobacco going back to the first quarter earnings call. It felt like some of the non variable expenses would be handled or at least strategically thought about into regions are you getting any commentary from the reasons about actions they might be taking or how they might be thinking about the business differently.
It would impact the nonvariable expenses.
Yeah.
The short answer is.
Our leaders are looking at the businesses.
In the best way, they see fit to run the business long term.
So I want to clarify something because I think it's very important I know that when people talk about things like levers and variable and fixed cost and are there things that you can pull in the field that will impact we don't think about that that's like a way that big.
Companies think in my opinion and so the short answer is we think about what is the best thing to do for our company our customers in our teammates for the long term and so.
There are a lots of companies that are laying people off and or furloughing and all of that and they have all the reasons and we're not commenting 'cause it their businesses are under intense pressure we understand that.
But.
Up to this point you know if we've had somebody depart the team has been performance related it's not a a wide.
You know.
Impact across a number of teammates and so we think about it because although this is going to impact the business in the near to intermediate term, we will come out of this difficult operating environment, having learned a lot of things as evidenced by going to a remote.
Work environment in as seven working days and how we've done that in interfaces with customers in different ways via video and et cetera, but no I want to make sure that I understand that there's not some like hidden agenda out in the field that we're going to do to.
Clip off some big number I think that that under the circumstances I think that our margins and our growth we're quite good in Q2.
We're very pleased with that.
Bill I mean, what we were trying to hopefully convey it the first quarter and just give everybody additional insight.
How do we run our company and here, we talked about on the first call first quarter. We don't put on mandates is just not our operating culture. We rely upon the leaders of our businesses to know how to adjust their cost and if you look at the second quarter. It demonstrates exactly how it works.
It worked perfectly they did an outstanding job of managing all of their variable cost of the needs of their customers up and down and so we're very very pleased with how well everybody did inside of the team and we think it works very well inside of Brown, <unk> brown might be need to be differently and other companies, but it's part of the reason why.
We have the Greek margins and we've had them for so many years because of how we run the organization.
Yeah, I suppose there, but it looked like.
The growth, particularly in program.
Was much stronger than at least I was expecting in just focusing on my place I mean, I was hoping you could help me understand the make up about portfolio and how it might be conditions to to be.
A stronger growth in economic downturns, I mean, what's what are the the negative correlation versus the broader market there.
And the lender placed in something that some highlights of the past couple of quarters as a particularly strong business, maybe the proportionality of things that run counter cyclical.
We might be able to think about the group continuing into segments.
Okay. So, let's just use two big comments, just broadly what about when the coverage.
And quake coverage. So you heard me say in the comp in the prepared comments that E N S property.
In some instances coastal yes properties up to 15 20, 25%. Okay. So if you have a program that provide when to cover it could be habitational it could be other than to habitational. It could be frame it could be good construction a mix of all the above.
They're seeing rate increases so capacity constraints.
Create a very unusual tension in a period like this so unlike 2008 to 2011, you had the economy going down and you had rates going down we would tell you as we said in Q1 the rates are going up now and the economy is going down. So you have this.
Unique dynamic and so whether it be there could be some seasonality in some instances about when some accounts come up.
For renewal I'll, just make something up I'm, not I mean, not make it up and give you. An example that it's not a program.
A specific we have programs in this area, but let's just think about public entities for a moment.
Public entities, usually date on.
7191, 10, one those are big dates for public entities and 630. So they may renew you know school board on 630, or seven one whether you're in Texas or you're in Oklahoma, you're in Florida, or New Yorker, Washington.
And so that same school board, obviously I mean, if it were news in June and they have this huge quake exposure hypothetically wherever they are then that's going to be in the month of June with this big exposure as opposed to in July you may not have any large school boards or your.
Why not have any large companies that are seeking I mean, we have a lot of large companies that are seeking quake coverage and when coverage, but I want to I want to.
Acknowledge something here that I think is an important nuance.
All of you have seen and or read and heard about additional capacity that is allegedly coming into the marketplace and you hear about management teams that are forming new startup risk bearers be it insurance or reinsurance or both.
What is that a good thing or a bad thing for US. We believe it's a good thing because it gives us more capacity to serve our customer base, having said that you might think of it as saying, okay that could be a governor potentially we haven't seen this yet the governor on the upward pressure.
Sure on rates because that new capacity comes in and now competes against some of these large standard carriers that America or overseas that want X rate and they're not able to get act, they're able to get half of X. Because there's this new capacity becomes the online that has no.
Not happened yet I want to make sure everybody knows that but there's a lot of activity out there and a lot of discussion.
That capacity could be plugged in.
To our programs businesses in certain areas and if in fact that case or do occur that may moderate the rate increases.
Conversely, if in fact capacity in some instances dried up.
Dried up and that's a extreme example, it's not going to do that but dried up to extent, where you could only you know continue to write your renewals and your renewals would go up on a rate alone and you didnt have additional capacity to write new business that would also impact the organic growth.
So I'd say this.
We're very pleased with the organic growth of National programs. We do not want you to think that the growth. This quarter is what we think it's got to be next quarter, where we're more oh, we have moderated view on that we think the outlook is very good for the business.
We're very pleased with how its going and a lot of it will be impacted by the actions or in actions of existing capital providers and then the entrance of new capital providers.
Got it thanks, so much.
You up.
Thank you never take our next question from Greg Peters from game on team.
Please go ahead.
Hi.
Good morning.
Let me circle back to your comments around M&A have you seen any oh, continuing a lack of oh involved in the private equity side or.
The private equity side back up and running at full steam and then also can you speak to any.
Any potential benefit or fall out.
Year to date from a on Willis towers Watson proposal.
Okay, a private equity is going full steam.
So I would tell you Greg the analogy we would use is think about somebody that's driving on the highway about 85 miles an hour and you come into this initial covidien environment and they take their foot off the gap.
That does not mean, they put the break on it means they take their foot off the gap. So for a period of let's say two months or maybe three month you go from 85 miles an hour to 65 miles an hour and now they put the pedal back to the floor.
And they're going back up towards 85.
So I'm very active environment, continuing in the acquisition space.
Again.
As it relates to the proposed merger or the two firms.
You know, we don't we don't really speculate on that I mean, there are people that we hear about and talk to and things about that that seem to be interested in exploring other opportunities, but we're not going to really speculate on all of that and we wish them you know the best and.
However that all worked out at a complex complicated deal and we're going to just keep on you know trying to write new business and get the best people account our team. So I I don't really want to speculate too much about that.
That's fair or can you I mean, you brought it up can you talk about.
How you're you're producer retention has held up through the first six months relative to historical standards.
Yeah, I Oh sure and the answer is I think it is held up exceptionally well.
I think that are producer retention and our overall teammate retention has been really really good.
Okay Fair.
Fair enough.
Maybe Andy you can circle back to the comments on profit sharing and guaranteed supplementals.
Can you review that the you know.
The the puts and takes on the results year to date and how we should be thinking about that again for the full year. I know you commented in your prepared remarks, but if it can go back you better be helpful.
Sure you know from Greg Good morning.
So, let's just go through it and look at them a combined so for the.
First quarter.
We were up year over year about 8.8 million second quarter, we were down about $1.7 million 1.8 million and that was.
Primarily due to the one time Gee I see that we got the second quarter of last year.
The comments that we made and there is at least for the first half of the year.
Those either represented new Jia seizure contingents that we qualify for or adjustments to finalize the estimates that we recorded in 2019 and get if you recall with the new AMC, we have to record.
Our contingents throughout the year based upon written policies to the best that we can then when we receive the cash in the first and second quarter, we have to do our final true ups. So that's a combination of all those with what really drives the upside we don't anticipate that for the second half of the year as we mentioned earlier so as it.
Right now we think that contingency GE as sees will look fairly similar in the second half of this year as to what they did in the second half of last year barring something new Pops up we just don't know about.
Great. Thanks, and then the the final piece I know you know we've been watching the struggles with your services segment.
For several quarters now.
It's kinda feels like this could be a trough year in terms of organic and just total revenue.
For that business is is that is that oh, right sort of sense that you guys have about that business or <unk>.
Is there something structurally going on there that might lead to further revenue shrinkage as you think beyond this year.
I think you're at a I think your first assessment, who is correct I think we look at a trough either.
That is we don't believe there's anything structurally wrong with the business or anything like that there's just a combination of things as we outlined in my comments and Andy's comments that had alluded to that so we kind of you know work our way through it and you know it'll be better in a few.
Yes, Greg the piece, it's always a one of the unknowns inside of there we've been talking about for a few quarters is around the so security advocacy business we are.
We are definitely impacted at times, what happens at security administration, and the federal government so depends on how quickly they or.
Processing and claims on there and the amount of resources. They flow. So that does it just things up and down overtime and we've seen that over a number of years. So it's just kind of one of those wild cards. We just don't know amount until what kind of starts coming along so we have to watch and see what happens with general property is claims that are out there that was again.
Just move back and forth based on weather related.
Got it thanks for answers and Powell stay away from the night clubs in the beaches in the third and fourth quarter. Okay. Thanks, a lot actually as you know Greg I have 10 weeks of immunity.
[laughter].
Thank you and now we think there next question from Yeah, I don't cannot from Gordmans.
Please go ahead.
Hi, good morning, everybody.
A couple of on the $8 million about 11 adjustment for coal then so first I guess.
She said I kinda half million on workers comp and employee benefits last quarter, you 8 million on GE out are there any other lines that you could see such adjustments that people.
Hi, good morning here and as of right now no. We don't see any other lines that we've not captured at this stage of other facts seem to pop up we'll have to address those what we tried to do is for the outstanding policies in Q1 and.
Again, the outstanding policies in Q2, we tried to incorporate those into our adjustments.
So that's kind of at least the best estimate right now all the kind of we just need to see how things continue to play out in one of the challenges we had going into the second quarter was how to estimate because we had that that lag effect on reporting. So we really didn't start getting real good reporting for some of the monthly on.
Employee benefits for work comp until May and June we've only got a couple of months.
Down so we're going to continue to monitor and see a what things look like and then will also start to see some of the the renewals in the third quarter and they'll start to give US an idea also of what a return audit premiums look like and how well we did estimating that for.
The 8 million.
Okay, and so far the workers comp and payback.
Since our holding well.
Sorry, one more time your hard here.
Sorry about that see the workers comp and employee benefits estimates of the ones that you had to trust last quarter are those still holding well as Uh huh.
Yes. They are they are the mix of different button. So yes.
Okay.
And can you still with the earnings impact was from those $8 million this quarter.
So are you getting your hard to hear on it here, you're breaking up a little bit what was can you repeat please.
I I was asking if if you could say what the earnings impact was from the $8 million this quarter Oh, it's a it's quite high on there.
Okay.
And then one other question Hum, how many of your customers, specifically retail and wholesale.
Has taken action or chosen to cut programs in order to reinsurance cost.
As opposed to the carrier coming in from what were you know, where we're lowering yep I think what I would say is I want to clarify I don't I'm not aware of well maybe I should backup.
Theres two segments, let's think about small business first so we have small business in both retail and wholesale and that's a scenario where we have people they call I'd say, we're we're done.
We just we here's the keys like where we are there out of business. So we've had a lot of that ER and small business areas, but those are small accounts.
Okay and larger accounts, what you might find is the cost goes up substantially and therefore, they buy less of the coverage, but that doesn't mean, they don't buy the coverage. Let me let me give me a perfect example, let's say.
You are on your your company as a large manufacturer and you have a 25 million dollar umbrella and that 25 million view.
You manufacture, let's just say something like a.
Baby Christmas and childrens.
Infant clothing, something like that and I'm. Your 25 million dollar umbrella I was just for sake of this discussion a million dollars and premium.
And the the carrier that put the $25 million up comes back to you.
Through your broker and says we're going to quote $10 million of coverage for $1 million a premium.
So then your broker goes out and get the other 15 million and let's say, that's the $800000 or something so you're you're limit.
Oh for 25 million.
Went up a 2 million eight or two and a half million or whatever the number is but your primary 10 million was the same price as the 25 a year before you may say, hey, I can only by 10 million of coverage.
That's what I'm talking about and larger customers, they're not saying, we're not going to buy an umbrella that that's not what they're saying well what they're saying is there are certain extreme examples if you're in the transportation business, Let's say you have a thousand long haul trucks your excess liability premiums is gone through.
The roof multiples of times and so if you bought 80 million of limits before you might have an l. the only be able to by 40 million now because the prices so high.
So it's not we haven't seen in the small accounts area, we see people going out of business in the middle market accounts area, we see people, mostly renewing but there's some gnashing of the tea.
In the large accounts, particularly and and tougher classes of is that we may see a lower excess limits purchase because the rate increases are so substantial.
Got it on this so Dan. Thank you for the color in parallel and hope to your and your teammates and families I'll stay healthy.
Thank you very much.
Thank you and I would take a next question for Mark Hughes from Suntrust.
Please go ahead, yeah. Thank you.
Thank you on the wholesale the I think he said the binding authority was a little slower this quarter, what do the prospects for about the pick back up and within the normal or should go back to more mid single digit growth.
Yeah, Mark a I'll tell you what you've got in wholesale it's interesting you got two segments in that business as you know the brokerage threats transactional brokerage and then you have binding authority. The binding authority is primarily.
Smaller premium accounts not small, but smaller so think of accounts that are primarily you know $25000 and premium and under that could be higher than that but let's say 25 in under and then transactional large transactional wholesale would be bigger accounts or layer property or.
Perella or something like that.
I think what you've got is in our business.
The binding authority is being impacted it's hard to estimate the full impact because as I said and the previous question a lot of that business is impacted by the business prospects. So let me give you an example.
In April and May.
A binding authority new business was way down because the economy was closed and the whole deal and in June when it opened up organic I mean, the number of new businesses. We wrote was significantly more than the prior two months, but now it's going back the other direction.
And so I kind of things that the binding authority business is gonna be under pressure and the near to intermediate term. So let's say the rest of the year.
Brokerage is is there's an opportunity for us to grow nicely, but you got to remember that Theres also an enormous amount of pressure in some instances, where some of that business might go from the non admitted market to the admitted market in certain instances.
You don't normally think of that but there are certain instances, where that's happening so I would I would moderate.
The growth expectations and then in that second half of the year for that just because there's a lot of uncertainty around.
How that part of the market response normally I'd say no I think it's great and it's going but I just think that theres some headwinds there.
Understood then a quick follow up or interest expense.
Do you feel pretty good a run rate absent from the bigger example.
Yeah second quarter is probably a good run rate presuming that rate stay where they are mark and we don't have any incremental borrowings for acquisitions.
Thank you, Hey, Hey, Mark I want to clarify something that I think is important and it's a a very timely example.
One of the areas that we write a lot of binding authority business exam, and example would be personal lines in California, and as you know, California, but burning and there's all kinds of things over the last couple of years. So a number of carriers have basically just said, we're not gonna right personalized coverage in the state of California and.
Brush zones, which as you know not admitted areas and so what that does is it there's a lot of disruption in that market you might find some of that in Florida in certain pockets, where carriers have already gotten hit or exceeded their capacity and so there are backing off so.
Again, it is there our forces that.
Our our little different doesn't mean that we don't you know we should go work through it but it's just kind of interesting where you have all the sudden you know a place like California, which is a sixth largest economy in the world and a big personalized market, if they're choking on it and so a lot of its going to state plan.
Thank you your kids.
Thank you.
I think almost question from my machines from here that the huge KBW.
Please go ahead.
Thanks, Good morning up Alabama, you're doing well claims that your comments correctly it sounds like it more revenue pressure on the small accounts, whether that's in retail for the wholesale and obviously overall margins or somebody that but as that market sits itself have any margin implications that makes it that much.
Liquidation.
Well I think.
We like and small business and it's been a nice part of our business and so remember as it as a part of the whole. It's a smaller segment, but it does have a positive impact on our margins or a negative impact.
He said they get it back when it goes away.
I'm, sorry could you repeat that you were unclear.
I'm sorry, so when you say that it had positive or negative I can say, but having less molecule business is although people either positive or negative can I just I just I'm afraid.
Yes. The answer is it the fact that you have less small business is a negative.
Okay. So that makes equal they'll become more aggressive so that's good to hear on the personal Oh, I think you'd anticipated, what new business and higher retentions.
And I'm just wondering what happened in any way to talk about it in wholesale thing that we talk about less lower retention I thought that the cold it is that while the component.
That some of it but it's not exclusively that I mean, remember think about it a retention rate and retail or as you've heard us say before and in an office.
Overall might be 90, 392% to 95% overall revenue retention.
In a in a wholesale business depending on if its binding authority or brokerage. It's a you know 15 points less than that maybe more so there's a lot of you know churn in that in that book and so if you're either not able to replace it I eat more new business there's ample.
Pack, there or if you lose a couple of accounts and if those accounts were big that puts pressure on it. So I'll give you give you. An example think about any industry.
It would be dramatically impacted and this period of time I'll pick one for you.
Car rental.
Okay. So how many cars have you rented in the last four months, let's say not very many compared to the normal that you might rent and so the if that's the case you can have customers I just use that as an example, the customer might be a restaurant or a bar it might be.
Entertainment environment, you know think about if its a.
You know, it's got a its or some sort of.
I was going to say like a fair or something like that where usually it's based on receipts, which translates to a number of people and you could say, okay $10 to get in or whatever the number it is well guess what.
What they said it now they're receipts or you know 110th if that so the rate that theres compression in the existing book So remember.
Let's let's not lose sight of the fact that in and retail we called this out but just a general compression in hospitality restaurants Entertainment, we talked about sports think about whether its professional sports or you know Little League soccer, you know all of that impacted.
So you have you when they renew the account, but the accounts, it's all of sudden a 30% of what it was.
So there's inherent compression in certain segments of the book not by the way Meyer, it's not exclusive to wholesale we have that and programs. We have set in services, we have that in retail.
Very important distinction.
Yeah, that's very helpful. Thank you very much.
Yep.
Thank you.
My question for Mike that's it from Morgan Stanley. Please go ahead.
Hey, Thanks actually first question two quick ones I appreciate some yet.
But probably you mentioned a mix easier is a number was only accounts and simply can't pay on have you seen any examples or any pressure for from.
How many outside parties to issue any kind of late in the need for rebates consumable almost or something.
Can you give them a commercial loans at all.
The answer to the question is we've seen some things on the health side.
Where there have been some actions taken by some oh insurers around the country more regionally.
And I'm not.
Oh aware off the top of my head of commercial and yet I'd say that and I know of several large carriers that we are there are trading partners, who have been more than willing.
To adjust prices mid term, maybe more so than others and so that gives rate relief right there.
So they might not have said you know like a personal lines auto policy, we're going to give you a 15% you know reduction in your premium what they basically said is hey, or do you have 100 trucks on the road and right now you're only driving let's say 20 of them, we're going to give you you can adjust.
Your exposure units down or your payrolls down or whatever so it's going to give them. The the benefit of not being charge for the trucks that are that are sitting up in a a warehouse.
So it's the same thing, but it's not a rate cut it's an adjustment in exposures and then there's some carriers that are not willing to do that.
I mean, we've seen every scenario I mean boy we've seen them.
Okay, that's going on I guess.
And then on the M&A side, you mentioned, a private equity still going full steam on there's still opportunities out. There can you can make any comments on what you're seeing from just the valuation level, but what's being done up there today will tend to respond much stock orders.
Yeah, I mean, I would tell you that.
The the acquisition prices or the multiples that are being paid and remember I'm always one that likes to say a multiple of what you know if you'd have a seller, saying just somebody what they got versus the buyer.
I want to know what the real EBITDA is this sustainable ongoing EBITDA not a jacked up a you know modified dramatically EBITDA. So I would tell you that our sense of it is.
The multiples being paid today are very similar to what they were being paid and the first quarter and maybe even the last quarter of last year. So the multiples are not necessarily that different Michael it's just how to get comfortable with.
The impact of the pandemic on the earnings.
That's really important.
HM Okay now that makes sense. Thanks for your time in pockets thing, Okay, I suppose absolutely.
Hey, Anita its about 17 passage of the hour unless there's a we'll take one last question in the queue and then we'll go ahead and wrap it up for today Okay.
Thank you said because I left question I said he from any screens for me to follow up question. She from Wells Fargo.
Please go ahead Matt.
Thanks, Tom will then for teaching me back Yeah on my follow up I'm, just trying to tie hmm.
The died on and I do recognize.
No nothing.
Given inorganic side, but as you think about Oh by the positive negative year on a couple of questions there.
Mm Hmm.
Right.
Can you tell on an overall.
No well by being positive for the next quarter well My second question.
Hi, there some on the 1.8 million a document that corner.
The back what are you seeing keep me why the coupons that are.
Two questions at the yet.
Right. So the answer to the question again, a with the unknown of how the economy.
It's impacted by the number of spikes in the Cove it.
And cases can from Dan and.
And all the resulting issues could it our growth be positive of course it could be.
It could also be negative I'm not trying to be you know diverting the comment could it be positive yes, it could be positive.
There's a lot of variables you know and like I said, if a bunch of insured all of a sudden had their exposure units. All go down 20% between now and ended the year the idea of growing out of that even with a good amount of new business might be hard so I don't know Elisa.
The first thing.
As it relates to the the adjust that the Andy referenced and I think this is a kind of an important this is a non-GAAP answer.
Okay, So, but it's got how based on GAAP principles.
The adjustment that Andy and the team has made not only in Q1, but in Q2.
Those adjustments for the best estimate at the time of what we could see in the business.
So the reason I bring that up is we could get into Q3, and there's very possibly another adjustment. We don't know, but we know that right now the way we looked at the business. We have made the best.
Judgment on the business as we see it today and I think that's an important distinction.
So I just I just mentioned it for what it's worth I hope that helps it I know, it's frustrating because again I.
Frustrates me too but.
It is what it is.
Okay, that's very helpful.
Yeah.
Thank you we have no further questions at this time.
Okay. Thank you all very much for your time today, we look forward to talking to you in Q3, please be well be safe.
I will tell you that I got it and you don't want it but and I have a number of people that I know that have gotten it or come through it. So it seems like it's it's touching almost everybody so be well and be safe and we look forward to talking to the next quarter.
Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.