Q3 2020 Brown & Brown Inc Earnings Call
[music].
Good morning, and welcome to the Brown <unk> Brown Inc. third quarter earnings call today's call is being recorded.
Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature.
Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the third quarter and are intended to fall within the safe Harbor provisions of the securities laws.
Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired are referenced in any forward looking statements made.
As a result of a number of factors such factors include the company's determination as it finalizes its financial results for the third quarter that its financial results differ from the current preliminary unaudited numbers set forth in the press release issued yesterday.
Other factors that the company may not have currently identified are quantified and those risks and uncertainties identified from time to time in the company's reports filed with the Securities and Exchange Commission.
Additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward looking statements is contained in the slide presentation posted in connection with this call and in the Companys filings with the Securities and Exchange Commission.
We disclaim any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
In addition, there are certain non-GAAP financial measures used in this conference call.
A reconciliation of any non-GAAP financial measures to the most comparable GAAP financial measure can be found in the company's earnings press release, R&D invent investor presentation for this call on the Companys website at Www Dot BB insurance dotcom by clicking on Investor Relations and then calendar of events.
With that said I will now turn the call over to Powell Brown, President and Chief Executive Officer, you may begin.
Thank you Kevin good.
Morning, everyone and thank you for joining us for our third quarter 2020.
Earnings call before we get into the results for the quarter I wanted to make some high level comments.
First I'd like to say, thank you to all of our teammates and express how pleased I am with our performance for the quarter. They continue to be laser focused on delivering innovative solutions for our customers.
Operating in the current environment is not easy, but our team find creative ways to serve and support our existing customers engage with new prospects.
Impressed with our teammates are leveraging the investments we've made in technology over the past few years enhance our capabilities and customer interactions.
These include everyone from producers service marketing brokers and underwriting teammates.
This stage, we do not see face to face interactions returning to the pre pandemic level for quite some time and more than likely the new normal will be different than in the past.
As we navigate our way through the pandemic I'm confident that we will continue to leverage innovation in our sales and service model to help further our growth and support our customers.
We've talked a lot in the past about how were built for the long term and think about delivering shareholder value on Tuesday of last week, our board of directors increased our quarterly dividend by 9% with this increase we are now on our 27th year of consecutive increases something were very proud of now.
In addition to the results of the quarter.
I'm on slide number three.
Had a great quarter and are very pleased with our results, we delivered $674 million of revenue growing 8.9% in total and 4.3% organically again in a more detail on a few minutes about the performance of our segments.
Our EBITDA margin was 32.8%, which is up 130 basis points from the third quarter of 2019, our net income per share for the third quarter was 47 cents, increasing 14.6% on an as reported basis.
On an adjusted basis, which excludes the change in acquisition earn out payables. Our net income per share was 52 cents, an increase of 33.3% over the prior year.
Our team has done an outstanding job of growing our revenue while managing our expense base in response to the dynamics associated with Cove at 19.
During the quarter, we completed another six acquisitions with annual revenues of approximately 31 million, we'd like to extend a warm welcome to all of our new teammates to join during the quarter from a capital perspective, we issued $700 million of 10, and a half year bonds.
September we're very pleased with the coupon of 2.375%.
Particularly considering that we issued bonds in March of 19, with a coupon of 4.5%.
Our issuance was very well received by the debt markets, which we believe is a true reflection of Brown <unk> Brown credit quality with this capital and our cash flow generation, we're well positioned to further invest in a disciplined manner in our business and deliver future results.
In summary, we are very pleased.
With a strong performance for the quarter as the strength of our operating model continues to perform well through these unprecedented economic times later in the presentation, Andy will discuss our financial results in more detail on slide number four as you.
You May remember in April we thought our third quarter would be the most challenging due to the expected decrease in exposure units for our customers.
And then we performed slightly better than anticipated in the second quarter and during our second quarter earnings call. We indicated that third quarter would not be as low as originally anticipated.
As a result of good new business higher retention and rate increases we had a really good third quarter. We saw company doing their best to restart their businesses, which included some rehiring of employees are taking them off or low we thought employers. It we thought individuals would start to lose an employee benefits coverage through layoffs or reductions.
In force, which will also drive a decline in workers' compensation coverage.
We saw that in certain industries. However, there are many industries that have been quite resilient or have even grown over the past six months.
As a result of our diversification across geography customer side industry lineup covered and capabilities.
We've continued to grow please don't take my comment comments out of context, we have customers that are struggling.
And we're doing our best to help them.
We believe that there's going to be challenges over the coming quarters, and consequently expect there will be ups and downs in the quarter.
But our rate increases similar to the last few quarters and in some cases they increased slightly.
For the most part admitted market rates are up 3% to 7% across most lines commercial auto rates are the exception as they remain up 10% or so.
There's a lot of talk about worker's compensation rate starting to turn positive during the quarter were not seeing this across the board generally workers compensation rates are not declining as fast as they were in previous quarters for an E. N F perspective, most rates are up 10% to 20%.
Coastal property, both wind and quake or up 15% to 25% professional liability is generally up 10% to 25% depending on the coverage and the industry for both of these lines there can be outliers.
One area, where we're seeing the most pressure right now in personal lines in California, Florida, and the Gulf Coast State.
The continued reduction in carrier appetite has been caused by fires and tropical activity, resulting in a reevaluation of all cat exposed property, we believe the reduction and personalize capacity and cat areas will continue to decrease in the near term.
In connection with the increasing rates the placement of coverage for many lines certain industries or customers with significant losses continues to be challenging. This would include access or umbrella coverage, where a carrier or carriers might want to reduce their limit by half, but keep the premium constant.
Just to give an example, we do not expect this trend to change for the next few quarters.
We've been active in the M&A space closing six transactions during the quarter with annual revenues of approximately 31 million. During the first three quarters. We closed 16 transactions with annualized revenue of approximately 117 million and in addition, we've already closed a few deals for the fourth quarter I'm now on slide number five.
Let's discuss the performance of our four segments a retail segment.
Organic revenue grew by 4.1% in the third quarter is a really strong performance recognize across substantially all lines of business driven by a combination of good retention improving new business wins and continued rate increases we're very pleased with how our team is prospecting new accounts in both the traditional face to face model.
As well as virtually.
Our national programs segment grew 8.4% organically delivering another impressive quarter. Our growth was driven by continued strong performance and rate increases for many programs, including our lender placed our commercial and residential earthquake and our win programs just to name a few.
Our wholesale broker brokerage segment grew 8.2% organically for the quarter, we realize improvements improving new business and continued rate increases for most lines of coverage brokerage was the fastest growing while our binding authority business delivered modest growth as many mainstream businesses are not back to full operation.
And we experienced continued headwinds in the personal line space. We expect this rate pressure to continue for at least the next few quarters until carriers reevaluate their risk appetite or allocate more capacity that's challenged area there.
Organic revenue for services segment decreased 13.1% for the quarter. The main drivers of the decline were lower claims volume for so security advocacy businesses a prior.
Prior year terminated customer contract and lower claims for many of our other businesses related to Cove at 19.
We expect organic revenue in the services segment will be down in the low to mid single digit range for the fourth quarter.
Overall, it was a strong quarter and we like to say thank you for all up to all of our teammates to continue to deliver for our customers in this challenging environment now, let me turn it over to Andy to discuss our financials in more detail ticket thousand warn everybody like.
Like previous quarters, who will discuss our GAAP results certain non-GAAP financial highlights, including our adjusted results. Excluding the impact of the change in acquisition earn out payables were over on the slide number six.
The third quarter, we delivered total revenue growth of $55.3 million or 8.9% and organic revenue growth of 4.3%.
EBITDAX increased by 13.2% growing faster than revenues as we were able to leverage our expense base and further manage our expenses in response to COVID-19.
Both of these factors were able to offset the headwinds associated with certain nonrecurring items related to legal costs. The write off of uncollectible receivables for one of our programs.
Increased non cash stock based compensation and a gain on the disposal businesses recognized in the prior year.
A quick comment regarding our employee compensation and benefits.
Other operating expenses as a percentage of revenues.
Well the compensation and benefits ratio increased slightly as compared to the prior year driven by higher noncash stock based compensation cost as we are performing above the targets for our long term stock incentive plans.
In addition, with the market recovery during the quarter. There was an increase in the value of deferred compensation liabilities.
Please remember the impact on EBITDAC margins substantially zero as it increases offset within other operating expenses.
The ratio of other operating expenses decreased due to the continued management of our variable expenses in response to COVID-19 and to a lesser extent the benefit of the aforementioned change in deferred compensation cost.
Our income before income taxes increased by 4.2% growing at a slower pace than EBITDAC. This was driven primarily by the $21 million a year over year increase and the change in estimated acquisition earn out payables on the next slide will discuss our results excluding this adjustment.
Our net income increased by 18.4 million or 15.9% and our diluted net income per share increased by 14.6% to 47 cents.
Our effective tax rate for the third quarter was 15.5% compared to 23.9% in the third quarter of 2019, the lower effective tax rate, which was in line with previous guidance was driven by the tax benefit associated with the vesting of restricted stock Awards.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased 8.5 cents or 6.3% compared to the third quarter of 2019.
We'll refer to slide number seven this slide presents our results after removing the change in estimated acquisition earn out payables for both years. We believe this presentation provides a more comparable year on year basis.
During the third quarter of 2020, the change in estimated acquisition earn out payables was about 15 million, representing an increase of approximately $21 million as compared to the third quarter of 2019.
Remember that we adjusted certain earn out liabilities down in the first quarter of this year at the onset of the pandemic based on our estimates at the time.
Since in certain businesses have rebounded faster than anticipated.
Causing us to increase the estimated earn out liabilities in the third quarter of this year.
On a year to date basis, the net impact of the change in estimated earn out payables as a charge of about $5 million as compared to a credit of approximately $7 million for the same period last year.
Excluding the change in acquisition earn out payables in the third quarter of both years, our income before income taxes grew $27.2 million or 18.6% growing faster than EBITDAC due primarily to lower interest expense.
Our net income on an adjusted basis increased by $35.3 million or 31.6% and our adjusted diluted net income per share was 52 cents increasing 33.3%.
He's grew faster than income before income taxes due to the lower effective tax rate for the quarter overall it was a strong quarter.
Moving to slide number eight this slide presents the key components of our revenue performance for the quarter, our total commissions and fees increased by 8.7%.
Contingent commissions and geographies were substantially flat.
Our organic revenues, which excludes the net impact of M&A activity increased by 4.3% for the third quarter.
Over to slide number nine our.
Our retail segment delivered total revenue growth of 6.5% driven by acquisition activity over the past 12 months and organic revenue growth of 4.1%, which was driven by growth across most lines of business and slightly lower contingent commissions and geographies.
For the quarter or retail realized about 100 basis points of incremental organic revenue growth from the timing of new business in certain renewals, we expected to recognize in the fourth quarter of this year.
Our EBITDA margin for the quarter increased by 250 basis points and EBITDAC grew 16.2% due to higher organic revenue growth and cost savings achieved in response to the pandemic both of which were partially offset by a prior year gain on disposals.
Higher non cash stock compensation costs, and higher intercompany I T cost.
Our income before income tax margin increased 50 basis points and grew slower than EBITDA due primarily to a change in estimated acquisition earn outs.
Or to slide number 10, our national programs segment increased total revenues by 25.1 million or 17.6% and organic revenue by 8.4%.
The increase in total revenue was driven by strong organic growth.
Recent acquisitions and an increase in profit sharing contingent commissions.
EBITDA growth of 12.7% was slower than total revenue growth due to the write off of certain receivables in one of our programs combined.
Combined with higher intercompany high teen charges. These items more than offset margin expansion from strong organic growth as well as variable cost savings in response to COVID-19 income.
Income before income taxes increased by $600000 or 1.3% with the growth primarily impacted by increased acquisition earn out payables and higher intercompany interest expense.
Over to slide number 11, our wholesale brokerage segment delivered total revenue growth of 16.2% and organic revenue growth of 8.2% total.
Total revenue grew faster than organic revenue due to recent acquisitions.
He would that grew by 21.1% in the margin improved by 160 basis points as compared to the prior year due to strong organic growth and the delivery of reduced variable expenses in response to COVID-19, which more than offset higher intercompany I T charges and higher non cash stock based compensation.
Costs.
Our income before income taxes grew by 21.1% substantially in line with EBITDA growth.
Over to slide number 12.
Total revenues and organic revenue for our services segment declined by 13.1% driven by the items Powell mentioned earlier for the quarter EBITDA declined by 22.8% driven by lower organic revenue and higher intercompany I T expenses.
These were partially offset by reducing certain variable expenses in response to the pandemic.
Income before income taxes decreased 59.5% due to a credit of $6.3 million recorded in the third quarter of 2019 for the change in estimated acquisition earn out payables and there was no adjustment in the third quarter of this year.
A few comments regarding cash conversion and outlook for certain items regarding cash flow from operations as a percentage of revenues decreased as expected for the third quarter due primarily to about $50 million of second quarter taxes that were paid in the third quarter as permitted by the cares Act.
For the first nine months of 2020, our cash flow from operations as a percentage of revenue was approximately 27% as compared to 25% realized for the same period of the prior year. The increase is driven by our expanded margins lower cash taxes and continuing to manage our working capital.
Regarding liquidity in interest expense now mentioned earlier that we issued $700 million of 10 and a half years senior notes in late September with.
With spread decreasing materially and the receptivity of the debt markets. We thought it was prudent to access the additional capital at long term rates materially below our prior issuances.
Our incremental debt is $500 million as we repaid $200 million on the revolving line of credit.
With the additional debt our interest expense will increase by approximately $3 million per quarter with this additional capital our revolving line of credit and strong generation of cash we are well positioned from a capital perspective to fund in a disciplined manner additional investments to help further grow a bit.
So with that let me turn it back over to Bill. Thanks, Andy for Great report through 10 months, we've seen 6.4 million acres burn in California, Oregon, Washington in Colorado with $4.3 million of those acres in California alone.
There have been 27 tropical storms and 10 Hurricanes with five of these hurricanes hitting the Gulf Coast region, and one may hit this week.
[laughter] rates are also increasing in most instances and interest rates are at historic lows. All of this is in addition to COVID-19 and the related choppy economic environment, we have customers laying off large numbers of employees and others are the busiest they've ever been.
Even under these extraordinary circumstances, our diversified businesses performed very well for the first nine months, we grew our business, 3.5% organically delivered improving EBITDAC margins of 32.4% and adjusted EPS was up 21.4% overall.
Fair performance and financial results have been strong.
With rates continuing to rise, you'll see new capital come into the marketplace. Opportunistically. This will be in certain lines of coverage, but not universally across the board. In addition, very few senior leaders that insurance companies will discuss if rates are exceeding loss cost when that happens that.
Usually points to rates moderating or flattening, we're not sure if we've reached that point yet.
The acquisition space continues to be hot there is a lot of competition between private equity and long term strategic we don't see this competition slowing down anytime soon our ability to continue investing in our business was further bolstered by our recent bond offering quite honestly I didn't think our cost of borrowing for 10 year money would add.
Her being 2.375%.
Our pipeline is good but as you know we don't count anything until it's signed five.
Finally, we continue to drive our technology agenda across the company through Digitization data and automation and prioritize technology investments around the following one continually optimizing and enhancing our data and analytics program to expanding our digital delivery cable.
Abilities around products and services and three engaging initiatives designed to drive greater efficiency and velocity through our underlying processes. We are constantly thinking about how we can serve our customers better and faster.
In closing we thought it was a really good quarter with that let me turn it back over to Brian to open it up for the Q and a session.
Thank you, ladies and gentlemen, if you wish to ask a question. Please signal by pressing star one on your telephone keypad keeping score at the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one ask the question.
Our first question today comes from Greg Peters of Raymond James.
Hi, good morning, everyone.
You had a great quarter he oh.
First on the organic revenue growth. A result, I was wondering if you could give us some more color on the balance between the impact of rate increases.
This is new business, you did call out Paul's comments about customers floating.
Hi, I'm wondering if the organic is more than a reflection of rate increases in their new business opportunities are down, but maybe you could give some perspective on that and then thrown some comments about the performance of those.
[noise], Okay. So number one let's talk about historically, Greg as you know we've talked about the impact of.
Rates were somewhere between 25% and 33% on the overall impact in exposure units was a bigger impact on our business that you know we're going back over a 20 year period, when I say that that's number one.
Number two.
We are new business is.
Good but it is not at pre pandemic levels, So I would acknowledge that.
But I do believe it's a combination of all of the above and so I'm very pleased with growth and new business in a number of our offices one some places in the country or are you seeing more rate impact.
The others I'd coastal areas, our retention levels are up.
And even if that slightly incremental improvement there that helped so I think it's a combination of all of the above a number one and the second question. We've been very very pleased with us that hey team and joining brown <unk> Brown.
And that's their performance as well as the rest of our team continues to be really good. So we're very very pleased with.
That acquisition and a lot of good things going on there.
Great and my follow up question would be just around.
On the expense side I know you called out you know lower TV I guess.
We would like to know I have some ideas on what what you think.
It's going to be higher travel and entertainment next year. So you should see margin pressure in this area and also I think you called out you know lower taxes and wondering what the taxes like you know.
In a reverse next year to a higher level.
Okay. So as it relates to a higher variable expenses next year well, we do believe that there is kind of a slow steady increase as people start to travel again and entertain visit.
Errors and things like that and we can't tell you when that's going to happen, but yes, we do believe that that will work its way into our results next year number one number two.
We don't we don't speculate on the outcome of the elections.
And as you know the important thing really is will be the decision if the house and Senate are in the same party or they're in different parties.
And how things will get through Congress. So I would tell you that we like you are a waiting with great interest and have considered a lot of scenarios to <unk> Ah regarding you know who wins and what that potential impact would be to brown and brown, but I think that we.
We are positioned well to continue to invest and grow the business.
Regardless of the ultimate outcome.
Next Tuesday.
[noise] located.
Yeah I agree.
I'd just add to that just as you're thinking about rate next year barring anything have to do all the elections we.
We would expect our effective tax rate would go up a little bit next year remember, we got the tax benefit in the third quarter of this year, which drove our effective down to 15.5%. We wouldn't see that same level of benefit next year. So we'll go up a little bit okay.
Thank you for the clarification, just one follow up on point number one regarding a gradual increase in TV Paul.
Paul you know as you look across the entire enterprise you know as you think about things would turn into whatever the new normal looks like.
Is it conceivable that you know there could be little or no margin expansion next year as like returns or whatever the new normal is.
Yes.
Got it all right. Thanks for your answers guys.
Our next question comes from Mayor Shields of KBW.
Oh thanks.
Thanks, Good morning, one 'cause it doesn't need to help us with is with regard to the pace with which you are possible to new insurers are filing claims have you seen that pick up dramatically between second quarter and this of course, they're going to.
No I wouldn't Oh, I just want to make sure. He was it's a little grainy the reception there and you wanted to know with her and marked increase in number of claims with our insurance between Q2 and Q3, though he said exactly right yes.
Yes, no we haven't seen that I would tell you that you know in the second quarter. There were lots of claims filed in anticipation or potential coverage around.
VI claims on pandemic, but I would not say that there was some huge jump between Q2 and Q3 now.
Okay and.
And then.
I'm, just a little bit more than say, that's one aspect of the business I know you don't break out the volumes of maybe the smallest accounts.
But can you give us a little bit of color on that the perception is that that segment of the industry is most vulnerable to the best of the dynamic I was wondering how that translates into the book into that segment of your book.
Yeah, all right. So, let's let's think about it at a high level and where we have what you might call small business small business, let's just for sake of this discussion make it simple at premiums under let's say $30000 a year.
So you have that in commercial I mean is that.
Hey, commercial exposure and retail you have a lot of that in binding authority and wholesale and we have a lot of that in national programs.
So that's number one number two in.
In addition, you have some personal lines business, which is being impacted as we said because of either firelayers or windstorm and you know coastal areas.
So yes, we are seeing continued pressure on the small businesses because you know it.
When you go home.
If you live outside the major city and you go buy a strip shopping center and there is a place that used to go and have dinner and they're sort of open and he they're operating at 50% and that that people sitting outside that exposure basis is down substantially and in some instances.
They are not making it and if you do live in a major city you see a lot of places that have gone out of business and that has impacted us already and will continue to impact us.
And so that is the area at least so far a fire that we would say is.
We're seeing the most impact I think that we saw it early we saw that often we continue to see it and there were more medium and larger sized businesses. If they were financially stable they were making.
Tough choices, but to protect the business.
I'm instances, but smaller business didnt have the financial resources to do that so yes, we are seeing that in our business.
Okay that was very thought they keep going up.
Oh.
Our next question comes from at least Greenspan of Wells Fargo.
Hi, Thanks, Good morning on my first question on you guys.
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Given public guidance from a corner here.
Right.
I level and then about somebody segment, so I'm just trying to hire local power.
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Oh I'm sorry.
Well hear now it seems like that too.
Oh, Oh Oh.
Yeah.
Yeah, Hi.
Mm Hmm.
Well like crop.
One.
Wow.
Yes, good morning, Elise I think you could think of it that way I think Alan.
Sorry, the challenge on that is.
I know you want a certainty and there's no one that you will talk to they'll be able to give you certainty around what's going to happen in Q4 in Q1 and Q2 of next year and so so much of this is I believe impacted on a impacted by you know.
What happens with the virus and do we have some limited shutdowns and Q4 as it continues spike does that not happen what happens with the virus and therefore, how does that impact the business.
If you looked at it on a trajectory standpoint, you would think that yes. It is improving.
And I mean, we don't run our business on hope and a prayer and so we don't know I know you want that but we don't know if that's going to be the case and what we've always said is we believe our business is a low to mid single digit organic growth business and its steady.
State economy, we are not in a steady state economy. We have unique factors that are positively impacting anti he rates going up we have unique factors I Corona virus and other things that are impacting businesses, where you have businesses going out of business or.
<unk> Reid, reducing exposures dramatically. So let me give you an example, [laughter] lease if.
If you talk to a number of our construction customers the number of our construction customers all over the country. What you have here over the last quarter and today is they have very good work flow.
Well or a pipeline of work for the next six to nine months, but.
But at the end of nine months, there's more uncertainty out there not because they don't have the capacity to do it. It's just people are not in most instances bidding as much work right now that far out now in certain places, we're seeing that pick up you know here in floor.
Lots of people are moving to Florida, So you've got people bidding contracts all all over the place.
So I wish I could we could answer that and give you some level of comfort.
Both cat I would tell you that we're very pleased with the way we executed.
This quarter.
And our three big divisions all delivered.
So we're really pleased with it.
Yeah, Oh Geez, you know in our commentary, we said it could be ups and downs, we expect that's going to happen over the coming quarters. So it's not going to be that the fourth quarter will guarantee is going to look more to the third quarter. It could be up it could be down Q1 could be up or could be down to it. We just think it's going to be a little bit a bumpy as we work our way.
Okay through this economy right now.
That's helpful My thoughts.
Right.
HM.
Well keep quiet.
Mm Hmm.
Economy bumpy.
Good morning, Dan.
I'm going to 2020 2021.
No not at all no I wouldn't jump to that conclusion, I think it really gets to what.
Ultimately happens on the renewal business underneath the lease so recall back in Q1 and also in Q2, we took adjustments for revenue that we had recognized previously.
And that's to therefore bring that down to what we think is appropriate for the change in the exposure units what happens at renewal will be the question.
So did we get the exposure units correct don't know, we'll find those will get tool for renewables in the for the audits that are out there if companies aren't feeling positive. They may drop exposure units further I don't know I'm again, if those type of things that we're going to have to watch it.
And see how they play out in the fourth quarter and into the first quarter.
The other thing that leaves you got to you got to know that as rates are going up.
And exposures are potentially going down in instances there are a number of customers who are buying different limits or are dropping certain coverages because of a bit of costs.
So, let's just say that you know it was a leap manufacturing and you did 40 million dollar umbrella last year and we came to see you on 10, one and if you bought a $25 million umbrella and you're paying actually more for the 25 and he did last year for the 40.
So you're having people make adjustments in certain areas and access is a very good example, where they're basically saying I can't pay anymore.
Or in certain classes of business, where they basically just say I can't I can't do it we cannot pays a premium for that level of for that coverage and they decide to go faster on it on something.
So we're starting to see that too so, let's not lose sight of that.
That's helpful and lastly, just wanted something you mentioned on this on some.
Uh huh.
Like common bond offering something that can't be quantified that but I'm just fine.
Impossible.
So just to be thinking about.
Uh huh.
HM.
The corner.
Okay, and and we're going to repeat the questions were here. It's it's hard for some people on the line to hear the questions being asked so the question was about what was the size of the deferred comp adjustment. So for this quarter the market impact was around $4 million between.
Salaries and benefits as well as other operating expenses.
On a year to date basis, the adjustments actually getting fairly small skin I was trying to work out through the year.
Okay. That's helpful. Thank you for the color.
I think Italy.
Our next question comes from Mike Zaremski of Credit Suisse.
Hey, good morning.
Maybe for Andy first question on let's see there's a you have a like a bunch of outstanding debt with a coupon over 4% is there any opportunity.
To retire some of that make sense financially and issue.
In the twos.
We would.
Always evaluate that but I'm, probably the economics right now would it make sense to do that at this stage Mike.
Just because of the the prepay from them and everything.
Okay got it.
[noise] I guess, you know I'm thinking about the some of the comments that probably made up about the rate environment and one that on one hand, you kind of said that you know given there's a lot of terrorists or are now kind of part.
On the table that rates is in excess of loss trend that could be in that right momentum dissipates in the coming year I.
I guess on the other hand, you know maybe this is just I mean already in their portfolio. They can get more color I think you talked about a very challenging environment for certain companies, where you even mention that you know a carrier might want to reduce our limit by half, but keep premium constant you expected that to you and trends.
To remain for the next few quarters too. So just maybe just and me some more color on on on the rate environment and what you guys are seeing is that is extreme example, you gave.
Sure so to repeat the question for everybody. The question really is.
Can you provide a little more color on the rate environment.
And do you think there could be moderation next year or will you see extreme examples like the umbrella example that I gave for you have half the limit for the same price.
So let's go back to something that we said in the in the script, which was.
We believe there's going to be certain opportunistic capital that will come into the market place where do you think we will see that you might ask and we believe we'll see that again.
Lines of business that can be quickly.
Quickly or easily that particularly short tail business like cat property, but it could also be on claims made business and professional liability could be in reinsurance it could be in a number of different areas, but it's not going to impact, let's say an automobile or not.
On the NPAC, a traditional general liability account in the middle of the United States I believe a manufacturing of a product or whatever the case, maybe that's number one number two like we said that insurance company senior leaders are going to be very careful although there have been one or two that avoids this but above.
Oh, how their rate increases are tracking towards lost cost increases.
And it do we see something that would moderate so you I know the industry would say that for example, casualty has not made money for a number of years and I believe that to be the case I believe that to be in GL auto a lot of these things.
But then the reality is is can you can you have a 10% increase on top of a 10% increase on top of a 10% increase let's say three years in a row.
I tend to think the answer to that is it becomes more difficult.
Hmm and if and when I say that there's a tolerance level that the customer base can actually stomach and doors then they start to take units off the road. They start doing things that you know mitigate costs wherever they can so when I talk about when we talk about an umbrella that.
You get half the limit for the same price or more.
Those are typically on very large accounts, but not exclusively so umbrella business is very much impacted but somebody could drop their umbrella but.
But again, if youve got rates that are up 3% to 7% and and admitted markets and auto up maybe 10% or more.
That make chugs, along but in some of those areas that you're seeing 15 20, 25% increases I don't think they're going to be going up as much next year. So cat property, there's going to be a point, where other markets you're going to say the returns are high enough.
To where we want to pile in.
And so there will be a moderating of that at some point and I don't know exactly when that's going to happen, but it's going to happen.
And so you know it creates all kinds of challenges.
To place the business.
Hey, It also creates all kinds of opportunities.
When people are very frustrated with their broker that may not be doing the best job for them and we can come in and help hopefully save the day.
Okay. That's that's helpful and just a last quickie, yeah on a macro level as well when you should we be thinking kind of stimulus. If it's something that passed after the election would be a would be a positive for organic growth and some of some of your customers and vice versa.
That something we should kind of think about when we take a look at our numbers are for your reference.
Yeah, I think that first of all we're not going to speculate on if that happens or if it doesn't happen. So we don't know, but if in fact it work to happen I think it would have a slightly positive impact.
Because but there's going to be a point.
Regardless of if it now or in the future, where the stimulus will stop and so there will be a reckoning there at some point and so having said that the businesses that are kind of right on the line might get another three months, let's say and so.
Of those might fall under that small business category that we talked about earlier and then the question is does the economy pick up enough in that period. So they can make it and that's yet to be determined but we typically think about it might not so much about the the quarter impact when we think about ultimately.
Fact that that's going to have to stop and so there's still a day of reckoning, there and there's going to be some fall out I think in some industries absolutely in consolidation.
Understood Thanks nice quarter.
Our next question comes from Veronika Camaro of Goldman Sachs.
Hey, good morning, everybody.
My My first question goes to the M&A activity seems like it's been picking up a little bit is that just a function of more in person meetings again.
Maybe you could talk a little bit about how you see the pipeline and then or is there an increase appetite for M&A decreased appetite on M&A.
Any color you can offer that though.
Sure Good morning, Iran. I would tell you a number one.
There's just a lot of activity, that's first and foremost and I think we said in the last call. If you'd asked me or us that Fannie and myself in April what do you think's going to happen in M&A.
And we really thought about it.
We thought there was a potential likelihood that it just sort of stopped for six months and it really sort of stopped for six weeks.
Our eight weeks and then it started picking back up again. So you have generally a lot of activity. That's number one number two in the last six weeks, there's been an increased interest and the possibility of doing things between now and end of year.
With the potential that there would be a president and or Congress that would be in a position to increase cannot do things.
This is which means they'd want to take some chips off the table in the lower tax structure or tax rate. This year. So I think you're going to see some things happen between now and ended the year potentially as a result of that but really if they're not in the pipe now if somebody raised their hand last week unless you got.
Everything working perfectly.
You know it takes a while and so it may or may not be able to get it done by then.
So I would also tell you. It just says a broad statement you know if if he tell if you can look at our numbers and you know that we're having some reduction in variable expenses well and other agencies are having a reduction in variable expenses and what we want to make sure that we do is we want to buy.
Businesses based on ongoing concern basis.
Now what does that look like and that's hard to anticipate so the key is getting your arms around the revenue streams and the expense.
Levels on an ongoing basis in the business and a lot of that is just talking with the people and in that process figuring out you know culturally is there a fit and then financially is there some way to structure something it's a win win we feel really good about the opportunities that are out there there.
As we said in the past, although it's very competitive there.
The interesting thing is there are distinct chances.
HM.
Not only P.E. buyers, but a bomb strategics and that does not mean one is the you know the only good are they better necessarily than any other they are different and so usually those things are sorted out and not betting profit.
Yes.
So, let's just say the pricing is you could throw a blanket over the pricing that three or four firms put up it ultimately comes down to there is a cultural fit and I tell people that you know, we know or meet in the process and it may not be with Brown <unk> Brown.
But I've always we always say pick the farm you feel the most comfortable with culturally and they go getting a corner and figure out how to.
To cut a deal with them because if you do a deal with a firm that just gives you the highest number of many times that may be P. E that sell or is not going to be there. Most of the time in three years, because they'll be frustrated 'cause culturally it might be different than what they did but they went for the dollars only.
So you know, it's just a different and the difference in philosophy.
Right right I appreciate the phone so.
And then my second question you called out the potential impact of of the team capital gains tax any other key considerations that you're looking out into the selection things. They can do I think about your business.
Sure. The question really is are there any changes other than a cap gains tax that were thinking through for this election and so the short answer is sure. So let's think about that for just a moment.
You know one of the things that I talked a lot about is the evolution of health care in the United States and so we have a large health care business and I'm talking specifically about the <unk>, providing a health insurance I'm not talking about the ancillary line stuff with the health insurance.
And is there some variation of Obama care or a see a that is modified going forward.
That's a possibility how does that impact number two cap gains and or things like carried interest.
And if in fact, that's eliminated and what would that potentially due to P.E. buyers.
And so there's a number of things are you know there's there's speculation around.
Ah so security taxes.
Going from a limit to an unlimited number there's a whole bunch of things that we've talked about and evaluated.
You know you you think about the impact of federal and state taxes, and me and the interplay between those some of you that live in in States, like California, or New York, or New Jersey, or Connecticut, or got to get the opportunity to fund more of the deficit.
In the states that you live and which is going to create a departure or more people coming to places like Florida, and Texas and other states that don't have any income tax and so how is that all going to work and so it's got to be really interesting and the next let's say couple of years.
To see that kinda evolution slash migration to places more.
Amenable tax structure states.
Uh huh.
Thank you.
Well.
Our next question comes from Mark Hughes of Truest.
Yeah. Thank you good morning, the evils write off the national programs.
What was the amount.
Im sorry, Mark would you said it was your question on word of mouth, yeah. So the the write off there was around about $3 million.
You mean.
And then the tax rate for next year do you still a lower tax rate or is it going to be a steady throughout the whole year.
No. It will it'll go back up next year.
Probably a better view when you think about 2021 is actually look at 2019 on the on the phasing by the quarters.
Okay, So maybe a little lower agreed to but not that much.
No it.
Yeah, it won't be that much lower again look at look at 19 that'd be a much better barometer. There is like this year was lower was the vesting of restricted stock that we had mark and we won't see that same level of 21.
Okay.
Yeah, I teach argues intercompany I'd be paired with the added.
Impact on margins for quite some time does that moderate or the next year or so.
Still going to be a kind of a headwind.
It will probably start to moderate out next year.
So its a weve as you know we've been making investments in technology that started in 16, a lot of that we funded at the corporate level and then as those programs are mature now we've been charging them out to a to the segments overtime.
And then finally, the contingents and Supplementals next quarter any body language on that.
No. We don't really have a view on those mark again as you probably recall with the new accounting rules, we were accruing for those throughout the year based upon the placement the policies.
So don't really have a view on cash collections until we get into next year.
Thank you very much.
Yeah sure. Thank you.
Our next question comes from fill to the final of Deutsche Bank.
Yeah, Thanks, and good morning.
Born or earlier this year is it felt like there was the dispositions from you guys, but we're not going to have an expense programs.
We have incentives in place for regional management to run their ship correctly, and we're going to lean on them to do so.
And it feels like there was a better improvement in variable expenses in third quarter than second quarter and I was curious if you've got any insight from the field operation just what changed or what you know what drove this margin benefit.
Okay, so fill up a bit I.
I think that was pretty clear I think people should understand is religion, so not going to repeat that you got to remember or is not a centralized program and I know that there are some firms out there that are saying you know, we're expecting X amount of expense savings and we think some of it's going to be permanent.
Some of this is going to be temporary and health and the answer is remember we build everything into individual businesses. So if you run Atlanta your whole all your expenses are in Atlanta, If you Ron If you are in Texas, you got all of your centers that you run when Texas and depending on.
On the office.
And the businesses that they service that's going to dictate the t. any and other variable expenses that are incurred in that office. So, let's just say the Atlanta office for sake of this discussion right. The number of customers that are all over the country and they have a high number.
<unk> customers, and Arizona, California, Oregon, and Washington, and whatever class a business that is and so that people want airplanes. All the time well that's stopped so the expenses that would be saved and and Atlanta might be dramatically different than if.
Fewer and lets say Fort Myers, Florida, and the vast majority of your customers are within 60 miles and driving and they can still go and drive and see those customers. So no. There's not some magic wand or you know thing relative to the variable expenses in Q3 over Q.
Two.
We would just tell you I think its a function more of retention.
New business and.
And rate increases.
Yeah, Phil Yeah don't jump to the conclusion, just because the margin was up more in the third quarter versus the second quarter that we were able to take out more variable expenses in our prepared commentary what we were trying to make sure. We conveyed it was a balancing of the increased organic.
As well as managing the expenses, but as we also mentioned we are anticipating and we are starting to see the variable expenses are slowly starting to go up as we're able to engage more with customers and we would anticipate that that will continue on in the back into the year and into 21.
Got it Okay, and there was talk about the potential for pricing in excess of loss cost.
You know, putting aside whether or not that's true yeah at some point in the future. If it were true does that change your positioning your expectations or the negotiations around profit sharing contingency.
You know as we get pricing in excess of loss cost and move it forward expectation of maybe better margins at the underwriters do you does that change your posturing. So they the profit sharing.
No because remember or profit sharing or contingency is based on the results that we have and.
And so insurance is based on law of large numbers and so you could have rate going up but you could have a freak accident, where there's like a truck that you ensure that hit someone killed somebody totally on anticipated and you have a limit loss so remember conceptually.
I think your thought is correct in actuality it it's very much based upon the performance of our book of business.
And so I I don't want you to confuse the overall results of the insurance company with the result of let's say the Brown <unk> Brown business inside there.
Understood. Thank you.
Oh, thank you.
Kevin how many more do we have in the queue Sir.
There is currently one further question.
Okay, we'll take that last question and then we'll go ahead and wrap up for today.
Definitely the last question today comes from Michael Phillips of Morgan Stanley.
Oh, great. Thanks for putting me and I. Appreciate it I was wondering if you could just give any a close on near term outlook, you see people into but it doesn't.
Sure. So the question is the outlook for lender placed business I think the number one as you know we made an investment in a business loan protector, which is additive to procter and they're both complimentary. So that's the first thing to say.
Second thing is.
The business that we are writing some of it is what you would call expansion of existing accounts, where they're having more things for thought of programs, but I would tell you its more us writing new business and that's very important. So if you go back.
2009, and 10 and 11, the increase was an existing financial institution that their portfolio is expanding.
As opposed to us getting more companies with different portfolios now you say that Andy yeah.
So so I think that that's that's a positive thing for for us and with the investments that we've made there are lot I should say lot a handful or two handfuls of traditional middle market lender placed firms and they're like Warner.
To like really big 800 pound gorillas and with our investments not only in the capabilities and the technology, but the size and the portfolios that we handle now we're able to better compete against all sizes, including those large ones. So we got a lot of cool stuff.
Going on there and like Cox and his team's doing a great job. So yeah, we like the business.
Yeah, Mike what point, you guys to read into our commentary that we're seeing an uptick in colas are in lender placed for foreclosures. That's out there that that is not what we're seeing is it just purely on new business or would that we're picking up.
Very important thing.
Thank you for them he said.
It real quick because and you made a comment earlier in your opening remarks that I kind of broke up only football game, but I thought I heard you did something on the retail side.
Something about revenue, we can pull to.
Yeah, we this in the third quarter and so everybody on the phone. The question was around the the revenue from the fourth quarter into the third quarter. We just called out we had around about 100 basis points of benefit to the organic in the third quarter, which was really the distant we'd anticipated would close in.
The fourth quarter or that originally we had anticipated would renew in the fourth quarter. So that's.
That's just some movement between the quarters.
Okay.
Thank you. Thanks goes if we go to <unk>.
Thank you okay. Thank you all very much for your time, we hope you have a wonderful quarter and look forward to talking to you in January have a great day. Thank you very much.
Ladies and gentlemen back from today's conference call. Thank you for your participation you may now disconnect.
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