Q2 2022 Brown & Brown Inc Earnings Call
Standby, we are about to begin.
Good morning, and welcome to the Brown <unk> Brown, Inc. Second quarter earnings call today's call is being recorded.
Please note that certain information discussed during this call, including information contained in the slide presentation posted in connection with this call and including answers given in response to your questions may relate to future results and events or otherwise be forward looking in nature.
Such statements reflect our current views with respect to future events, including those relating to the company's anticipated financial results for the second quarter and are intended to fall within the safe Harbor provisions.
Securities laws.
Actual results or events in the future are subject to a number of risks and uncertainties and may differ materially from those currently anticipated or desired or referenced in any forward looking statements made as a result of the.
A number of factors such factors include the company's determination as it finalizes its financial results for the second quarter.
That its financial results differ from the current preliminary audited numbers set forth in the press release issued yesterday.
Other factors that the company has it made may not currently identified or qualify it.
And those risks and uncertainties identified from time to time in the company's reports filed with Securities and Exchange Commission additional discussion of these and other factors affecting the company's business and prospects as well as additional information regarding forward looking statements.
Is contained in the slide presentation posted in connection with this call and in the company's filings with the Securities and Exchange Commission.
We disclaim any intention or obligation to update or revise any forward looking statements, whether as a result from new information future events or otherwise.
In addition, there are.
Certain non-GAAP financial measures used in the conference call a reconciliation of any non-GAAP financial measures.
To the most comparable GAAP financial measures can be found in the company's earnings press release or in the Investor presentation.
For this call in the company's website at Www Dot BB and shrink dot com by clicking on Investor Relations and then calendar of events.
With that I will now turn the call over to Powell Brown, President and Chief Executive Officer, you may begin.
Thank you Allie and good morning, everyone and thanks for joining us for our second quarter 2022 earnings call. We had another strong quarter growing double digits organically, while expanding our adjusted EBITDA margins.
Our business performed well during the first half of the year and has great momentum.
Additionally, we completed our acquisition of global risk partners early this month and we couldn't be more excited I am very pleased to see how the teams are executing on our proven integration plan.
Excuse me, we'd like to extend a warm welcome to the more than 2000, new teammates in England, Ireland and Northern Ireland.
Now, let's transition to the results for the quarter I'm on slide number four we delivered $840 million of revenue growing 15, 5% in total and 10, 3% organically. Our adjusted EBITDA margin was 32, 7% for the quarter, an increase of 30 basis points compared to the second quarter of 2021.
Our net income per share was 51 cents on an as reported and adjusted basis, Andy will discuss our financial results in more detail later in the presentation. We also completed eight acquisitions during the quarter with annual revenues of approximately $11 million. In summary. This is a very strong performance I'm on slide.
Five <unk>.
During the quarter most businesses continued to expand slightly even with continued downward moderation in GDP to more traditional levels.
As we've seen in previous quarters businesses continue to face inflation labor shortages and rising interest rates.
For many renewals the quoted a increase in premium is growing faster than the company's revenues.
All of these issues continue to put pressure on margins for companies across multiple industries and are influencing how and to what level leaders invest in their businesses.
The carrier landscape remained relatively consistent with previous quarters. Our focus is on the availability of limits for certain classes or geographies heightened pricing sensitivity and increased underwriting rigor.
Consequently customers continue to modify their deductibles and limits to the two best managed premium increases in an environment like this we leverage our collective capabilities to provide creative solutions to our customers admitted market rates were similar to prior quarters and were up 4% to 8% across most lines.
With the outlier being workers' compensation rates, which continue to be down 1% to 3%.
From an E&S perspective premium rates increased in the range of 10% to 20%.
Wind property rates were up 15% to 35% while earthquake rates were up 7% to 10.
Last quarter carriers were focused on insurable values as replacement costs have increased materially over the past couple of years.
The impact of higher values, coupled with losses will more than likely keep property rate increases in a similar range through year end the placement of professional liability and excess liability for most accounts remained challenging with rates up 5% to 15%, while we did see some slight decrease.
<unk> is in public company D&O in June and the first of July .
Regarding cyber the story is substantially the same with rates and deductibles continuing to increase and carriers requiring effective security protocols.
Personal lines for property in California, Florida, and Louisiana continues to be challenging due to losses in aggregate concentrations. We expect carrier appetite in these markets will continue to be constrained through at least the end of the year and a number of accounts will move into the state plans I'm on slide six now let's.
Transitioning to discuss the performance of our four segments, our retail segment had a great quarter, delivering nearly 9% organic growth as a result of good new business solid retention rate increases.
Modest exposure unit expansion, we delivered robust growth in most lines of business national programs had an outstanding quarter with organic growth of 19%.
This is one of the best quarters in the division's history.
The growth was driven by Onboarding of new customers within our lender placed business strong new business.
Good retention and exposure unit expansion across many of our programs.
Wholesale brokerage segment delivered a good quarter with 7% increase in organic revenue led by strong growth in our open brokerage business. Our overall performance continued to be impacted by headwinds within our personal lines businesses.
The organic revenue for our services segment declined by less than 1% with the main drivers being higher prior year claims activity related to travel cancellations and weather events now let me turn it over to Andy to discuss our financial performance in more detail great. Thank you Pat Good morning, everybody. We're over on slide number seven like previous quarter.
<unk> will discuss our GAAP results and certain non-GAAP financial highlights for the second quarter. We delivered 15, 5% total revenue growth and double digit organic revenue growth of 10, 3%. Our net income grew four 2% or $5 $9 million and our diluted net income per share.
Increased by four 1% to 51.
The growth of net income and net income per share was impacted by the incremental debt associated with the G. ERP orchid and BTB acquisitions for which we have not yet realized the full run rate of revenue and profit.
The effective tax rate increased to 27% for the second quarter of this year as compared to 25, 2% in the second quarter of last year. The higher rate was primarily impacted by the change in the market value of the assets associated with our deferred compensation plan and the reduced tax benefit associated with share.
Vesting from our stock incentive plans, we continue to anticipate our full year effective tax rate will be in the range of 24% to 25%.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $10 three or 10, 8% compared to the second quarter of 2021, we're over on slide number eight.
This slide presents our results on an adjusted basis, which excludes the impact of movements in foreign currencies on both revenues and expenses.
The net gain or loss on disposals, the onetime acquisition and integration costs associated with ERP work it in BBB and the change in earn out payables. Please refer back to slide 16, and 17 for reconciliations of these amounts to our most comparable GAAP results.
On an adjusted basis income before income taxes increased by eight 6% and EBITDA grew faster than revenues, increasing 16, 9% with our adjusted EBITDA margin improving by 30 basis points over the prior year, even with higher variable cost our net.
Income increased by 6% and our adjusted diluted net income per share was 51 cents, which grew by six 3% for the quarter salaries and related and other operating expenses were impacted by the changes in the liabilities and assets associated with our deferred compensation plan.
As we've mentioned before when the market changes year over year, we realized offsetting movements within these expenses as.
As a percentage of revenue the year over year benefit to salaries and related was approximately 3% and there was a corresponding offset in other operating expenses overall it was a great quarter and the strong operating results are the outcome of continued high performance from our team.
We're on slide number nine our retail segment delivered adjusted total revenue growth of 14, 4% driven by organic revenue growth of eight 8% and acquisition activity over the last 12 months.
Adjusted EBITDA grew 12, 6% with the associated margin decreasing by 50 basis points for the quarter.
<unk> year over year increased variable costs, such as travel and entertainment. We're on slide number 10, our national programs segment delivered adjusted total revenue growth of 28, 1% an impressive organic revenue growth of 19%. This was an outstanding performance.
As a result of our strong top line growth adjusted EBITDA grew by 42, 1% over the prior year and the margin increased by 430 basis points to 44, 4% due to the leveraging of our expense base in relation to the growth in revenue as well as the timing of prior year revenue.
Who's in expenses associated with the Onboarding of new customers in our lender placed business.
Regarding the second half of the year, we're expecting good growth, but not at the levels. We recognized in the second quarter due to seasonally fewer property placements and the revenue associated with the Onboarding of new customers in our lender placed business, becoming more comparable to the prior year.
We're over on slide number 11, our wholesale brokerage segment delivered adjusted total revenue growth of seven 5% driven substantially by organic revenue growth adjusted EBITDAX increased by two 2% with the associated margin declining by 160 basis points due primarily to higher year over.
Over year variable operating expenses, we're on slide number 12, adjusted total revenues in our services segment decreased by 2% and organic revenue declined by half a percent for.
For the quarter adjusted EBITDAX decreased approximately $1 million or 12, 9% due to fewer claims and some nonrecurring costs.
We're on slide number 13 since we closed work it at the end of Q1 G. ERP at the beginning of July and are expecting BTB to close August 1st we wanted to provide an updated outlook for these acquisitions as a result of the changes in foreign exchange rates.
And the underlying currencies revenues and EBITDA margins are unchanged from our previous guidance.
We are anticipating total revenues for July 2022 through June 2023 to be in the range of $375 million to $400 million and we've also.
So provided the projections by segment, we continue to expect the adjusted EBITDA margins associated with these revenues to be slightly higher than the margins of the segments in which they will be reported we anticipate the revenue and profit associated with these businesses should be recognized evenly by quarter note that our <unk>.
Second quarter results for this year included approximately $18 million of revenue associated with work at <unk>.
Few comments regarding liquidity and cash conversion for the first half of 2022, we delivered cash flow from operations of approximately $346 million our ratio of cash flow from operations as a percentage of total revenues was 19, 8% for the first six months of this year as compared to 24, 4%.
And the first six months of 2021 this ratio was lower than the prior year due to the difference in the timing of payroll funding as compared to the prior year the payment of earn outs of certain acquisitions have over performed our original expectations and paying higher incentive bonuses to our teammates for their outstanding.
The performance in 2021 overall, we are in a very strong cash generation and capital position.
During the second quarter, we repaid $100 million on our revolving line of credit.
It is also our expectation to continue to decrease our leverage over the coming quarters as we have done in the past posted larger acquisitions.
We'll have incremental interest associated with the debt related to the acquisitions of <unk>, ERP orchid and BTB and increased interest on our floating rate debt. As a result, we are projecting our quarterly interest expense for the remainder of the year to be in the range of $41 million to $43 million.
Regarding the outlook for the quarterly amortization expense, we anticipate this to be in the range of $44 million to $46 million for the second half of the year. This includes the amortization associated with ERP work. It in BB does not but does not include any future unannounced acquisition activity and then lastly, we expect our.
Full year, adjusted EBITDA margins to be flat or to increase slightly as compared to 2021.
This would represent a very strong performance given the increase in variable costs, such as travel and entertainment as compared to the prior year with that let me turn it back over to Powell for closing comments. Thanks, Andy for a great report.
We have a lot of momentum and believe this positions us well for continued profitable growth as we mentioned last quarter. We believe economic growth will continue to moderate to more normal levels federal rate increases the prospect of continued inflation resolution of supply chain constraints and geopolitical matters have the potential to further cool.
The economy with that said, we are well positioned to navigate these potential headwinds we had a significantly more diversified business today than we did a decade ago, which should make us more resilient to a slowdown in the economy.
From a rate perspective, we anticipate premium increases for admitted markets will remain relatively constant through the end of the year from an E&S standpoint, and all of this is subject to what happens during hurricane season premium rate increases for the remainder of the year should be fairly similar or potentially slightly lower as compared to what we experienced in the.
Quarter as it relates to California, Florida, and Louisiana. These markets will more than likely continue to be challenging and further rate increases for both personal and commercial property lines are possible, we continue to deliver creative solutions for our customers.
We have a good pipeline of acquisition candidates and are engaging with firms that we believe will fit culturally and makes sense financially history has proven that when we get a good cultural good cultural alignment, we deliver strong performance and value for our stakeholders.
We're making good progress in our innovation on our innovation agenda, which is focused on leveraging data to enhance the customer experience simplifying the placement of coverage and creating new products. In addition, we're focused on implementing efficiency tools to enhance the experience.
For our teammates and enable them to spend more time delivering solutions for our customers and.
In closing, we feel great about our business the momentum, we have and how well our team is executing and expanding our capabilities.
The addition of <unk> ERP orchid and BTB will further fuel our success with the addition of more than 2000 talented teammates with very diverse capabilities in the U K U S and Continental Europe .
While the economy might present, some challenges we remain focused on delivering for our customers winning more new business and acquiring great companies as we've done in the past. These will be key drivers of our steady long term growth with that let me turn it back over to Ali for the Q&A session.
Yes.
Of course, thank you and if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to rehear equipment.
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Again, it is star one if you'd like to ask a question and we will go ahead and take our first question from Greg Peters with Raymond James. Please go ahead.
Good morning, everyone.
Uh huh.
I have a couple of questions for you.
And Paul I was listening to your comments and you you spoke about potential macro headwinds the organic doesn't reflect that but.
Maybe you could spend a minute and talk to us about what youre seeing in the market as it relates to whether we're in a recession or not and talk about how you think your businesses are going to perform over the next year in the face of this uncertainty.
Okay. So let me first clarify I'm not an economist, although I did major in economics in college.
That said.
This is where we are today is obviously much different than where we were in eight 910 and the last slowdown so let's make a couple of broad statements and then get right to what you were referring to number one the banks are in better position today than they were in that period of time.
One to the consumer allegedly is in a better position with additional savings at least in the near to intermediate term you have rates that are going up now generally speaking across the board where rates were going down then.
And you also have inflation.
Going up now and inflation was not going.
And we have a labor.
The labor market is different in terms of unemployment than being much higher 10, plus percent and today, let's say, it's three 6% to 4% that said.
What does that mean for us well, there's a couple of things on insured values.
We are seeing the increase.
On replacement cost on let's just say any kind of property it could be habitation all it could be industrial it could be whatever so that's a nice way of saying you can't build it back for $60 a square foot and so they're moving at a 120 or whatever the number is it's appropriate between us and.
The underwriter that's the first thing the second thing is as I said rates, they're not moving.
And you are hearing that and consistency theres not going to be we don't believe some drop in rates very dramatically.
And so rates continued to be high.
Relatively speaking they may moderate a little bit, but they are still going up that's number two number three depending on the business.
The businesses, although may be cautious.
In many instances the businesses are having the best years, they've ever had so let me give you. An example, if you talk to most of our construction customers the business in their pipeline for the next year is off the chart.
So my point is that's already work in progress that's in the pipe or Theyre getting set and so that said more people are traveling to hotels that are coming to Florida, theyre going to California, and Arizona, there is lots of stuff going on.
And you know our.
Restaurants are fall all this other stuff. So we haven't although prices are up inflation I'm talking about inflation prices, whether its in a restaurant or your gas or whatever the case might be we just haven't seen it yet with our with our customers. So Andy did you want to say something on that.
The other thing that I would tell you is that that we're really proud of the one final comment is this and I said it in our comments.
Our business today.
Is much different than our business in 2009, so I want everybody to know and I think it's kind of interesting.
I know you don't think this Greg, but there are some people out there that think that where our retail business and I would say that we are a diversified insurance broker because 58% of our revenues retail, but for everybody else that maybe isn't getting it that's 42% other than retail and that part of our business performed real.
Well.
And so we're very pleased with how we're positioned the diversification of our business and quite honestly.
Yes, we know it's happening out there, but we're not seeing it yet with our customer base and let's let's clear up one other thing we are writing a lot of new business so that.
That that's that is awesome. So we're continuing to deliver for our existing customers and we're writing a lot of new customers. So this creates a lot of opportunity for us.
Thank you for the answer.
That's helpful.
Helpful can.
Can we put them more than you probably youre going to get there.
I'm I'm I'm, a little bit taken aback by that so that's good.
And I like the construction analogy and example.
Kim we pivot.
On slide five and on Slide 14, I know you kind of answered touched upon this in your previous answer but.
Theres, a ballpoint and both slide five and slide 14 regarding placement of California, Florida, Louisiana property being challenging.
Can you provide us what does that mean to brown <unk> Brown financially where are we seeing the pressures.
Positives and negatives of that issue manifest itself in your results.
Right. So here's the way I would look at it.
You have.
And our business, we have a large personal lines book, particularly.
Particularly in Florida, but we have a large habitation all book just these are two examples.
Large condominiums on the coast and so what Youre seeing is this you've got number one as you know in the state of Florida, we have a they.
They have takeout companies, which you've read about our demo tech rated and they're reevaluating that theyre not going to come out with adjustments today and tomorrow like they talked about that.
That's number one number two there's a flow of business back towards citizens, which anticipates there are a number of.
Policies could be somewhere in the range of $1 2 million or up to as high as 2 million by year end, if everything went to hell in a handbasket technical term.
We don't anticipate that but I'm, saying, it's possible and so in our business. We think the order of magnitude relative to the impact on it.
Residential properties.
Is in the neighborhood of several million dollars.
That could be moved from some of these things over into a facility like citizens or something like that that's the first part the second part which is much harder to put your finger on is.
In some instances we are seeing individuals who have very nice large homes in Florida, who do not have mortgages basically raised their hand, and say the insurance for personal lines is too expensive, we're going to self insure.
And that's hard for me to understand I mean, but I I got it.
But their insurance rates are going up this would be primarily in southeast Florida.
I haven't heard of that yet anywhere on the west coast or any of that Tampa, but I haven't heard that yet, but I'm talking in Dade, Broward and Palm Beach County, but specifically Dade and Broward.
And so.
What what I mean by that is you have this very interesting shift in California because of the wildfires.
And lots of.
Accounts are coming out of markets and they either have to pour into the fair plan or are they going to go into an E&S market, where the rates are going up substantially Louisiana.
It has been under intense pressure because of the losses and theyre, having the same issue in their homeowners market, although the values in Louisiana. As you know are much different than they are in Florida or California.
So that's a long winded answer Greg of saying one.
The order of magnitude in our opinion on residential for US is several million dollars.
If that were to all go to Hell in a hand basket.
That said, we haven't quantified it on our commercial book, because we think there's commercial options it's not.
Citizens does write in Florida commercial business, but most of the business that we write is actually an E&S markets that's on the coast.
Is that.
Yes.
Go ahead, sorry, Andy.
Okay.
Go ahead finish your question then I'll round it out.
Well I was just going to ask about the several million dollars is that principally in retail.
Yes.
Yes, primarily in in retail and that would be the delta. If we had to move all that to another market. If it went to citizens in the Delta on the commission rate. So we don't see that as a material headwind for us we still have that impact at all in our wholesale and we called that out in terms of like Arsenal lines.
So we do have a good sized personal lines book, there and that will continue to be under pressure, but if you think about just the overall on the <unk>.
Commercial property space, and where rates are going generally it's a positive for us Greg when you look across our programs and all the wind programs that we run in the wholesale business as well as on the retail from the placement component of an inside of there. So just want to make sure we balance that out.
Got it.
The final.
Cleanup question I have for you is just you did push some some revenue numbers for <unk> Orchard Bdd revised for currency can you talk to us about the integration. That's my last question.
Yeah, I'll take I'll take that first of all orchids on and up and going and where it's pumped for the team to be part of Brown <unk> Brown Theyre here in Florida, So very little integration.
Hurdles there as it relates to.
G RP.
We've got a lot of good stuff going in terms of information sharing from teams there and in teams here. We've got leaders from here spending time, there and vice versa, they're leaders coming here.
And we have senior leaders over there.
This summer I've asked Barrett to go over and spend six weeks with his family there.
Getting to know all of our teammates and carriers and customers are in a period of time that within reason and so we have a lot of good stuff going on there and we're very very pleased.
With what's going on with the integration, but it takes time and I know Andy I'll make a couple comments on this but we're continuing to get them kind of onto our how we think about it and reporting structure and all that stuff. So you want to expand on that a little bit yeah, Greg we touch on this briefly in the opening comments, but we've got a proven way in which we go about it.
Grading acquisitions, and bringing the teams together and that covers everything to how we think about the go to market with customers. How are we engaging with their carriers and expanding the potential markets. How are we integrating the back office all the way through.
From the front to back so we feel really good with how all of our teams are collaborating and obviously, it's still early days, but.
All in the right direction, which is really good.
Got it thanks for the answers.
Perfect. Yeah. Thank you we'll go to the next question.
We will take our next question from Weston Bloomer with UBS. Please go ahead.
Hi, Good morning, My first question just a follow up on the integration of the deal and the lower revenue guidance associated with that can you just give us a sense of the economic backdrop that you're baking into those assumptions.
And could that guidance holds potential recessionary environment are there additional FX or maybe lower GDP baked into that currently.
Yes, West and what we did in here. So when we originally communicated this back in March we had just used a spot rate at that time, not knowing exactly what it is going to look like over the next 12 months.
The Sterling as well as the Euro has they both devalued materially since that stage. So what we wanted to do is provide the updated range on revenues from where they were again those numbers are realistically going to move around again, if FX. If the exchange rates go back up so thats, how we got from the $3.
75 to 400, a couple of important things keep in mind.
There is no change in our expectation for the underlying performance of the business.
A really good first half of the year from everything we can tell when they were running a little bit ahead of their plan on the ERP front, which is which is very good.
Margins on the businesses are still running right in the range of what we had anticipated back when we communicated before and as we mentioned the margins will probably be a little bit slightly higher than each of the segments that we're going into so the health of the business is very good all of the new movement is just FX right now and it's going to continue to move around.
Over over time okay.
Got it that's helpful and then just switching over.
You maintained your EBITDA guidance for the year and that does imply a stronger growth in the second half of the year.
I guess does does the inflationary environment really change how you invest in your business.
They're from hiring talent or other investments and maybe you could just give us a broader sense of how investment spend could trend in the second half and the resiliency of <unk> business.
Sure.
I will split this into two pieces. So one for clarity we've actually we've increased our guidance for the full year as you probably recall western when we originally gave guidance for the year, we said down slightly to flat to up slightly based upon the strong performance in the first half of the year and taking a can.
<unk> some of the headwinds of continued inflation, we now think that will be flat to up a little bit which is good.
But there is still inflation going on in the business both from a compensation standpoint, as well as just operating expenses, if you've taken a airline flight lately you can definitely see where the costs are today versus where they were a year ago.
So we're trying to take all that in consideration.
So as it relates to how we think about investing in the business.
Number one as you know our business is all about teammates. So we're focused on getting the right people on the team rewarding them.
Challenging them to work.
To the best interest on the best for the best interest of our customers and grow personally and professionally and financially.
That said.
Some of the hiring that we're doing obviously is costing a little bit more today than it was a year ago and that's gonna be reflected in SNR, that's but that doesn't mean, we think differently about it we're always looking for the right people. That's number one number two and he made the comment about travel, let's just talk about <unk>.
Plane flights and hotel rooms, and we saw an uptick in.
Our business in <unk> in the second quarter, and so as more people go out to see customers and go to events and do things, we're going to continue to see that and at the present that the cost for that is higher today than it was a year ago or two years ago. So just keep that in mind.
The third thing is about acquisitions and the answer is we're always looking for acquisitions.
Because it's all about cultural fit and does it make sense financially we have not seen.
Any indication that the purchase price multiples are coming down as a result of any increase in fed rates or anything to that effect.
And actually don't anticipate that in the near to intermediate term.
But we will continue to be out meeting with people and why and when people do transactions is very different for different firms.
But we think there continues to be a great number of opportunities for us to invest in businesses that will either embellish existing capabilities or expand into new capabilities.
Great just a quick follow up on the M&A comments I know you did eight deals for $11 million deal activity was up $1 1 million was down versus historical trends.
Much of that is a reflection of kind of the multiple environment or as you integrate M&A or maybe just those really opportunities you had you saw in the quarter.
It was the latter.
It really was and I think here's the thing Western we don't get caught up in the number of transactions I think that's important that's not a criticism, but we don't get caught up in it whether we do eight whether we did 10, whether we do three whether we do non where we do more than that it's all about investing in the <unk>.
Right firms now just coincidentally, it's kind of interesting.
G ERP bought eight businesses in the second quarter. So that's that's just a statement not a you know.
Not a here nor there and so we look at it as when the right firms that fit culturally and makes sense financially present themselves. We don't think it's down or up because of anything other than that.
Okay great.
Great. Thank you for the color.
Yes. Thank you.
And we'll take our next question from Michael Phillips with Morgan Stanley . Please go ahead.
Hey, Thanks, good morning.
Pat you mentioned.
Something similar to what we heard from some of the carriers on the admitted side that is rate deceleration, it's kind of slowed if not going back up again.
I guess in your numbers were a little bit the same.
You quoted is that is that pretty broad based by line or is that specific to property lines and thats driving that.
Remember, let's let's look at it this way, let's talk about the areas, where you see pressure automobile continues to be under pressure.
Pressure because of the number of accidents and more importantly, the cost of the claims that are being paid.
Number one number two liability if youre going to see some downward rate pressure I think in the primary you might see it there if it's if it's priced appropriately you may not see increases as much.
Excess continues to be challenging that's umbrella as you heard us say that.
And this is kind of across the board.
We talked about umbrella is under pressure you talk workers' compensation rates being down 1% to 3% I think is what it was.
And from a standpoint of property Cat property continues thats not admitted now I know that but even admitted property carriers continue to look at their property portfolio as part of that is highly driven around our reinsurance placements and any law.
Imitations or pullbacks from the reinsurers enter them into like a large season, one of the primary carriers. So.
It's interesting how carriers are viewing their property portfolio's.
Broadly speaking this is a broad statement carriers want to figure out ways to reduce volatility.
And diversify their books of business that kind of a.
That would be conceptually, what any carrier would like to do.
And it's easier for some than others.
Okay. Thank you that makes sense.
Second question on the National program, obviously really strong numbers on the organic side I just want to confirm was there anything at all that was kind of a one off anomalies in there that drove that 19.
Good morning, Mike.
Andy here I Wouldnt say, there was any one offs inside of there the big drivers that we saw across all of the national programs as we talked about we had really good business in many of our programs. We had good retention and we're seeing some exposure unit expansion in.
In addition, and we've talked about this for a few different quarters, starting last year was the onboarding of some new customers in our lender placed business and this was the final quarter before we make the lap.
On the revenue and.
The expenses coming around so that's part of what is driving the increase that's why we made the the earlier comment about there'll be on a more comparable basis and we think the organic we're still expecting good organic in the back end of the year for the National programs segment, but we would anticipate it would slowdown we loved the growth at 19%, but part of that.
Has just making the lap on the lender placed but that is not the majority of it just it was a really really good quarter now keep in mind, when we head to the third quarter and this is traditional in that business.
We have less property placements.
In the third quarter than what we have in the second quarter. So if you look at the organic.
It normally does dip down a little bit in the third quarter in comparison to others. If you look back over history, Thats, a pretty traditional trend.
Okay cool. Thank you for the comments and I appreciate it.
Okay.
We'll take our next question from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, Paul.
Spoke about macro headwinds I recognize you said you guys really aren't yet right.
Right.
Youre expecting right when it necessarily compare to some prior slowdowns as you also mentioned right inflation on still good pricing environment.
Quickly.
Brown Hasnt necessarily guided organically, what you have said in a steady state environment that you guys typically grow around mid single digits. So when you think about those factors that you mentioned I guess reiterated how do you see the organic growth environment playing out.
For the rest of the carrying into 2023 as well.
So I know I appreciate that you asked that every quarter lease, but as you know, we're not going to give organic growth guidance.
In our retail business or any of our businesses you are correct in saying, what I've said historically and that was just kind of put that out there to allow you to chew on that everyone in the investment community, but the short answer is this we're going to continue to service our customers. So that's first and foremost.
Number two we're going to try to write a lot of new business, which we've been successful so far and doing.
And number three we're going to continue to look for businesses that we can there.
Fit culturally that makes sense financially and those businesses typically are growing organically and they have capabilities that either expand on our existing capabilities or create new capabilities for our organization. So I'm, sorry, I know you'd like to hear me say something differently.
Certain quarter, but I'm not going to do that.
But we feel really good about the business we feel good about what we can control we can't control the economy.
And so what we can do is we can do a great job for our customers and we can go out and write a lot of new business or be aggressively seeking new business and thats, how we have positively impacted our organic growth not only this year, but last year.
And you've seen the results accordingly.
Yes at least as we think about it.
The economy over the coming quarters.
This comment is consistent with what we said over the last.
Few quarters, we anticipate that GDP is going to continue to moderate down to more normal levels.
We don't think that it goes negative, but who knows what could happen.
Out there in the future, but we're coming off of almost historic highs on GDP. It's got a moderate itself back down to more normal levels and that just going to take a number of quarters in order to get there so dependent upon the actual trajectory of it.
How it will influence our business over time, but we feel really good with how we're positioned today.
And then my second question is on the margin side. So you guys saw 20 basis points of margin expansion in the first half of the year. Andy you mentioned right at the updated guidance kind of reflects the better better than expected start to the year.
Lack right some of the <unk> coming back in the second half of last year.
Is it the fact that you guys still might just come in at flat margins for the year does that just reflect some conservatism around inflation that should more than overshadowed the easier comp in the back half.
I think as we look into the back into the year, we anticipated originally that the comp would be a little bit easier.
With the incremental inflation on the areas that we mentioned earlier, yes that may take some of that potential.
Tailwind out so just being a little conservative just don't know exactly what it's going to look like in the back into the year.
But we feel really good with how all our leaders are managing their expenses and investing in the business. We do a really really good job with us across the entire organization and we'll see ultimately how the numbers play out in the back into the year.
And then one last one we've seen rates move a good amount can you just give us a sense of how.
That could start to benefit you guys potentially greater fiduciary investment income.
Yeah.
I know we've had this this comments come up on a few calls on the fiduciary income is.
If you look back over over time is that is not a significant driver of revenue for us and I know some of the other brokers make different comments that are that are out there.
Given maybe their businesses have a different profile underneath but we don't see you know for every 1% increase in the fed rate that that drops out millions upon millions of dollars for us. It just has not historically done that one because the other thing that is something to think about it in that equation is even if the <unk>.
Fed takes rates up by 1%.
They won't flow through from the banks at the same rate theres always going to be some sort of a spread in there and theres always a delay so theoretically yes that makes sense in reality, that's not what really happens that that's out there. So we do a great job of managing our capital and in all the fiduciary to the extent that we can.
Also I think we've mentioned this in the past as and in many cases.
The fiduciary side, there are restrictions put in place by either the states or by our carrier partners that only allow us to earn interest up to the extent of the bank fees that we incur and then after that we cannot earn it. So again, that's a portion of our fiduciary funds that are out there.
Okay. That's helpful. Thanks for the color.
Thank you.
Okay.
Well take our next question Mark Hughes with true. Please go ahead.
Yes. Thank you.
In the presentation, you comment on the frequency and magnitude of lawsuits driving reduced appetite you certainly touched on construction replacement costs, and maybe coastal property or wildfire losses, where youre, making any broader point there about.
Frequency and severity of clean.
Maybe related to broader inflationary issues, you see seeing anything among your customers or carriers talking about.
Loss trends, perhaps picking up just curious.
Yeah, No I wasn't there was not a <unk>.
Subliminal message there I don't I don't want to give you that impression I just was trying to give you a state of the marketplace and how we see it which is you.
You know the.
Some instances depending on the class of business. The line of business whatever the case may be there may be a higher frequency, but for sure. There is pressure on the loss costs. So the losses that happen are paying out at a higher rate today than they were a year two years three years ago, that's what I'm, saying in it that was.
Just trying to have underlying support for the pressure on.
The upward pressure on rates.
Be it they could be going down slightly but they are moderating at a slower pace or just slowly moderating that's that was the implication mark.
Yes, I appreciate that what do you think workers' comp.
You implied that.
Declining at a slower pace.
Do you think that.
<unk> I'll ask are there any signs of any kind of inflection.
Yeah. The answer to the question is no.
No there's nothing that I've seen that there is some we've hit the bottom or whatever the case may be but let me let me be clear on that I don't me personally I don't think as much about the rates in workers compensation.
As the payrolls, because remember that's what's driving that business and so if the economy is expanding or payrolls are going up.
And then typically our business is performing better.
So in a high unemployment environment, you have lower payrolls typically and therefore, that's a downward pressure on our business at the present time, we haven't seen that because it's the exact opposite because it's very low unemployment and actually the pressure on wages is.
Higher today than it has been so therefore in the near to intermediate term. That's typically a positive from a workers compensation, which I believe offsets any negative downdraft that 1% to 3% that we talked about.
And then finally a quick one.
You talked about three big pipeline visibility within the construction sector.
Is that where Florida centric or are you seeing that across the country.
That's everywhere and it's not just residential it's commercial it's in both.
Very good thank you.
Thank you.
And we'll take our next question from Robert <unk> with Goldman Sachs. Please go ahead.
Hey can you talk about how the premium audit process has been this year and how youre seeing inflation work its way into insured values.
And aside from property lines.
What areas are you seeing material benefits from inflation.
You can take that Andrew.
Morning, Robert is from the audits.
At least what we've been seeing over the last few quarters is we've been in a.
In advanced position, but theres been no.
Material increases or decreases in the audits. So I guess, if youre trying to get a feel for our.
Are the insureds trying to materially understate their insured values are payrolls or whatever the case might be and then having a big adjustment on the back end no. We're not seeing anything major there at least in the first half of this year.
Got it thank you Amy.
Yes, let me try to address your question about.
Inflation in insured values so remember.
I'm just going to make it simple lets just use habitation all property so that could be apartments that can be condominiums that could be anything of this sort and for sake of this discussion, let's put it anywhere in Florida, and Texas or California, just as an example, large population states, we write a lot of business there.
And basically underwriters both in the E&S market and in the admitted market are looking at replacement cost values, and saying that does not look right and so therefore, there is slight embedded upward pressure. There in addition to the rate increase.
So we're continuing to see that and in some instances.
Underwriters are looking for higher.
Increases in values then.
We think we can get it.
It can't all be done in a year I mean, we've had to say look theres just no way the under the care of the the insured can buy that and so there is a an issue going on there so the most.
To your point the most marked.
The increase from an inflationary standpoint would be around the following let me give you an example.
You have a car that actually you get in an accident yourself a personal automobile accident. It's not your fault you drive a jeep just made that up and you needed to get fixed so the part is going to cost more and it takes longer to get so the insurance company.
The person that hit you is paying you for a rental car for six weeks or eight weeks when in essence it used to be done in two weeks. So there's additional costs, there which increases the total overall claim that'd be an example case in point you have a fire loss and people you've got to get wood.
Right away or.
Cinderblock or whatever the case may be those products cost more cost to get it to this.
Site.
The job site is more in the cost to the good goods is higher than the cost of installing it is higher so you have kind of the.
The trifecta there it's kind of across the board. So we're seeing it kind of in all segments of our business.
Interestingly enough you didn't ask this.
Robert but I would tell you that we're seeing that similar and in similar fashion in England. So.
Their inflation rate, obviously as high as it is here and we're seeing the same kind of thing going on there.
Thank you that's very helpful.
And.
For your second question, just going back to your comment in the presentation regarding acquisition multiples continuing to expand can you just talk about that a little bit.
And why they would continue to increase and in light of rising interest rates.
Okay. So depending on who you ask the number of acquirers out there.
Continues to grow and so you have strategic buyers like us and the other public companies you have buyers that are short term in nature, which are typically backed by private equity which will be sold.
And then but they have businesses and then you have private equity firms that are trying to get into that don't have businesses.
That kind of the way I look at the <unk>.
Different buckets and so when you have.
Firms that don't have businesses and they say they want to get in they may be willing to so called pay up for a business or for an asset that.
We would not be able to get our head around the valuation.
Having said that.
As crazy as that sounds.
They're willing to take lower returns to put that money to work. So they may project.
Our return of X, but they are willing to take half of X to put that money to work.
So again, we invest for the very long term, we are all about the high quality people that do the right thing for our customers and we.
We try to invest in a manner that will build long term value for all of our stakeholders. So again.
The other thing that I do want to mention which I think purchase price multiples people say, well, they're up or they're flat or they're high or whatever and the answer is a purchase price multiple of what okay. So let's make sure we're clear on that a investment banker or business broker can gussy up a pro.
Forma and make it look a lot better than the reality of life and so it's a multiple of what is at a multiple of the real earnings is at the multiple of the adjusted earnings is at a multiple of what and so again I find it very interesting what people will buy based on.
On the projections, because we don't think those are true.
Ongoing it's not an indication of ongoing concern.
So that's the way I look at it.
Thanks, a lot Robert.
Thank you.
And we'll go ahead and take our last question from Raj <unk> with Jefferies. Please go ahead.
Thank you.
Yeah.
Okay.
Thank you.
We're not able to hear you you're on.
Yeah, your headsets breaking up.
Can you hear us.
Yes, we can hear you year on we can't hear you.
Alright, what we'd do this year on what you were wanting to work on your headset I think we've got another question in queue will take that era will come back.
There. We go there we can area go ahead, maybe you better know sorry about that yes.
My question was around margins or the margin guidance of flat to slightly up.
<unk> at either end of that range is that really going to be driven by the level of organic growth that youll achieve through year end or are there other drivers that would impact the margin range.
Yes, it could be a number of things in their ear, so organic would be one of the drivers.
There'll be the.
Travel and entertainment cost in the back into the year just potential inflation on other operating costs that we have.
As well as salary related so it's going to be kind of a combination of all of those together, we haven't put a specific waiting on each one of those in our guidance, but just trying to take all of them into consideration.
Okay.
And then I did have a couple of questions on the M&A front. So one.
Did I hear you correct me in saying that <unk> executed on eight deals.
Since you announced the acquisition and if so where those eight deals already contemplated in the guidance.
So two different things on that comment so the eight that we had mentioned here and those were the ones that they had completed during the second quarter.
Of this year. So we're just trying to give you kind of perspective on the activity that they had and then they've already completed two or three this quarter already.
And.
All of them almost all of those were anticipated as part of the overall transaction.
Okay.
And then the earn out.
For G RFP vdb in or are those all in local currency and are they.
Just on EBITDA earned in local currency and would they be paid out in local currency.
Where there are earn outs, yes, those are based in their functional currency.
Okay.
And final quick quantified.
Are the margins from <unk> and <unk> going to be any different on a U S dollar base.
The margins is and we mentioned this earlier, we're expecting the margins from those three businesses to be slightly higher than the margins for the segments in which they will operate in.
And FX should have minimal impact on the actual margin.
The margin percentage, sorry, not margin dollars because that will move around.
Right.
Understood. Thank you.
Thank you.
And then one last question.
Meyer Shields with television debut.
Okay.
Great. Thanks really quickly.
It's Blake.
Sir what your European current and future colleagues are thinking about economic growth there.
Well remember, we don't give organic growth guidance.
So we are our European.
Teammates look at the environment much the same way, we do in terms of the inflation being almost 10%.
And how that impacts everything from food and gas too.
<unk> supplies to you name it and so there is a similar feeling there as we have here about being mindful of it but there is an optimism about the business.
And our ability to serve our existing customer base and the ability to write new customers and bring new and innovative solutions to them. So I would tell you that.
As it relates to the inflationary pressure I would say, they're cautiously optimistic as it relates to business operations I would say, they're extremely enthusiastic and optimistic.
Okay Fantastic and then one last question to finish it we understand it.
Look to national programs in the first and second quarter of 2023, we will be onboarding have any impact there or should we look at what you've reported so far is the right baseline for next year's revenue.
If you are comparing the dollars.
Yes don't compare the growth percentages per our earlier comments because of part of that is making the lap around it for the onboarding, but dollars, yes that would be good to work for them.
Excellent. Thanks, so much.
Okay. Thank you.
Alright Ali we're going to we're going to wrap this up and I'd like to say, thank you for everyone joining us.
This quarter for our earnings call. We're very pleased with our 10, 3% organic growth with a slight improvement in our adjusted EBITDA margins and we wish you a great quarter and we look forward to talking to you next time today.
And with that that does conclude today's call. Thank you for your participation you may now disconnect.
Yeah.
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